Natural Resources

Profiting from energy

Despite the weak economic growth across the developed world, global energy consumption continues to grow strongly, driven by emerging markets. Human progress over the past 150 years has relied on cheap and plentiful sources of energy. But now, billions of people in emerging markets are using more and more energy. Will there be enough energy to go around in future, and at what price? And how can investors profit from it?

I believe we are all living through an age of massive change.

The old economic powers have dug themselves into a massive debt grave, and keep digging. Plus their populations are ageing and about to start shrinking.

At the same time vast swathes of poorer countries, usually referred to as “emerging markets” in the investment world, are freeing up their people to go out and make money. And their populations are mostly growing as well.

Ridiculous old political dogmas, such as communism, have been largely abandoned in favour of commerce. Dictatorships and autocracies have been replaced with democracies.

Bureaucratic regulations are being thrown on the bonfire. Taxes are being cut. Trade barriers are being removed. Infrastructure is being built.

Of course there are exceptions. And different countries are better or worse in each regard. But viewed from 30,000 feet, the “big picture” is one where hundreds of millions of people, perhaps billions, are being given the chance to improve their incomes and their standards of living.

These people are moving from subsistence, with barely enough food to eat, to having spare income to spend on luxuries large or small. They are becoming “consumers” for the first time. And quite reasonably they want a lot of the things that people take for granted in developed countries.

Fridges…air conditioning…a motorbike, maybe a car…a television…more clothes…a better and bigger home…a computer…the list goes on.

All of this stuff has to be made from something. This increases the demand for commodities such as iron ore, copper, zinc and aluminium.

It also leads to much higher energy demand. The manufacture of “stuff” uses energy. Delivering it to customers through the supply chain uses energy.

Using a lot of it needs energy too. Motorbikes and cars need fuel in the tank. Electrical equipment needs to be plugged into the power grid.

…for all the clever improvements in energy efficiency that are being developed, total world energy use continues to climb.

So for all the clever improvements in energy efficiency that are being developed, total world energy use continues to climb.

Here’s a chart from the BP Statistical Review of World Energy 2016 ( Link Updated). It shows how world energy consumption grew from 1967 to 2012, by energy source. Each type is shown in million tonnes of oil equivalent, or “MTOE”. The trend is very clearly upwards.

BP Energy Consumption Report

There’s a lot in here. But first off, let me highlight that renewables (dark orange) remain a tiny piece of the bigger picture. These include energy sources such as solar, wind, wave, tidal and geothermal power.

Despite decades of investment, massive government subsidies, and tax breaks for these sectors, taken together they satisfied just 1.9% of global energy consumption in 2012.

…it’s also clear that they remain practically irrelevant for now when it comes to meeting global demand levels. In the grand scheme of things, renewables are a rounding error.

It makes sense to keep investing in these areas, where they’re economically viable. But it’s also clear that they remain practically irrelevant for now when it comes to meeting global demand levels. In the grand scheme of things, renewables are a rounding error.

Next is hydroelectricity, shown in blue. The expansion of this is limited by natural features. For a hydroelectric plant you need a big river and a suitable place where you can build a massive dam and power plant.

Also, power is lost when transmitted over long distances through cables. Often the best sites for hydroelectric power stations are far from the industrial and population centres where the power is needed. Hydro provided 6.7% of global energy in 2012, but looks unlikely to grow much.

Then there’s nuclear, shown in yellow. This energy technology is complicated by the fact that waste materials from the fission process are used in nuclear weapons. So people that have nuclear power feel the need to stop others developing the capability. Or at least they try.

As I’ve explained before, the uranium price could rocket higher as increasing demand meets constrained supply. But for now, nuclear energy provides just 4.5% of global energy needs.

This leaves us with the big boys: fossil fuels. Between them they made up 86.9% of global energy sources in 2012. Oil (in green) is the biggest at 33.1%, although that’s down from 42.9% of the total in 1967. Next is coal (in grey) at 29.9%, followed by natural gas (in red) at 23.9%.

Like it or not, the maintenance and improvement of global living standards remain heavily reliant on carbon intensive fuels. This has implications for climate change as energy demand continues to grow.

Broadly speaking, my view is that the developed world should lead by example to cut emissions at home, while living standards play catch up in poorer countries.

After all, the developed countries are responsible for most of the carbon dioxide emissions created in the past. But developing countries need to play their part too. This is especially true if they want to become world leaders in energy efficiency technologies, which I expect to create huge new industries in the future.

Do we have enough energy?

Taken at the aggregate level, world energy consumption increased by 203% between 1967 and 2012, a span of 45 years. It went from 4,123 MTOE to 12,477 MTOE. Put another way, it went up by a factor of just over three.

…energy consumption grew roughly twice as fast as the population did.

Over the same time the human population went from 3.47 billion to 7.05 billion, an increase of 103%. In other words, energy consumption grew roughly twice as fast as the population did.

The population keeps growing. Huge numbers of people are using more energy than before, even as the developed world has weak economic growth. And energy is becoming more expensive, increasingly difficult and less efficient to produce (a topic I’ll return to another day).

Combined with inflationary effect of the crazy money printing going on around the world, I expect this to keep upwards pressure on energy prices, especially over the medium to long term.

You should expect your energy bills to go up, OfWealthers. But one way to stay “hedged” (reduce your risk) is to invest in the companies or countries that look set to prosper from this ongoing energy grab.

Apart from uranium, you could also take a look at Russian shares (stocks). Most Russian index funds have a high exposure to oil and gas producers, and the Russian market is trading at bargain basement levels.

For the adventurous there are also plenty of highly profitable individual natural gas and oil stocks in Russia, mostly trading at ultra low P/E ratios. Just remember, prices can be volatile and you must stay diversified at all times with your investments.

Energy will continue to be a big issue in the coming years and decades. Make sure your investment strategy is positioned to profit from it.

Until next time OfWealthers,

Rob Marstrand
robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.