Energy is not Growth (but doesn't have to be)

The Gist: (1) Throughout history, oil and gas returns on capital have struggled to compete with the leading growth and tech stocks of their respective eras. (2) Even though energy is not growth per se, it doesn’t need to be. (3) Future value is generated by reinvesting at opportune moments—particularly when the cost of replacing and developing the next hydrocarbon reserve is low.

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The first recorded price for a barrel of oil in the U.S. (for which I have record of) occurred 1,986 months ago in September of 1859 at $20/bbl.

Since its introduction, oil prices began to decline and wouldn’t surpass that nominal price until July of 1979—120 years later.

However, after adjusting for inflation, a barrel of light sweet crude from the foothills of Pennsylvania fetched an astonishing $752.27/bbl in today’s dollars—a price that has never been reached since and most likely never will be. But never say never!

Think about that: since the industry's inception, we have essentially been in a long-term bear market.

This is why the oil-to-S&P ratio forms a descending log-scale chart.

One key takeaway from the chart above is not just that energy versus stocks (hard assets versus paper assets) tends to trade price leadership every 12–13 years, but, more importantly, that U.S. large-cap equities—primarily growth stocks—prevail over the long run.

Markets exist to allocate capital to sectors with the highest returns, and oil and gas have historically struggled to compete with the leading growth and tech stocks of their time.

As the chart below illustrates, this pattern has persisted through various eras, including the Roaring Twenties, the Nifty Fifty boom, the late 1990s, and even today.