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Do oil companies have a future on the ASX?

Black gold…

Oil has long been the source of enormous wealth, both in Australia and around the world. Indeed, one of the richest men to have ever lived – John D. Rockefeller – built his fortune on the back of oil. His company Standard Oil was so successful that the government eventually had to break it up. Its legacy companies are still amongst the largest oil companies in the world.

More recently, a Saudi Arabian company Saudi Aramco has broken the record for the biggest stock market float in history, which valued the company at an almost inconceivable US$1.8 trillion.

But what kind of future does oil have on the ASX?

Australia is home to many large oil companies, including the $34 billion Woodside Petroleum Ltd (ASX: WPL), the $18.75 billion Santos Ltd (ASX: STO) and the $12.2 billion Oil Search Limited (ASX: OSH).

And who could forget the Big Australian – BHP Group Ltd (ASX: BHP), which boasts significant petroleum operations as well.

Oil is a commodity – drilled out of the ground and sold at whatever the prevailing market price is at the time. Like all commodity extractors, oil companies are ‘price takers’, which means (unlike most companies) they have little to no control over what they can sell their product for.

Despite this, oil has traditionally been a great place to invest. Oil companies pay some of the best dividends around – both here and overseas.

Right now, Woodside shares are offering a fully franked starting yield of 4.97%, for example.

Over in the US, oil giants ExxonMobil and Chevron offer similar yields. In Britain, BP pays a whopping 6.17% yield.

The problem with oil

But here’s why I’m not investing in oil anytime soon (despite being partial to a good dividend myself).

I have no idea what the oil markets are going to look like in 10 years’ time – let alone 30 or 40. It’s no secret that the electrification of road networks is a goal of most governments around the world. The internal combustion engines that cars and trucks rely on today are inefficient, dirty and significantly contribute to global warming.

Vehicle manufacturers like Tesla are also making long-range electric cars (and soon trucks) that are gaining traction in the US and other markets as well. If this trend continues, I see a possible ‘demand cliff’ for oil over the next decade.

Foolish takeaway

Whilst I’m sure oil will continue to be used in many industrial applications for the foreseeable future, I do think that its future as the main fuel of transportation is limited.

It is for this reason (as well as my concerns around climate change) I’m not interested in ASX oil stocks (or those beyond our shores) in my investing portfolio. Oil may have some kind of future on the ASX, but it’s not one I’ll be a part of.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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