When Coal Is King Again

A transition to cleaner fuels seemed so much easier in the depths of the pandemic, when energy demand collapsed and oil futures traded in negative territory. Indeed, even as economies around the world struggled with the effects of Covid-19 and lockdowns in 2020, "additions of renewable sources of energy such as wind and solar PV [photovoltaic] increased at their fastest rate in two decades, and electric vehicle sales set new records," the International Energy Agency noted today in its world energy outlook. It often takes a crisis to force meaningful change. 

A UN climate change conference in Glasgow later this month could speed up the transition, but it comes at a time of rising prices for energy around the world. "The near-term economic pain and potential political instability caused by high energy prices could cause leaders to lose their nerve," Washington Post columnist Catherine Rampell recently cautioned.  "There are already worrisome signs that they have."

Even the dirtiest fossil fuel, coal, is now back in favor. TotalEnergies CEO Patrick Pouyanne told CNBC today that "coal today is a king, because coal is cheaper than all the other sources of energy.”

So what's an investor to do? The long-term future of oil, gas -- and certainly coal -- still looks unpromising, but the transition to alternatives is likely to be long and difficult. And the current price rallies could advance well into next year.

A recent report by Bank of America analysts pointed to 26 "Buy-rated pure-play companies in their sector which are likely poised to benefit the most" from the Glasgow climate change conference, known as COP26. The conference, Avi Salzman of Barron's wrote today, is "expected to be a landmark event for the future of climate policy, a way to further solidify and advance the 2015 Paris agreement."

The stocks are divided into six segments: renewables, industrials, hydrogen, biofuels, electric vehicles, and carbon capture. Avi has more here.

The Bank of America analysts offered a sobering global outlook, unusual for Wall Street research, albeit one with a silver lining: 

This is the decade of climate action and COP26 will be the tipping point of the race to reach net zero emissions -- the balance of reducing and removing carbon emissions from the atmosphere. To achieve it, a transition to clean technologies in all sectors at an unprecedented pace would be required, with the steering of governments and willingness of society. This is the last decade to act. Absolute water scarcity is likely for 1.8 billion people, 100 million face poverty, and 800 million are at risk from rising sea levels by 2025. Climate migration could reach 143 million from emerging markets, driven by extreme weather. At the same time, $5 trillion of annual investments, $2 trillion of R&D, 42 million green economy jobs, and a cleaner planet could generate an unprecedented global opportunity.