Everything in the world consists of energy, and in that respect, the economy too consists of nothing but energy. Nor is it surprising that after the invention of the steam engine, the world's economic growth exploded, so to speak. Energy is what drives today's society. In developed countries, the consumption of energy is hardly growing in recent decades. The effect of increasing prosperity is offset by the increasingly efficient use of energy. This is not the case for many less developed countries. These are sometimes still in the transition process from burning wood to using fossil fuels, although they are increasingly skipping that step and switching from wood to alternative forms of energy. The demand for fossil fuels in the next 25 to 30 years will grow by 25 per cent, in line with world population growth.
Bear in mind that three-quarters of the world's population does not have the luxury of an energy transition. Those who cannot afford it for the time being. Poor people especially start consuming more energy as they move up to the middle class. See car ownership, for example. The average American owns 0.71 cars and the average European 0.52. In Asia, it is 0.14 cars, and in Africa 0.05 cars. It is an illusion to think that these last two regions would not want to go to the level of Europe or the United States. Who is going to stop them?
Energy consumption still revolves around fossil fuels. It took us 150 years to produce and consume 100 million barrels of oil a day, and such an infrastructure cannot suddenly be replaced. The European Union may ambitiously announce that fossil-powered cars will no longer be allowed to be sold in Europe in a little over 10 years, but the alternative of an electric-powered car quickly faces a major shortage of various metals in this transition. On average, it takes seven to 10 years between an investment decision and eventual production from various mines. Those who want to drive just about everything electric in 10 years' time may start investing heavily in new mines now to make this possible. On the contrary, less investment is being made.
There is a lot of support on paper for reducing CO2 emissions to zero as soon as possible, but the moment this comes at the expense of energy consumption, that support quickly falls away. It is like the protests against globalisation, every week the same people walk out of the supermarket with two shopping bags full of globalised products. Moreover, following the invasion of Ukraine, it became clear that it is unwise to fight two wars at once. The war against the Russians wins out over the war against the climate crisis. Natural gas, nuclear power, and even coal, in the face of the looming energy shortage, were again quickly accepted by climate Pope Timmermans, with plenty of lobbying to get all these forms of energy under the European Union's sustainable flag.
Against the rising demand for energy, including fossil fuel energy, there is remarkably a shrinking supply. Now there is plenty of oil in the world, but as far as exploration is concerned, the low-hanging fruit has now been picked. It will become increasingly expensive to extract oil. There are three main producers in the world: Saudi Arabia, Russia, and the United States. By far the cheapest oil to produce still comes from the Arabian Peninsula, but they are starting to hit the limit. Recently OPEC reduced production by 2 million barrels a day, but before that, there were growing doubts about whether OPEC (read Saudi Arabia) would be able to produce an additional 2 million barrels.
OPEC+: Running out of spare capacity at an unstable time
Source: IEA, Oil Market Report (October 2022)
Russian oil production is also doomed to fall rapidly. See the example of Venezuela where oil production fell from 4 million barrels a day to 500,000 barrels a day. The only reason was the departure of foreign oil companies. Without Western technology from Schlumberger and Halliburton, oil production may fall even faster in Russia than in Venezuela. Indeed, the harsh Russian winter has little respect for Western components. In addition, in the US, shareholders steer towards returns in the form of dividends and share buybacks. Reinvestment is discouraged.
Investing in new production has also become rapidly more expensive. There too, it is difficult to find staff, and credit has become substantially more expensive for the fossil industry in recent years. Based on proven reserves, oil and gas will run out in about 50 years. Of course, there is much more in the ground, but it will not be cheaper to extract it. One alternative is nuclear power. France went from 2 per cent nuclear power to 70 per cent nuclear power in 20 years (up to 1997), which was just right for the climate crisis. Such a transition with solar panels or wind turbines at the same time is impossible given the metals required. Moreover, the French were using older and therefore more expensive technology. Modern nuclear power plants are cheaper and safer.
Energy now weighs about 5 per cent in the S&P 500, with the five largest tech stocks comprising as much as 22 per cent (after last week's 21 per cent) of the S&P 500. Moreover, there is a strong analogy between the FAAMG to the Nifty Fifty. Strong companies have become too expensive, partly because everyone wants them in their portfolios. It does not actually happen in history that yesterday's winners are again the winners of the future. Given the fundamental outlook and the still low valuation, energy has a good chance of being among the new winners in 2030.
Comments