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Forbes: Energy Stocks Are This Generation’s Big Tobacco, Says Economist Peter Sainsbury

Jan 24, 2020

The fossil fuel industry faces a dilemma similar to what confounded big tobacco a generation ago, according to economist and energy specialist Peter Sainsbury.

Speaking on the Contrarian Investor Podcast, Sainsbury says oil companies in particular are starting to be seen as “sin stocks,” with institutions divesting themselves on ethical grounds. But therein lies the opportunity. Much like tobacco companies reinvented themselves in the 1990s, energy companies can undergo a similar renaissance. Indeed the process of oil companies divesting harmful assets is already underway. This causes opportunities for investors. But first, headwinds can be expected.

“Back in the late 1990s … the tobacco industry was feared, hated, disgraced even,” Sainsbury says. “It was a really unpopular business to be in,” with lawsuits around public health and other negative publicity taking its toll. But the tobacco industry has since reinvented itself, diversifying into healthier alternatives. The oil industry has started its own version of this process, investing in more environmentally sustainable energies. “A company like Shell has moved increasingly from oil to gas, reducing its carbon impact. I think we’re going to start to see much more aggressive moves in that direction.” As this happens, these companies’ earnings may be put under pressure in the short term. “But that relative cheapness creates an opportunity over a period of several years — a decade or more — for that share price to outperform in the future.”

There are other historical parallels that make a bullish case for oil prices over the long term. Sainsbury points to the lead market. By the late 1980s this business was increasingly unpopular, due to adverse health effects coming to light. As measures were taken to reduce use of lead (unleaded petrol, lead-free paints, etc.), demand fell. “Because it was such an unpopular business to be in, there was not enough investment in new mines, new smelters.” When demand did return, there was not enough supply and lead prices skyrocketed.

Another commodity investors should pay attention to is gold. “Over the last three- to six months, there’s been an interesting pattern emerging.” Technical signals point to higher prices, the U.S. presidential election stands to create uncertainty that should benefit gold, “and potentially pressures in the global economy could see pressures start to go much higher.” Sainsbury likes gold miners as well. He is less bullish on palladium, viewing prices of this metal as “frothy”.


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One Comment

  1. Christopher Ives says:

    John – an eye-opener – Chris

    Green Myths that Canada’s LNG Sales Force Tells the World.

    “No, methane’s no fix for global coal-fired energy. Here’s why.”
    by Andrew Nikiforuk Yesterday –

    1. Leaky LNG actually poses a bigger climate threat than coal.
    2. There is no guarantee LNG will ‘replace’ Asia’s coal burning.

    Even the Canadian Energy Research Institute, a pro-industry group, has aptly summed up the problem of extensive methane leakage from industry:

    “There is a consensus about a knowledge gap in the amount of methane emitted from the natural gas supply chain.”

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