Climate change concerns have now overtaken peak oil as one of the primary risks facing investors in the oil and gas sector. Oil and gas companies are facing criticism from investors about their greenhouse gas emissions. At the same time, investments in green energy are booming, which is having a slight impact on the demand for oil and gas. The effect is not too pronounced just yet, but I expect this trend to accelerate as the cost of renewable energy continues to decline.
In the U.K., for example, it is now cheaper to build a wind farm than it is to generate electricity from hydrocarbons, and the cost is only going to fall as turbines become more efficient.
Even if you take climate change concerns out of the equation, simple business economics suggests that the world's move away from costly hydrocarbons towards renewable energy will only accelerate over the next few decades. This shift was something Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) talked about back in 2010.
The changing world
At the 2010 Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual shareholder meeting, one investor asked the two billionaires for their thoughts on the oil supply situation, and what it meant for the future prosperity of the world. After explaining the global supply situation, Buffett said:
"Don't ever give up on humans' ability to innovate in ways that create solutions to problems that seem insolvable. We've faced all kinds of predictions. You know, all of the inventions having been invented — there's some famous statement, I forget who made, on that. We haven't really started. I mean, if you could pick a time in history when you would want to be born — leaving out the nuclear, chemical and biological threat, which is something to leave out — but I would pick today. The world has a bright future."
The CEO of Berkshire then handed his microphone over to Munger, who added his thoughts on the topic:
"In our advanced civilization, which has benefited from this last 150 years of technological expertise, we can get ahead without the oil if we have to. Now, Freeman Dyson is a physicist who is not an economist but a genius, and he's been very good at pointing out that it isn't that horrible to contemplate a world which goes off oil, provided that world is as rich and knowledgeable as ours is now. So the fact that they couldn't have got to where we are now without the oil starting 150 years ago, does not mean we can't do without the oil if we have to."
From an investment perspective, this is a sort of warning to investors both in the hydrocarbon industry outside of it. Munger and Buffett have both repeatedly praised humanity's ability to change with the times and adapt to different circumstances.
As investors, we can never rely on one trend or theme to last indefinitely. We need to keep an eye on the world and the way it is changing in order to make sure we stay ahead of the curve and are not caught out by changing tastes or technological developments. I include technology businesses in this. Tech companies have been able to take advantage of a lax regulatory environment over the past decade, but now regulators are starting to catch up, and tech is having to invest more to stay ahead.
Climate change and the use of hydrocarbons is just one of many scenarios where investors are facing losses driven by a changing world. The key is to find companies that are staying ahead of the curve and investing in new technologies or resources to stay relevant for the next 10, 20 or 50 years.
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
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- What Does Seth Klarman See in Vista Oil & Gas?
- Warren Buffett and the Problem of Patience
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