Oil is dead. We’ve actually known that for a while. Right now, prices trade below 1974 levels, and that’s not adjusting for inflation.
In January, we got a clear sign that fossil fuel producers would experience a difficult future. This time, the challenge wouldn’t come from regulators or activists. It would be an inside job from capitalists themselves.
“Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” Larry Fink, head of Blackrock, wrote earlier this year. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”
This was huge news. Blackrock controls roughly $7 trillion in assets. When Larry Fink sends a warning, the market listens.
The New York Times later reported that Fink and BlackRock will exit investments that “present a high sustainability-related risk … His intent is to encourage every company, not just energy firms, to rethink their carbon footprints.”
As we’ll see, this call was only the beginning of the end.
Leaders agree with Fink
Following Fink’s letter, many other experts corroborated his call.
Norway’s $1 trillion sovereign wealth fund began divesting large portions of its fossil fuel portfolio. Then the U.K.’s biggest pension fund began divestment. Dozens of other funds, big and small, followed suit.
The potential fallout was obvious: with fewer potential funding sources, the cost of debt and equity would begin to rise for fossil fuel producers, accelerating their decline.
“Oil companies need to think about [preparing] themselves for when their cost of capital soars,” warned Ben Caldecott, a director at Oxford University.
Last week, the fallout official began, with BP (NYSE:BP) announcing that it will slowly exit the oil and gas industry entirely, shifting its focus to power generation and renewable energy.
Bloomberg reported that BP will “cut dividends in half, shrink oil and gas output by 40% over the next decade and spend as much as $5 billion a year building one of the world’s largest renewable-power businesses.”
“BP had two choices,” noted Brian Scott-Quinn, a professor at Henley Business School. “First, simply paying out the maximum dividend it can in the future by not investing in the future at all. Alternatively, it can diversify on a much larger scale.”
BP chose the alternative path. We should see more oil majors opt for divestment. If you want to succeed, avoid fossil fuel stocks entirely. Stick with companies that are already built for the future.
Ditch oil for this stock
As its name suggests, Brookfield Renewable Partners (TSX:BEP.UN)(NYSE:BEP) is all in on renewable energy. It’s one of the largest players in the industry. It has a giant portfolio of wind, solar, hydro, and battery storage assets.
Roughly $1.5 trillion was invested in clean energy over the last five years on a global basis. Over the next five years, investment should total $5 trillion. If you want to bet on the future, this is your stock.
Critically, Brookfield has the track record to give you confidence. Since 2000, shares have delivered double-digit annual returns. It’s time to ditch oil for renewable energy stocks. Brookfield is the clear leader.
Fool contributor Ryan Vanzo has no position in any stocks mentioned.