The oil price is up but ethical investors can be the biggest beneficiaries

The price of oil is surging over fears of an escalation of the Middle East crisis but before you conclude this is a time to buy oil, think long-term.

Article updated: 7 January 2020 12:00pm Author: Michael Baxter

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Actually, I think the biggest surprise concerning the oil price is that it hasn’t risen even higher. After the killing of Iranian general Qassem Suleimani, the oil price rose, securing headlines across the financial press. Then again, Brent crude oil, which peaked at a few cents short of $70 a barrel a few days ago, moved close to $75 last spring and for a few days back in 2008 went north of $80.

Despite the worrying situation in the Middle East which is extremely worrying, oil has only reacted modestly.

Gold is up, but then it had been rising anyway —what with the yield on some government bonds going negative, investors looking for a safe haven asset have limited options, although I think those who invest in gold as a hedge against inflation have misread the situation. It will be interesting to see how bitcoin does, after-all, its advocates claim that it is the digital equivalent of gold — although I am not a fan and think bitcoin has more in common with a Ponzi scheme than gold.

But what are investors to do? While the media starts talking about the risk of World War Three, many see this as a buying opportunity and have been buying into gold and oil.

Personally, I think WW3 is extremely unlikely — the consequences are too awful for words and there is no popular appetite for any further wars in the Middle East, so the risk of a war with Iran escalating into something bigger is unlikely as a war with Iran is unlikely.

But suppose the current troubles mark a turning point in the oil price — and the cycle is set to move into an up phase.

Would this mark a good time to buy into oil companies?

Bear in mind that any oil company that relies on shipping oil via the Straits of Hormuz would struggle to benefit from higher oil prices in the event of an escalation in the Middle East. Aramco, could be an example of such a company, although, of course, it can sell oil to Asia. But look back over the last couple of decades and there has been a correlation between share prices in oil companies and the oil price.

But setting aside the role of fracking and shale gas in all of this — which has added a quite new dynamic — there is a rather big problem with the future of the oil industry and that problem is called climate change.

Oil companies themselves, concerned about the risk of stranded assets, may not invest as much in oil exploration as they have done in the past, introducing a new variable into the oil cycle equation.

Looking beyond the immediate wild reactions of the markets, in the long run, in an era when climate change is becoming visibly real, I would have said sustainable oil substitutes would be big beneficiaries from higher oil prices.

The renewable revolution is occurring anyway — the extraordinary speed with which the cost of wind and solar is falling guarantees this — but any hint of a rising oil price will give even more momentum to the oil price.

This is why an ethical approach to investing can afford benefits from a rising oil price.

The 2020s will see the renewable revolution involving, not only energy generation, but storage too, come of age.

Funds such as the Octopus Renewables Infrastructure Trust could be worth watching. 

Tesla and Drax could be worth a look too.

As Lord Rothschild once said 'buy when there is blood on the streets,' but I prefer a strategy that sees an upside when blood can be avoided.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

 

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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