How do volatile oil prices impact renewables and what does this mean for investors?

The oil price impacts your life in more ways than you might think. It’s about much more than just how much you pay at the petrol pumps.

Oil prices impact transportation costs and this ripples through the entire supply chain. Businesses pass on increased operational expenses to their customers, resulting in higher prices for a wide array of products.

This can tip both household and corporate budgets into the red, potentially leading to reduced consumer spending and delayed investments.

How does the oil price impact renewables?

Higher oil prices can make renewables more competitive, intensifying the focus on sustainable alternatives and encouraging increased investment and innovation.

In 1973, for example, a war between Israel and its neighbours led to an oil crisis which laid the groundwork for the wind power generation industry.

High oil prices can also incentivise people to move towards electric vehicles to help insulate themselves from the higher cost of getting from A to B.

It’s not quite as simple as that though.

Oil is needed to build the technologies necessary for renewables to succeed. Just as a rising oil price impacts the supply chains of most businesses, it can impact the supply chains of renewable energy producers too.

Take solar panels for example. They require a wide array of minerals like aluminium, copper and zinc – all these metals need to be mined, refined and transported, and that takes energy. If the cost of that energy increases thanks to higher oil prices, it could translate into increased production costs for solar panels.

What does this mean for investors?

At this time, the world cannot function without oil. The transition to cleaner energy is happening, but it’s going to take time and traditional oil and gas companies are likely to be part of the solution.

They have the reach and infrastructure required to scale up new technologies such as electric vehicle charging, hydrogen and biofuels.

They’re also some of the biggest investors in renewable energy and a greater part of their business is likely to be focused on these areas in the future. However, it’s important for investors to focus on those they believe are taking a genuine approach to sustainable solutions, not those making limited progress.

Laggards could find that their business model becomes economically unviable in a low-carbon world, or that they own a high number of ‘stranded assets’. That’s where a previously valuable asset can become inefficient to continue using as it reaches the end of its useful life.

What does good look like?

Companies in the oil and gas industry often tend to carry high environmental, social and governance (ESG) risk.

Environmental concerns are a primary driver of this risk, with carbon emissions and waste disposal being two of the main cause for concerns. Health and safety, community relations, and effective governance are also contributors to ESG risk.

When our share research team carry out ESG analysis on the companies they cover, they consider what best practice looks like for companies across the major sectors.

Here are some of their key criteria for companies in the oil and gas industry. Mapping companies in this sector against these criteria is a good way to understand how much ESG risk they’re exposed to.

• A commitment to achieve net zero for operational emissions with a detailed plan, clear key performance indicators and medium and long-term targets, for 2030 and 2050. We’d expect measurable progress towards net zero over time, with a focus on accelerating emissions reductions.
• A portfolio that’s shifting away from reliance on oil including progress toward decommissioning, rather than divesting, all oil sands assets (a particularly dirty way of extracting oil). In addition to reducing the proportion of the business linked to oil, renewables output should be increasing.
• No major safety or waste disposal incidents. Community engagement in place for all new and developing projects and close oversight over operations in areas where there’s a high risk of human rights abuse.
• No reported ethical incidents, with controls in place to avoid improper relationships with foreign governments.

A worked example – Shell vs BP

Is there a commitment to net zero for operational scope one and two emissions, complete with medium and long-term net zero targets?

Shell is aiming to reduce scope one and two emissions by 50% by 2030 (compared to 2016 levels), reaching net zero by 2050.

BP plans to lower scope one and two emissions by 20% by 2025 and 50% by 2030 (compared to 2019 levels). It aims to achieve net zero by 2050.

Is the company’s energy generation portfolio shifting away from oil?

Shell - New CEO Wael Sawan dropped the company’s plan to reduce oil production by 1-2% each year of this decade after saying it had already been achieved. However, the target was reached by selling oil fields to others who will extract that oil instead. Current levels of oil production are likely to remain steady until at least 2030.

BP - Production within BP’s hydrocarbon business is expected to decline 25% by 2030, although this replaced a previous more ambitious 40% commitment.

Is the company increasing investments into renewable energy?

Shell's strategy references the need to sell more low-carbon products, but there are no specific targets. In 2022, Shell’s overall capital expenditure was $25bn, of which $4.3bn was invested in low-carbon energy solutions like biofuels, hydrogen, wind and solar power. This is an 89% increase on the previous year.

BP is targeting investment into its non-oil and gas businesses to account for 40% of total capital expenditure by 2025 and 50% by 2030.

Does the company have exposure to oil sands?

A very small portion of Shell's total revenues can be attributed to oil sands extraction.

A very small portion of BP's total revenues can be attributed to oil sands extraction.

Has the company encountered any safety/waste disposal incidents?

Shell - The group’s struggled against incidences of spills, particularly in its Niger Delta upstream operations, which has been vulnerable to sabotage. The group’s been divesting its interests in this region.

While BP hasn’t had any single major spills recently, the group’s 2010 Deepwater Horizon spill continues to generate legal actions. Plus, BP’s had a number of smaller, recurring environmental violations which suggest the group’s policy might have some gaps.

Does the company conduct community engagement on new and developing projects?

Shell has strong community involvement programmes, including formal systems for identifying local stakeholders or communities of interest. However, positive community relations could be better incentivised among the company’s executives.

BP has a reasonable community involvement programme. Although there are several areas for improvement, including establishing better systems to identify local stakeholders and aligning executive remuneration to positive community relations.

Is there close oversight in areas with high risk of human rights abuse?

Shell has a human rights policy and programme, including training for relevant staff, although its overall approach could be improved.

BP has a human rights programme which the company’s executives are ultimately responsible for, but there’s little staff training on human rights.

Are there controls to avoid improper relationships with foreign governments?

Shell - The group’s anti-bribery and corruption programmes mean although litigation regarding past allegations of corruption still linger, the group’s risk in this area is relatively low.

BP - The group’s bribery and corruption programmes are adequate with only minor controversies related to this issue cropping up in recent years.

This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest.

Want to learn more?

To learn more about investing with environmental and social factors in mind, have a look at our Responsible Investment hub.

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