Making oil is more profitable than saving the planet. These numbers tell the story

Camila Domonoske

December 12, 2023 / 2:00 am

Oil companies have long been under pressure to invest more money into renewable energy to help fight climate change. Here's one simple reason why that's not happening: Right now, oil makes a lot more money.

Energy companies spend a lot of money every year. Picture a giant Scrooge McDuck-style mountain of cash, to the tune of $800 billion.

According to the International Energy Agency, the oil industry would need to spend 50% of that on clean energy by 2030 to be on track to meet global climate targets.

But right now, oil companies are spending just 2.5% of their capital, collectively, on green power. The speed of the transition to renewables — as well as who should pay for it — has been a hot topic at the ongoing COP28 climate talks in Dubai, United Arab Emirates.

Companies point out that their expertise is in pumping oil, but there's another reason that is obvious to every energy investor. Just consider these numbers.

102 million barrels per day

That's how much oil the world uses every single day. And it's going up.

Fossil fuels power the global economy, in cars, trucks, airplanes and factories. Despite urgent efforts to reduce demand and switch to cleaner power sources, demand for oil has continued to rise so far. And that keeps oil prices fairly high.

How long before oil demand drops? That's a matter of fierce debate. But for now, high demand means high prices — and for oil companies, high returns.

20% to 50%

That's the internal rate of return — the money a company will make off the capital it puts into a project — for a company producing U.S. oil and gas right now, according to Dan Pickering, the chief investment officer at Pickering Energy Partners.

Pickering says that's the best bang for your buck you can find in the energy world today.

That assumes U.S. oil prices of around $75 to $85 per barrel, which is where they have hovered for most of 2023.

5% to 10%

By comparison, that's how much money Pickering says the same company could expect to make if it put money in solar or wind projects at the moment.

These are ballpark figures, and some projects are better than others. But generally speaking, returns in the single digits are common for renewables, which are more like the low-risk, low-return business of electric utilities than the boom-and-bust landscape of oil.

Green energy is also relatively smaller and younger than the oil industry, which contributes to lower returns.

Rebecca Fitz of Boston Consulting Group says renewables — with their very different risk profile — appeal to a lot of companies. "You can build a good business out of a low-risk, low-reward business model," she says.

And indeed, a lot of money is being poured into renewables. But almost none of it is coming from oil and gas companies, which need high returns to pay the dividends their shareholders expect.

Negative 10%

Consider BP. The company tried to pivot from oil and gas to renewables. The result? From January 2020 to December 2022, its stock value dropped by 10% — a clear sign that shareholders were unhappy.

By contrast, competitors that stuck with oil and gas were thriving during that period: Chevron stock was up 46%, while ExxonMobil was up 57%.

Things got so hard for BP that in February, the company announced it would slow down the switch to renewables and put more money in oil and gas. (BP maintains that it is still committed to renewables over the long run.)

Or consider ExxonMobil, which plans to invest $17 billion into "lower carbon" investments. That may sound hefty, but it's just a fraction of the $120 billion to $150 billion in total investments the company plans over the same time frame, most of which will be invested in more oil and gas production.

Dan Ammann, the head of Exxon's Low Carbon Solutions unit, says his investments need to deliver returns "consistent" with what Exxon's oil and gas projects make, on average.

"The business we're building here will need to, you know, compete for capital relative to the other businesses of the corporation," he says.

That means not wind and solar energy, where ExxonMobil says it doesn't have any competitive advantage, but instead things like hydrogen and lithium for electric vehicle batteries.

Amena Bakr, who covers OPEC for Energy Intelligence, says once green energy is highly profitable, producers — including state-owned oil companies like OPEC members — will pour money into it.

"But until then ..." she says, pausing. "Yeah, unfortunately, this is how the world works. Everyone wants to make profits."

$1.7 trillion in 2023

Is this a death knell for renewables? Not at all.

Even without a bonanza from oil companies, the International Energy Agency calculates that the world now invests $1.7 trillion per year in clean energy, higher than the $1.1 trillion being invested in fossil fuels.

Partly, that's because wind and solar are profitable, albeit not as profitable as oil and gas.

That's also because clean energy has benefits, and fossil fuels have costs, that don't show up on any spreadsheets about returns. By producing less air pollution and greatly reduced carbon dioxide emissions, renewables could avoid trillions of dollars in economic damages and save millions of lives.

Governments, recognizing those benefits, are subsidizing renewables.

Andrew Logan, of the sustainable investment group Ceres, says that high oil and gas prices create "the siren call of these high returns," but he also argues that renewables look better on a longer time scale.

After all, the world is pivoting away from fossil fuels — even if that process could take decades.