In the 2020s, investors are torn between two schools of thought. On one side are your parents and grandparents, who did just fine over the years investing in classic energy companies like Exxon Mobil (XOM), Chevron (CVX), and Occidental Petroleum (OXY). On the other hand, new energy firms like Tesla (TSLA), Plug Power (PLUG), and First Solar (FSLR) are grabbing the headlines and capturing the attention of younger traders.
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Picking between fossil fuel drillers and clean fuel businesses isn’t a political decision, but a practical one. It’s a matter of mapping out the trajectory of the transition from internal combustion engines to electric vehicles, and from dividend darlings to growth hopefuls. Ultimately, choosing between the old and new schools will determine your stance on the future of fuel – and, like it or not, could impact your portfolio’s profit-and-loss profile.
Classic Values for Modern Investors
Some young traders might be tempted to dismiss their parents’ investments as outdated, but there’s wisdom to be gathered from old-school methodologies. After all, if Warren Buffett’s Berkshire Hathaway (BRK.A)(BRK.B) holds shares of Chevron and Occidental Petroleum – but not Tesla, Plug Power, or First Solar – this speaks volumes and youthful traders should take note.
Along with fast food, Buffett is known to have a taste for deep value and dividend payments. Modern clean energy companies aren’t known for providing these benefits, unfortunately. Tesla’s trailing 12-month P/E ratio is a sky-high 102x, while First Solar’s is a lofty 74x. In addition, Plug Power doesn’t even have a P/E ratio because it’s currently not a profitable business.
Meanwhile, it’s not difficult to see why Buffett would favor old-fashioned fossil fuel drillers for Berkshire’s portfolio. In terms of valuation and income generation, Chevron (P/E ratio of 9.7x, forward annual dividend yield of 3.7%) and Occidental Petroleum (5.8x, 0.83%) are easy picks; Exxon Mobil (9.4x, 3.9%) isn’t in Berkshire’s current holdings, but could easily meet the value-and-yield criteria.
Peak Oil and Peak Profits
Even if Tesla, Plug Power, and First Solar aren’t Buffett-backed businesses, this doesn’t mean today’s traders should ignore them. After all, fossil fuels are finite resources and while traditional drillers are trying to transition, more future-facing firms are already ahead of the curve. That proverbial curve is steepening as we speak, as peak oil demand may be much closer than most people think.
British fossil fuel producer BP (BP) expects global crude oil demand to rise to 101 million barrels per day (b/d) in 2025 – just three short years away – and then to remain flat through 2030. After that, crude oil demand is anticipated to decline to 98 million b/d by 2035, and then to 92 million b/d by 2040.
That’s BP’s most oil-optimistic forecast, by the way. The company also envisions a potential scenario in which global crude oil demand falls to 98 million b/d by 2025, followed by just 75 million b/d by 2035. Traditional fuel producers will have to revamp their business models, a costly and time-consuming proposition. In contrast, Tesla is already busy making new energy vehicles, Plug Power is already a go-to source of hydrogen fuel cells, and First Solar is nationally known as a solar module standout.
Clean Energy is Likely the Better Long-Term Option
Clearly, there’s a lot to consider here. The good news is that retail investors can include both traditional fossil fuel drillers and green energy companies in their portfolios. That said, it’s important to consider the future of your investments and decide whether old-school or new-school energy businesses should take precedence. Eventually, you probably won’t have a choice. Fossil fuel producers like Exxon Mobil, Chevron, and Occidental Petroleum are already transitioning into cleaner energy companies.
Sooner or later, every energy stock will be a green energy investment whether you like it or not. Therefore, while it’s fine to own both types of stocks, clean energy investments represent the inevitable endpoint of modern fuel sourcing. No one will be faulted for being like Buffett and holding some oil drillers for value and yield – but to truly future-proof your portfolio, it’s best to keep it clean if you want to stay in the green.
