Author | Value Walk
Compile | US Stock Research Institute
01
Summary
Fracturing technology reduces the cost of extraction.
Oil companies are making money despite pipeline shutdowns and driver shortages.
The U.S. grid won’t support a full switchover to electric vehicles, which means the auto market still belongs to the oil companies.
Even with a weak economy, investors in oil companies will continue to profit.
With the global push toward green energy, electric vehicles and the reduction of coal, oil and gas processing, many investors wonder whether they should keep their exposure to the oil industry. Shareholders of companies like Exxon Mobil (NYSE: XOM ) find themselves wondering whether their investments will continue to be profitable.
02
Reduced costs for oil companies
Fracking, the method most commonly used to extract oil and gas from the Earth’s surface, has been blamed for all kinds of problems. Some even claim that fracking can cause earthquakes along fault lines around drilling sites. Despite these claims, fracking remains the safest and most cost-effective method of extraction.
To extract oil and gas from shale formations in the United States, oil companies like BP plc (British Petroleum Plc) use fracking, which extracts products from tight fractures in the rock. Directional drilling is used to find tight fractures in the subsurface, then pump sand, water and chemicals into the fractures, causing them to widen. This allows oil to flow freely to the wellhead, allowing companies to extract products for refining.
However, fracking certainly has its detractors around the world, and many laws and regulations have been written in an effort to limit fracking and try to make it less invasive to the areas surrounding mining sites. Bernie Sanders introduced bill S.3247 to Congress in January 2020 to completely ban fracking in the United States. The bill aims to eliminate fracking entirely, which would force oil companies to use more expensive measures to extract oil. This in turn raises the cost of oil, and this cost increase is passed on to consumers.
03
Rising prices don’t mean zero profits
Other factors that have driven oil prices higher over the past two years include significant labor shortages. Many have decided not to return to work for an extended period, creating a major labor shortage across the country.
The oil industry has been hit again by a labor shortage as drivers are unable to deliver fuel to gas stations. Again, we see prices rise above the national average of $4 a gallon in 2022. In July, CNN reported that only 1 in 5 gas stations in the United States offered fuel for less than $4 a gallon. Yet despite all these factors, oil companies still make profits for their investors.
04
Can electric vehicles solve the problem?
Proponents of clean energy are also big proponents of a push to make all vehicles electric. The idea of an all-electric car is very plausible if only part of the truth is considered. However, if you take into account all the necessary information, EVs may be more of a problem than a solution.
In order to charge electric vehicles, people must install charging piles at home or go to public charging stations to charge. Fast charging takes anywhere from 20 minutes to an hour, depending on the brand of EV and the amount of charge required. A Level 1 household outlet charger takes 40 hours to fully charge an EV. Level 2 home chargers take 8 to 12 hours and can be done overnight. Level 3 fast chargers, the kind you’ll see at public charging stations, can top up your battery faster.
A home charging outlet also requires 75 amp service and is for cars only. Most homes in the US built before 1970 only have 100 amp service to the entire home.
This means that if you leave your car charged, you will be able to run your microwave, but not your dryer or electric oven while charging your car, or you will trip the mains breaker at home . To fix this, you’ll need a fully upgraded 200 amp service panel installed in your home. The cost of this can range from a few hundred dollars to several thousand dollars.
Another thing to consider about EVs is that in places like California, where power outages are common, it may become impossible to fully charge your vehicle. The grid cannot support the 1/3 of current drivers simultaneously charging their EVs. This will cause massive power outages across the country. The only way to fix this is to completely rebuild the grid infrastructure, or limit citizens’ ability to charge their vehicles.
In short, while EVs may be the cars of the future, they are not today’s solution.
05
Oil investors will continue to see profits
Widespread shutdowns have created enormous financial problems for businesses of all sizes. However, oil companies have managed to make money in this economy simply because we have to own the products they make in order to sustain our way of life.
The limited capabilities of electric vehicles on today’s grid mean that the oil industry will remain a necessary industry for years to come. No amount of legislation or committees will be able to overcome the physical limitations of the grid in the next decade. That means investing in Big Oil will continue to be profitable as long as people need to get from point A to point B. The higher cost of electricity than natural gas also makes oil the best choice for home heating.
Overall, investing in oil is a guaranteed return over time. Yes, prices fluctuate with market demand, and there will always be leaks or accidents that temporarily increase prices.
However, the oil industry is resilient and always rises to the challenge. That’s why long-term investors can see exponentially higher profits than they did 20 years ago. Despite its naysayers, fracking remains the preferred extraction method, and because it costs relatively less than other methods, it brings huge profits.
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