Nothing is forever! And that statement applies to oil. Is BP a good investment?
What’s the point of investing in BP?
“This time it's different.” It’s one of those phrases where literal meaning and intended meaning are opposites. The phrase ‘this time it's different,” is ironic. It is meant to imply that things are never different, history repeats itself and the economic cycle is forever.
Take the oil cycle, whenever the price is high, people talk about peak oil and say it will “never be cheap, never again.” But a wise person may react with scorn, “Oh, I see, this time it is different!” They mean the opposite, that the oil cycle isn’t dead, the oil price will collapse, one day. And of course, they were proven right in 2009 and again a few years ago.
Whenever, the oil price is low, some people will say that “it will always be cheap,” that supply is plentiful, that it was market distortions that led to rises in the past. Of course they are wrong, “that time it wasn’t different.”
But the wise are not always so wise. The only true constant in history is human nature, everything else changes.
If you sign up to the idea of “this time it's different,” as a statement of irony, I would say you are wrong. This time it is often different. As the dinosaurs would have testified, sometimes things happen that create massive change.
The late ‘90s boom was built on dotcoms, it ended in tears, because it was based on a ‘myth’ things had changed. Twenty years on, the internet rules, and it is companies that smugly dismissed it saying “oh, I see, this time it's different,” who finally weep tears of regret.
And that takes me to BP.
The share price is down on the year ago price, up by a mere 10 per cent or so over the last five years, lower today than the peak price seen in the year 2000. What’s the point of investing in it?
The answer to that could be the dividend — that is attractive — or an argument about how it has reduced costs so that it can cope with oil trading at half the price of five or so years ago.
But history tells us that the BP share price does not provide growth, is history wrong?
I would like to defer to Lord Browne, the former BP CEO. Recently he said: “I think it is important to be authentic here. If you are in the business of oil and gas production, you should say so. The main point is to figure out how you can decarbonise hydrocarbons.”
I am sorry, but oil is on its way out. It has to be. There are two very good reasons for this:
The first, what is it now? Oh yes, oil poses an existential threat to human civilisation because of its link with climate change and the risk we may be underestimating the possible consequences of climate change.
The second, renewable energies and energy storage continue to fall in cost at an extraordinary pace.
Governments, agencies bodies such as the IEA and oil companies alike, have totally failed to grasp the implications of this. The IEA, for example, has consistently underestimated growth in supply of renewable energies.
Since 2008, the cost of solar PV has fallen by 94 per cent, and onshore wind by 37 per cent. Since 2010, the cost of lithium ion batteries has fallen by 85 per cent.
The cost of a solar module today is less than one per cent of the cost in 1977.
The extraordinary falling costs we have witnessed were not foreseen, and just as relevantly, the implications are still not understood.
The narrative today is that things take time — that no matter how cheap renewables, it will take decades for the energy market to change. Such a narrative underestimates the speed with which capitalism reacts. Once we see a tipping point, and to consumers the benefits of electric cars become overwhelming, once the cost of renewables makes coal or oil based energy generation look expensive, the markets will take over. To those companies that rely on oil or fossil fuels, it will be as if a meteorite has come from the heavens, wiping them out as surely and suddenly as the dinosaurs were wiped out.
For the next few years BP is safe, but unless it throws billions and billions of dollars at decarbonising hydrocarbons, (maybe funded by cutting the dividend) it will go the way of Tyrannosaurs Rex.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees