The oil and gas industry just passed another milestone in the global energy transition. On Aug. 31, Exxon Mobil will be kicked off the Dow Jones Industrial Average, following its slide from the top 10 companies in the S&P 500 in 2019. That will leave Chevron as the only oil and gas firm left in the Dow.
What’s replacing those fossil fuel behemoths as they fall from grace? Increasingly, it’s global technology firms that represent significant share of major stock indices, as well as the broader stock market.
The Dow historically consisted entirely of heavy industries, manufacturing, and transportation (General Electric, US Leather, and Chicago Gas Light and Coke Company made the first list in 1896). Gradually, oil and gas rose through the ranks: At least one fossil fuel giant has been on the roster since the 1920s.
At its peak in 1976, the energy sector could claim Standard Oil of California (later Chevron), Exxon, and Texaco on the index. But today, just a quarter of the companies listed are manufacturers, and technology firms lead the index’s growth. Exxon’s replacement on the Dow will be business cloud software company Salesforce, joining peers including Microsoft, IBM, and Apple.
The trajectory of both industries has long been clear, but the coronavirus seems to have accelerated both. Salesforce, now valued at $196 billion, eclipsed ExxonMobil’s market capitalization only after the pandemic-related oil price crash kneecapped the oil major. On Aug. 25, ExxonMobil’s market cap fell to $172 billion.
The same trend has played out in stock prices. Energy stocks as a whole have performed dismally since 2015. That decline went into overdrive last year as oil and gas stocks dropped by 35% even as the broader market rose by nearly 20% (along with shares in major renewable energy firms). Tech stocks, meanwhile, have been on a tear, driving the S&P 500 to a record high last week.
In many ways, the market-cap-weighted S&P 500 index preceded the Dow’s decision to break up with energy. Fossil fuels accounted for nearly one-third of the S&P 500 at its peak in 1979. Today, technology companies are about a third of the index, while energy firms represent just 2.5%.
Neither index is likely to kick out every last oil company as long as the world burns hydrocarbons for most of its transportation. But their days may be numbered—especially in the S&P 500, which weighs corporate valuation over stock price, along with long-term financial viability and liquidity. If oil prices don’t recover, and national producers like Saudi Arabia and Russia continue to pump oil into a declining market, Chevron might find itself the next one to go.