How do the major oil companies navigate their way from currently searching for, pumping, refining and finally selling oil & gas to consumers to a world which will eventually have to learn to survive on energy from another source.  What is a sensible price (or p/e ratio) to pay for a major Western oil & gas company whose principal line of business will disappear at some point in the future?

At some point in the future the supply of oil & gas will become increasingly restricted (proponents of the Peak Oil theory believe that world production levels have already peaked and are now on a declining trend). Long before we get to a situation where Saudi Arabia and Gazprom/Russia have a stranglehold on oil and gas respectively, the rest of the world will have to have moved beyond petroleum and onto a different resource for their everyday energy needs.

The most likely source of the R&D funds to seek out new types of energy are Western governments and the oil majors themselves; the latter are fully aware of their need to diversify away from oil & gas or else end up being convenience store operators on the sites of their (former) petrol stations.  Just how much money gets thrown at this particular problem is likely to be directly correlated to the oil price (if oil is cheap & plentiful then there is no pressing need to hurry up and research its replacement).

Does this mean we should all sell our shares in BP, Shell and the other oil majors immediately? No.  As with most blue chips, the most sensible investing strategy is to play the trading ranges within a diversified portfolio.

However sensible portfolio diversification means not having too high a percentage of your portfolio in oil & gas companies.  Having no exposure makes no sense either because then you would have nothing to sell if the price of oil suddenly rockets for whatever reason (one oil-price-spike scenario the doomsters love is where the US gets Israel to bomb the Iranian nuclear reactors/processing plants and Iran closes the Strait of Hormuz in retaliation – 90% of the oil exported from the Persian Gulf passes through the Strait of Hormuz on oil tankers).

As a happy side-effect, when the world does eventually move beyond petroleum, carbon emissions will presumably fall off a cliff (millions of petrol-powered cars will no longer emit CO2) which will keep the global warming crowd happy and they will be able to move on to worrying about something else which is of more immediate interest to mankind (they can take their pick from : global poverty, hunger, malaria, girls’ education in the Third World, etc.).  Hopefully the entity which discovers the world’s next source of energy will engage with their charitable side and donate some of (what will undoubtedly be) their enormous future profits to one of these projects; echoing what happened when petroleum succeeded whale-oil and John D. Rockefeller donated some of his Standard Oil fortune to philanthropy.  To this day, ExxonMobil (which is essentially formed out of two of the companies which Standard Oil was broken up into in 1911) is still the most valuable company in the S&P 500 and XOM paid out over $8 bln in dividends last year.