Fossil fuels still greatly dominate global energy consumption but the coronavirus pandemic is hastening changes that are in turn providing investment opportunities. Below, we show you how to position your portfolio amid these fluid conditions.

Last month BP (NYSE: BP) released the BP Statistical Review of World Energy 2020. The annual Review provides a comprehensive picture of supply and demand for major energy sources on a country-level basis.

This annual report is one of the most important sources of global energy data. Many companies, governments, and non-governmental organizations (NGOs) use this data to make decisions, so it’s important to familiarize ourselves with the Review’s findings.

Energy Overview

Primary energy consumption grew by 1.3% last year, which was less than half the rate of 2018 (2.8%). Nevertheless, this still represents the 10th consecutive year that the world set a new all-time high for energy consumption.

The largest share of the increase in energy consumption, 41%, was contributed by renewables. Natural gas contributed the second largest increment with 36% of the increase. However, as an overall share of energy consumption, oil remained on top with 33% of all energy consumption. The remainder of global energy consumption came from coal (27%), natural gas (24%), hydropower (6%), renewables (5%), and nuclear power (4%).

Cumulatively, fossil fuels — shown below in shades of gray — still accounted for 84% of the world’s primary energy consumption in 2019.

China was responsible for three quarters of the world’s energy consumption growth, followed by India and Indonesia. The U.S. and Germany posted the largest declines.

Carbon dioxide emissions set a fourth consecutive new all-time high. However, emissions growth last year was only 0.5%, which was less than half the 10-year average. Since the negotiation of the 1997 Kyoto Protocol to curb emissions, global carbon dioxide emissions have risen by 50%.

Oil

Oil accounts for a third of the world’s energy consumption. That is the greatest share for any category of energy. In 2019, the world consumed a record 98.3 million barrels per day (BPD) of oil. This was nearly 1 million BPD higher than consumption in 2018, and marked the 10th consecutive record for global oil consumption. Oil consumption demand growth was led by China, which has been the case for the past decade.

But global oil production fell for the first time in a decade, as growth in the U.S. was more than offset by OPEC production cuts. Given the impact COVID-19 is having on the world’s energy markets, it looks as if 2018 may stand as the high mark for oil production for at least a couple of years.

Over the past 35 years, global oil consumption has risen by 39 million BPD, an average increase of 1.1 million BPD each year. Last year’s rise fell just short of that average.

Natural Gas

Natural gas is the cleanest of the fossil fuels. It is also fastest-growing fossil fuel, with a global 2.6% average annual growth rate over the past decade.

By comparison, oil grew at a rate of 1.3% over the past decade, and coal grew globally at 0.8%. Looking ahead, natural gas is projected to be the only fossil fuel that will see substantial demand growth over the next two decades.

Over the past decade, the U.S. shale gas boom propelled the U.S. into the global lead among natural producers. In 2019, the U.S. held a commanding 23.1% share of global natural gas production, well ahead of Russia (17.0%) and even the entire Middle East (17.4%).

Coal

Global coal production increased by 1.5%, led by increases in China and Indonesia. But global coal consumption declined by 0.6% and coal’s share in primary energy fell to the lowest level in 16 years. Coal demand in OECD countries fell to the lowest level in the history of the Review, which dates to 1965. This demand continues to be a function of whether a country is still developing, as those countries (i.e., non-OECD countries) continue to drive the world’s coal demand.

Coal is often called the dirtiest fossil fuel. What is meant by that?

Fossil fuels are composed of carbon and hydrogen. They are hydrocarbons. When carbon is combusted, it forms carbon dioxide. When hydrogen is combusted it forms water. Coal contains a higher percentage of carbon than does oil or natural gas. So, when coal is combusted, it produces more carbon dioxide per unit of energy than oil or natural gas will produce.

According to the Energy Information Administration (EIA), combustion of coal emits about 210 pounds of CO₂ per million British thermal units (BTU) of energy. In comparison, oil emits about 160 pounds per million BTU, and natural gas emits 117 pounds per million BTU.

Another issue with coal is that there are a lot of other associated emissions from coal-fired power plants. Historically, coal plants emitted a lot of sulfur dioxide, which causes acid rain. Regulations eventually reined in that problem, but coal-fired power plants still emit pollutants like mercury. They even emit more radioactive elements than a nuclear power plant. Thus, there have been many regulations passed that have attempted to lower coal’s impact on the environment.

However, because of the various pollution issues associated with coal, most developed countries have moved away from coal-fired power.

The decline in the U.S. has been dramatic. Coal consumption in the U.S. peaked in 2005, but remained at a constant level until the financial crisis of 2008. At that point, U.S. coal consumption began to decline at an average annual rate of 5.1% for a decade. U.S. coal consumption declined another 14.6% in 2019 and is now 50.4% below the peak level.

Cheap natural gas and renewables have displaced coal consumption in power plants in recent years. The dramatic decline in U.S. coal consumption is the primary reason U.S. CO₂ emissions have fallen sharply in the past decade.

Renewables and Nuclear Power

Renewable energy continued its impressive growth streak with the largest increase in consumption on record. Wind was the largest contributor, but solar was close behind. China once again led all countries in consumption of renewables, followed by the U.S. and Japan. The share of renewables in power generation increased to 10.4%, surpassing nuclear power for the first time.

Nuclear consumption rose at the fastest level since 2004, with China and Japan providing the largest contributions to the increase.

How should investors view the latest Review? It seems clear that coal is in a decline phase. While there will still be coal production for a number of years, investing in this sector is trying to pick a handful of winners from a losing sector. It’s not a good bet.

Oil and natural gas will continue to grow. But oil demand in the transportation sector is going to face increasing competition from electric vehicles. There is a growing belief that oil demand will peak within a decade.

Natural gas, on the other hand, is expected to continue to grow at a brisk pace for the next two decades. As the cleanest fossil fuel, it will likely maintain a place among utilities as a source of firm power to complement a growing portfolio of renewable power.

The best energy opportunities…

The real growth story will continue to be in renewables. A growth-oriented investor should look toward wind and solar companies, while a more conservative investor might consider utilities that are adding more renewables to their portfolio.

Regulated, U.S.-based utilities stocks are good proxies for dividend growth. Utilities provide essential services, a virtue that tends to make their stocks recession-resistant. During this pandemic-induced economic contraction, people still need electricity. Utilities also are insulated from overseas shocks, such as tariff wars.

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