By Anders Lorenzen

Short-term gains in fossil fuel stocks may look attractive to investors, but Anders Lorenzen writes that geopolitical instability, price volatility and the accelerating clean energy transition mean the long-term outlook remains uncertain. 

The right-wing media and climate deniers, including the US president Donald Trump, have for years lambasted clean energy and net-zero and have even blamed it for high electricity and petrol prices, but claims that the clean energy transition is responsible for high energy prices are not supported by recent market developments. The latest oil price surge has once again highlighted the volatility of global oil markets.

Short-term gains from rising oil prices

Investors and stock-market analysts would undoubtedly rush to recommend fossil fuel stocks such as the oil major Shell PLC after its share price surged alongside rising oil prices.

The surge in their stock price is hardly surprising, and even the basic maths will tell you that selling a barrel of oil for over $100 rather than $60 is nearly doubling the return on investment.

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The missing indicator: demand destruction

Therefore, on a short-term basis, that stock is becoming significantly more valuable.

But a key economic indicator is being overlooked. The effects are already visible: consumers are paying far more at the pump, airline tickets have surged, and higher oil prices will soon be reflected in the cost of food and everyday goods.

Why does the oil price spike? 

The price of crude oil, as well as natural gas, is wildly fluctuating and thus creating little market stability. While this is in part influenced by the oil and gas production, a large part reflects speculation and trading activity in global energy markets. Political announcements and developments, and especially comments by the US president, heavily influence the fluctuating oil price. 

Why rising fossil fuel stocks can mislead investors

Despite the global backlash against net-zero, the clean energy sectors are faring remarkably well. Even in the US, where Trump has gone to war with clean energy, the energy transition has not had as much of a setback as expected. This proves that clean energy technologies are bigger than any government.

Yes, offshore wind has faced some headwinds in recent years, but this is mainly due to rising costs of the supply chains they rely on, and ironically, a lot of this is tied to the fossil fuel price volatility. It has not helped that the Trump administration attempted to halt several legally approved offshore wind projects — a move later ruled unlawful by US courts — adding further costs and uncertainty for developers.

Oil price shocks and consumer behaviour

Historically, energy market shocks trigger what economists call demand destruction: consumers travel less, businesses reduce fuel consumption, and economic activity slows, which ultimately reduces oil demand.

Therefore, the key becomes whether the money lost by giants such as Shell due to declining oil sales volumes represents a larger sum than what they gain in revenue on the crude price surge.

This could be damage-controlled if we knew for how long the disruptions to the oil market would last, and if we have hit the peak, or if it could rise even further.

Will clean energy seize the opportunity?

With the unpredictability of fossil fuel price volatility, another development to watch is whether individuals as well as organisations will use this period to further ease their reliance on oil and gas, such as switching to an electric vehicle (EV) or transitioning an organisation away from and towards clean energy sources. 

While the economics of clean energy technologies have never been better and improve year on year, the same can’t be said for fossil fuels. 

According to research from Bloomberg New Energy Finance (BNEF), in many parts of the world, onshore wind is already the cheapest source of electricity, even when compared with fossil fuel generation.

The long-term risk of stranded assets

There’s also the risk that the old ghost of stranded assets could come back to haunt oil and gas companies. The US can go all gung-ho drilling for more oil, but if the oil price stays high, consumers are not going to spend more, no matter how much oil the US is pumping into the market.

In the long run, the longer the Iran war persists, the more pressure the oil supply and global markets will face. For fossil fuel companies, this means greater volatility, shrinking demand and the risk that the next market recovery may never return to pre-war levels.

Anders Lorenzen is the founding Editor of A greener life, a greener world.