It seems the energy sector is constantly taking center stage in the news. Sometimes it's the major investments being made in renewable energy. Other times, it's the skyrocketing gas prices as a result of low supply, high demand, and global market volatility brought on by events like Russia's invasion of Ukraine.
As a result, it's natural for investors to wonder whether they should be investing in oil stocks or renewable energy stocks. There are arguments for both industries and we'll dive into those below.
But it's also not quite as simple as an either/or question. Determining which types of energy stocks to invest in often involves considering personal convictions as well as potential returns. Here's how to think through both of these factors before you select energy investments for your portfolio.
The Short Version:
- Historically, oil companies have made up some of the oldest and largest companies in the S&P 500.
- After a volatile past few years, oil soared back up to pre-pandemic values in 2021. And sanctions of Russian oil producers has caused even steeper price increases in 2022.
- Meanwhile, renewable energy has emerged as a popular investment due to concerns over climate change and improved technology in the sector.
- To mitigate the risks of investing in oil while capitalizing on market surges, we recommend a diversified portfolio that includes both oil and renewable energy stocks.
Investing in Oil Stocks Over the Last Few Years
Oil has long been a key focus area of the stock market, partially due to its importance in the U.S. and global economies. Oil companies make up some of the largest (and oldest) in the S&P 500, including several dating back to the late 1800s and early 1900s. And today in 2022, oil stocks remain a popular investment option that show up in many investors' portfolios.
But just as oil stocks have a strong history in the U.S. stock market, they also have a somewhat volatile one. Since the financial crisis in 2008–2009, oil stocks have experienced dramatic fluctuations and more dramatic highs and lows than other industries.
Oil stocks were hit particularly hard at the start of the COVID-19 pandemic. A short-lived price war between Saudi Arabia and Russia pushed prices down considerably, which impacted energy stocks. To make matters worse, the lockdowns at the start of the pandemic cut oil demand dramatically. As a result, oil stock prices plummeted, and they didn't immediately recover with the rest of the stock market.
But 2021 brought a very different story for oil companies. Oil and natural gas prices increased 59%. This helped give the industry a major boost. Demand also increased dramatically as lockdowns had largely ended and people were on the go more. Oil stocks outperformed the S&P 500 overall in 2021.
Chart key: Orange line: crude oil / green line: S&P 500
Investing in Oil Stocks Moving Forward
Russia's invasion of Ukraine caused yet another large spike in gas prices. While this major event caused stocks in other sectors to lose value, oil stocks rose yet again.
Chart key: Orange line: crude oil / green line: S&P 500
On the one hand, this could indicate that now is a great time to invest in oil stocks. On the other hand, the recent price surges could mean exactly the opposite — that now is not the time to sell your oil stock holdings. Experts have observed that oil stocks are nearing their all-time highs, suggesting they have nowhere left to go but down.
It's worth noting of course that financial factors aren't the only ones worth discussing when it comes to oil stocks. The effects of climate change have become a major concern for many Americans in recent years.
There has been an increased investment in related industries in the past decade. And many investors today are being more cautious about where they put their money. If you aim to align your investments with your personal values, oil may be one of the sectors you choose to leave out of your portfolio.
Note: Many oil companies have also invested in clean energy generation and have committed to reducing their carbon emissions. As a result, it's not uncommon to find them in ESG and socially responsible funds.
Investing in Renewable Energy Stocks
It's no surprise that renewable energy stocks have become a popular choice for investors over the past several years. There has been considerable investment in renewable energy, including wind power, geothermal energy, solar power and more.
Environmentally-conscious investors have begun adding these stocks to their portfolios. And some of the largest companies (and yes, that includes oil companies) have made major investments in green energy.
Over the past decade, the trend toward green energy has been obvious in the stock market. And renewable energy exchange-traded funds (ETFs) have largely outperformed ETFs holding traditional energy companies. For example, the iShares Global Clean Energy ETF (ICLN) far outperformed the Energy Select Sector SPDR ETF (XLE) over the 10-year period preceding 2022.
Chart key: Orange line: XLE / green line: ICLN
Curious About ESGs? Check out our article on how to get started, leading strategies and more.
Oil vs. Renewable Energy Stocks: Which Is Right for You?
While oil stocks may not have measured up over the past decade, the industry isn't going away anytime soon. The U.S. — and the world in general — is still heavily reliant on fossil fuels. So while the industry may bring more volatility to your portfolio, there may still be a place for those stocks.
The glory days of renewable energy, however, are still very much on the horizon. The use of renewable energy is expected to only increase over time, especially as more governments and companies pledge to become carbon neutral in the next several decades.
That's why the simplest answer to the question of whether to invest in oil or renewable energy is: You can do both. As we mentioned, companies in the fossil fuels industry are some of the ones that invest heavily in renewable energy. This suggests that oil companies won't go away — they'll just adapt their business model to the changing times.
Finally, it's important to remember that a good portfolio is a well-diversified portfolio. So from a purely financial perspective, investing in both types of energy stocks is still the safest strategy.
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