I believe a long-term focus on renewable energy sources makes sense for oil majors. Firstly, it is a necessity because, eventually, extracting oil will cost more than companies can sell it for. Secondly, and probably more importantly, this is the direction in which demand globally is shifting. It may surprise you to hear then, that I don’t think its focus on green energy will help the BP (LSE: BP) share price. That is, not any time soon.
Nice theory
For months, BP has been setting out its new agenda of focusing on renewable energy sources and becoming carbon-neutral. In August, the company said it will be cutting oil and gas production by 40%, and increasing investment in low-carbon energy tenfold.
This month, the top brass at BP made various presentations to shareholders about these plans. The only problem is that despite all these assurances about converting to renewables, no one has really said how BP is actually going to do it.
BP makes its money from oil and gas. Despite any intentions it has, it is going to keep doing that for the foreseeable future. That means BP’s profits are dependent on the price of oil and gas. With Covid still causing trouble and airlines looking far from strong, its future green efforts may as well be pipe dreams at this point.
Over the next year or so, I don’t think any benefits the BP share price sees from investor confidence in renewable energy will be able to offset poor results that come from low oil prices. That said, I do think there is chance oil prices will start to strengthen sooner than we might expect. Once a Covid vaccine comes out, for example.
Can BP help the world go green?
As I said, as a long-term strategy I think moving towards renewables is a good thing for BP. But ‘long term’ really is the key factor. The truth is that despite all the noises being made about green energy, neither the technology nor the market is there yet. Not quite.
Battery technology and capacity is still a major limiting factor for zero-carbon alternatives like electric cars. Meanwhile the cost of the technology is prohibitive for most of the world. As any free market economist would suggest, if renewable energy sources were already better than the alternative, we would all be using them. This is simplistic, but certainly has a grain of truth.
Yet I think companies like BP are in a perfect position to push the technology forward. BP has been in the business of energy for far longer than renewable companies have been in existence. Indeed, even before green energy was ever talked about.
BP has vast resources, both financial and technical. What’s more, a somewhat sceptical view may be that it is undertaking this shift entirely to make more money, not for ideological purposes. This is exactly what real innovation may need.
Ideology can see people bogged down with technologies that don’t work well, because they are true believers. Focusing on making money is more likely to mean focusing on anything that actually works (and can be sold en-masse).
I have no doubt green energy will be helping BP in the future. For now though, I am looking towards the oil market for guidance.