October 14th, 2021
Opinion: The Cold Reality of Green Energy
Dear Retail Investor,
One day I was walking to the gym I frequent and noticed a Tesla parked out front with a custom license plate that read ‘LOL OIL’. I chuckled to myself, mainly because I found the vanity plate perfectly exemplified the somewhat self-righteous attitude of the typical Tesla driver.
But it is my opinion that the average climate doomsday disciple, who has good intentions with respect to the environment, does not fully grasp the reality of how the global economy currently functions and the amount of energy needed to not only sustain it, but to allow it to continue to grow.
Governments, which in the West are mostly progressive and left-leaning, tend to speak in platitudes about green energy, but their policies are often insufficient and shortsighted.
Green energy is a great endeavor for our planet and commitments are being made mostly in the form of decarbonization measures such as emissions reduction targets, imposing carbon taxes and banning new car sales of petrol-fueled vehicles.
But the truth is these measures fall far short of disrupting the supremacy of fossil fuels in everyday life.
Let’s look at the transition to electric vehicles, for example.
Many countries have brought forward plans to ban fossil fuel powered vehicles between the years 2030 and 2040, with the expectation that this will lead to most motors on the road being electric in the near future.
However, there was seemingly very little forethought given to where the raw materials to build the infrastructure needed for all these electric vehicles will come from, nor for the amount and type of energy that will be required to charge them.
For instance, if you’re a Tesla owner and you live in the United States, there is a 60.3% chance that you are charging your Tesla using electricity sourced from either coal or natural gas. Unless the source of the electricity, in this case the utilities sector, goes “green” by using more wind, solar, or hydroelectric power, you are probably still using hydrocarbons to charge that Tesla Model 3.
Every day we’re told by the media and politicians that fossil fuels are bad, and green or renewable energy is good. Since fossil fuels are bad they must be villainized in the media and policies must be put in place to uphold this perspective, such as moratoriums on drilling and cancelling pipelines.
But the fact is that like it or not, fossil fuels are still indispensable in our everyday lives, and it’s important that the right balance of reducing emissions and keeping oil and gas prices affordable is reached.
Fossils fuels like oil and gas are still, in fact, a vital part of the economy
However, thanks to policies that have slashed the development of natural gas projects, Europe is experiencing an energy crisis as they cannot find enough natural gas to heat homes this winter. The cold reality is that we still need fossil fuels – and we need them now.
On the other hand, relying on mainly green energy, on a mass scale, is still a pipe dream. According to the International Renewable Energy Agency, the global energy transformation requires US$27 trillion dollars of investment until the year 2050 to meet the objectives of the Paris Climate Change Agreement. The world is on pace to meet only half that investment. That’s a lot of money and a big shortfall. Moreover, there are a lot of moving parts in building green infrastructure, including mining raw materials such as copper.
In fact, copper is the primary metal needed for the electrification of the world, and we desperately need more of it to displace fossil fuels and meet our energy needs. Robert Friedland, a billionaire mining tycoon, agrees with this too. He thinks that world is massively underinvested in the materials for green energy and that politicians tremendously underestimate how difficult it will be to disrupt fossil fuels as the primary supply for rising energy consumption.
The world will need all the copper it can get, and it will need to mine it from high-risk countries, if we are serious about the green energy transition. This will require capital from the exploration phase all the way to building mines, and it typically takes at least 10 years or more to get from exploration to production. Also, copper prices need to remain high enough to incentivize development and production of new mines, especially if they aren’t high-grade deposits.
Make no mistake, copper will be the bedrock for the energy needs in the coming decades
However, it needs a hell of a lot more attention and investment now, even from self-righteous Tesla drivers, if we’re to transition to greener energy sources.
Like it or not the fact is we will need fossil fuels to meet the world’s energy needs, which have only been rising since the advent of smartphones and high speed internet. Trucks still need gas, homes need heating oil, your barbeque needs propane. These are the cheapest forms of energy for consumers and the most cost-efficient. Price stability is important for consumers’ wallets, but they may continue to get pinched in the current environment if producers keep getting stymied by government policy and lack of investment.
Oil and natural gas price have been on a tear, and the stocks within the sector have had phenomenal returns since the pandemic began and still trade at historically low valuations (see our previous article).
Some analysts are pointing to $100 oil again because supply is simply unable to keep up with growing demand for energy.
Natural gas has more than doubled in price this year. This will mean higher prices at the pump and higher costs to heat your home.
No consumer likes a pebble in their shoe and there will be frustration expressed by consumers as prices continue to rise. Unfortunately, the unrealistic climate change policies spouted by our hypocritical politicians will only makes thing worse as they continue to find ways to strangle the oil and gas sector.
Further, the investment funds divesting from fossil fuels could exacerbate these inflationary pressures if there is insufficient capital coming into the oil and gas sector to develop new projects. Oil companies have already thrown their hands up in the air and have made plans to drastically reduce capital expenditures in production, including drilling new wells. This means the supply side of oil is going to be very tight, new production will take more time to come online, and prices will rise.
To conclude, the transition from fossil fuels to green energy will not be an easy process unless government and institutional investors double-down on their investment in green infrastructure, which includes utilities, charging stations, batteries, and raw materials. Investment also needs to continue to be made into fossil fuels to prevent supply shortages as emerging markets develop and the world population grows.
In conclusion, green energy is a long-term investment and a great endeavor, but it’s costly for ordinary consumers right now.
The paradigm has changed for oil companies as they cut back on capital expenditures to focus on shareholder returns, which in effect could cause the oil price to continue to trend higher as spare capacity is diminished and demand outpaces supply. If this scenario plays out, those invested in oil and gas will be the ones laughing.
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