Why the Future Still Means Fossil Fuels, for Now

Despite some news reports that suggest the green ambitions of the US Democratic Party could spell doom and gloom for traditional oil and gas companies, Franklin Equity Group’s Fred Fromm and Matt Adams see signs that increased demand for fossil fuels in select developing countries could offset any potential demand slump in developed countries such as the United States. They also explain why they think equity investors concerned about the potential for higher inflation might want to consider natural resources stocks.

Now that the 2020 US election results are fully known, and Democrats have control of the White House and both chambers of Congress, many equity investors have asked us for our views on the implications for the natural resources sector. That’s an understandable concern, considering the plethora of news headlines on how the so-called “blue wave” will likely lead to a series of environmental and regulatory headwinds for oil and gas companies. In particular, environmentalists have long encouraged the US and European governments to lower fossil fuel consumption, make vigorous reductions in carbon emissions and transition to energy sources compatible with the 2015 Paris Agreement on climate change.

Additionally, systemically important banks, the world’s largest insurers, the biggest pension funds and many top asset managers are calling for the disclosure of climate-related financial risks, and face pressure to divest their holdings in fossil fuel companies altogether. All companies have a stake in calculating the risks of their activities, and energy companies were already reviewing their oil and gas reserves due to pandemic-induced price declines in consumer end-markets, but this is no longer the sole consideration.

With the pandemic undermining economies and reducing energy use, what had been an abstract debate about leaving oil, natural gas and coal in the ground to combat pollution and climate change has become a legitimate concern for investors as politicians push for green spending plans. From global energy conglomerates to regional oil drillers, energy sector companies are looking closer at projects that are no longer viable. Some are even limiting their exploration-related investments, potentially leaving energy deposits worth billions of dollars in the ground. Exploration cuts happen for several reasons—some prospects may become unviable because they are too expensive, remote or technically challenging. Still, pressure from environmentalists seeking a low-carbon world has grown into a major influence and may lead to reduced supplies.