Major environmental concerns. Oil, gas and coal companies are notorious for products that emit greenhouse gases, which worsen global warming. They also have other potential environmental issues, like oil spills. Not only is this an ethical concern, it also makes energy companies vulnerable to costly lawsuits, which can hurt your returns.
A volatile market. Energy prices can swing widely and rapidly, depending on the state of the global economy. For example, over the past 10 years the price of crude oil has gone from as high as nearly $110 a barrel to as low as less than $20 a barrel at the start of the Covid-19 pandemic. The value of energy stocks tends to track energy prices, making these investments more volatile and potentially riskier than stocks in other sectors.
Companies need to make big investments. It takes considerable resources to explore new sources of energy, like drilling for new oil wells, not to mention research and development for sustainable energy technology that may not always pan out. These financial drains can potentially harm your long-term returns if enough of them coalesce.
Extra regulatory risk. As the world ramps up the fight against global warming, global leaders could enact more regulations limiting the use and production of some sources of energy, like fossil fuels. On the other hand, green companies often rely on government subsidies for development, which don’t always come through, creating political risks on both sides of the energy sector.
Innovation and technology may reduce long-term demand. New sources of green energy, like solar, have become dramatically less expensive over the past decade. This is cutting into the demand for coal and could also start hurting demand for oil, gas and other traditional energy sectors, potentially jeopardizing their long-term value.