As the global clean energy transition continues to accelerate, oil and gas stocks are trending downwards and have lagged behind the overall stock market in the last decade, forcing investors to reevaluate their long-term strategies.
A new report from the Institute for Energy Economics and Financial Analysis found that in 2024, dirty fuel stocks fell behind the rest, reporting a 5.72% return compared to the entire S&P 500 index’s 25.02%. In seven of the last 10 years, the oil and gas sector has underperformed the S&P 500, “delivering the lowest performance and highest volatility of any S&P sector.”
As the world moves toward green energy sources, more investors and businesses are divesting from oil companies and investing in clean economy stocks as they see the writing on the wall.
“The traditional fossil fuel business model faces structural risks in a decarbonizing world, and the industry has yet to demonstrate a coherent response to this reality,” Connor Chung, IEEFA energy finance analyst and co-author of the report, said. “Investors should take note that the industry has spent much of the last decade dragging down long-term investment portfolios.”
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This doesn’t mean investors are selling all their oil and gas stocks, as dirty energy still powers much of the world. These stocks are not likely to tank majorly, at least in the short term, but it’s much better for your wallet and the planet to support clean industries such as electric vehicles, renewable energy, and other green tech.
With clean energy becoming more affordable because of the falling costs of solar panels, batteries for energy storage, and wind turbines, it’s never been a better time to invest in the sector. You could also consider investing in environmental, social, and governance (ESG) funds — a form of sustainable investing where investors consider a company’s environmental impact when making investment decisions.
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While ESG funds have underperformed compared to traditional funds in recent years, they’re a solid choice in the long term as the world gradually transitions from oil and gas to wind, solar, geothermal, and other clean energies.
Oil and gas stocks were once considered safe and lucrative investment options. However, as the planet continues to warm and public awareness about the changing climate grows, more investors are prioritizing environmentally friendly investments, and major disasters such as the BP oil spill of 2010 could easily damage a stock’s value quickly. That disaster caused BP’s stock to fall 55% in short order.
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“Disruption and destabilization in fossil fuel commodity markets, competition from renewable energy, the electrification of transport, and growing investor consciousness of climate change’s financial risks are driving investors to re-evaluate fossil fuels’ place in the portfolio,” Chung said regarding the 2024 IEEFA report. “As the economies of the past and the future collide, the fossil fuel sector is not prepared to manage the challenges of the coming decades. Investors have a responsibility to act.”
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