The global energy landscape is currently in the throes of profound transformation. While oil has powered the world for over a century and played a pivotal role in the evolution of modern society, its environmental and social consequences are undeniable. On one hand, oil has spurred unparalleled economic growth, facilitated global mobility, and shaped geopolitics. On the other, its extraction, transportation, and consumption have resulted in environmental degradation, climate change, and geopolitical tensions. However, the story doesn’t end there. There’s an interesting twist in this narrative – the very oil giants that have dominated the energy sector are now being compelled, both by public sentiment and market forces, to drive innovations in renewable energy.
The Dark Side of Black Gold
The negative impacts of oil are manifold, from polluting the natural environment to political tensions over access to it, oil has played and will continue to play an important part of how the world is run.
Environmental Pollution: Oil spills, such as the Deepwater Horizon disaster in 2010, have catastrophic consequences for the marine ecosystems and on a daily basis, routine shipping, drilling, and refining activities continue to release pollutants into the environment.
The burning of oil released 36.8 billion tonnes into the atmosphere in 2022, this is up 0.9% from 2021 and it contributes significantly to global warming, which in turn leads to melting ice caps, rising sea levels, and erratic weather patterns.
Geopolitical Tensions and Wars: Oil’s geographic concentration in certain regions has often been a source of international conflict. The Iran-Iraq War, which took place between 1980 to 1988, whilst it was fought over religious and territorial disputes, one big factor that influenced the conflict was the battle for control over the oil-rich Shatt al-Arab region, on the eastern border of Iraq.
The next war to be fought of oil came with Saddam Hussein’s invasion of Kuwait in 1990/91.The Gulf War was fought in part due to disputes over oil production levels and debt arising from the Iran-Iraq War. This prompted a U.S.-led coalition to intervene to protect global oil supplies, leading to 392 coalition service men and women giving their lives, as well as nearly 100 000 civilians losing their lives during this 1 year war.
The most recent war around oil was the Iraq War, that took place between 2003 to 2011. The invasion of Iraq by the U.S. and its allies was officially based on the suspicion that Iraq possessed weapons of mass destruction. However, with time many believe control over Iraq’s vast oil reserves was a significant underlying factor that prompted the invasion.
Over time this lead to massive oil price fluctuations and price wars that started to , and continue to, put recessionary/inflationary pressures on the world’s economies.
The Transition to a Greener Future
The iShares MSCI World Energy Sector ETF, which holds considerable stakes in major energy companies like Chevron, Shell, BP, Exxon Energy, and Total Energies, provides a fascinating glimpse into this transition. While these companies have historically made fortunes in oil, they’re acutely aware of the tectonic shifts in the energy sector.
These corporations are not merely diversifying their portfolios for optics; they’re redirecting vast sums towards research and development in renewables. It’s a pragmatic strategy: utilise current oil revenues to fund the future of energy. These investments span a wide range: from solar and wind technologies to hydrogen fuel cells and battery storage solutions.
For instance, Shell is investing in offshore wind farms in Europe, while BP has set an ambition to become a net-zero company by 2050 or sooner and is expanding its renewables business. Chevron is allocating funds for carbon capture and storage projects, and Total Energies has been aggressively expanding into the solar market. Exxon Energy might be a little bit behind the curve but they’ve been researching algae-based biofuels, which could revolutionise the way oil is used across the globe.
The Role of Oil in Renewables
Oil revenues provide these behemoths with the financial muscle to invest in clean energy ventures, which might seem counterintuitive. As these companies, along with the rest of the world, navigate the complexities of the energy transition, leveraging of their extensive infrastructure, technical expertise, and global reach to ensure that when the world finally weans off oil is a pivotal play by these oil giants and is one of the reasons why we still believe oil has such an important part to play.
The iShares MSCI World Energy Sector ETF is our thematic long term view. The ETF seeks to track the MSCI World Energy Index, this benchmark index invests in companies that are within the Global Industry Classification Standard (GICS). The massive oil companies that it holds shares in are on track to reach carbon neutral emission target dates, but these dates could be here a lot quicker than expected. Carbon neutral/Net Zero Emissions refers to companies offsetting their carbon footprint by taking carbon out of the atmosphere at the same rate in which they emit it. It is worth noting that in terms of being fully green when it comes to energy generation, we still believe that the world has some work to do. Oil is still the most abundant naturally occurring resource that is used to create a variety of products and is used in nearly every industry across the globe.
So why do we like it?
Oil is not going away, we believe oil has a massive part to play both now, as well as in the future to achieve a greener planet. These energy companies are at the forefront of research into cleaner energy generation and usage. The energy sector as a whole still has huge upside to invest in greener and cleaner energy. We are conscious of the impact investing has on the broader environment, and we believe this ETF aligns to a more sustainable and greener future that yields consistent returns. Whilst the performance seen below, the iShares MSCI World Energy Sector ETF has an annualised performance of 41% of a 3 years period.
It is worth noting that energy has come off of a very low base, but more importantly we feel that energy is going to perform for longer than expected, especially when one takes a glance at the tensions arising out of the middle east.
Moreover, they’re adopting circular economy principles. For instance, using waste products from oil refining processes to generate biofuels or investing in carbon capture and utilisation technologies that can convert CO2 emissions into useful products.
In conclusion, energy (whilst cyclical in nature) has a massive part to play in the everyday activities of the world’s populations over the long term. The journey from a fossil-fueled past to a renewable future is intricate and filled with paradoxes, and while oil’s adverse impacts cannot be understated, its current role in funding the next generation of energy solutions offers a sliver of redemption, this is why we believe in energy and the iShares MSCI World Energy Sector ETF. So, as these titans of the energy world adapt to this new dawn, they have the potential not just to mitigate the damages of the past but to usher in an era of sustainable, clean energy for all.
