Solving The Challenges Of Energy Security – Seeking Alpha

by | May 11, 2022 | Energy

onurdongel/E+ via Getty ImagesBy Sam Peters, CFA An Energy Crisis Decades in the Making We are currently in a crisis, as the world has underinvested in energy and is now short of power. Energy troubles were emerging even before the horrific events in Ukraine. However, the conflict unleashed a geopolitical crisis that reminded the world that power is one of the most effective strategic weapons. This crisis will spur much-needed investments in energy, both legacy and renewable, as energy security is merged with an acceleration in energy transition. The big challenge is that energy security and transition will take time and trillions of dollars in investment. We think the dominant narrative and driver of the current market cycle will be in meeting this great challenge. How did we arrive here? In the post-2000 equity bubble, the dominant market narrative was the explosive demand for energy and commodities from emerging markets. The thesis was the economies of Brazil, Russia, India and China (BRIC) would overcome the six largest western economies by 2030. The growth of these BRIC economies would drive such great structural demand for commodities, especially energy, that supply would never catch up. Investors were underweight commodities during the late stages of the BRIC mania. It dominated daily financial news, was a focal point of every meeting, and was accepted as truth. How could we not realize the world was simply running out of stuff? The major concern was that U.S. energy dependence was growing rapidly (Exhibit 1). The data showed that U.S. oil and gas reserves were rapidly dwindling, U.S. energy insecurity was growing rapidly and desperate solutions were emerging. As a result, the U.S. was preparing to import liquified natural gas (LNG), renewable investments in solar and wind were ramping up and some crazy energy companies were trying the impossible: fracking. Exhibit 1: Energy Dependence and Independence As of July 29, 2021. Source: International Energy Agency Fracking was originally a fringe idea that energy experts largely dismissed. But after a lucky mistake when a drilling team incorrectly mixed the fracking fluid, it produced surprisingly good results for natural gas. Then, to everyone’s surprise, it worked with oil. The U.S. became the largest oil producer in the world and enjoyed an incredible and unimagined path to its energy independence. The byproduct, of course, was that energy and most commodities endured a violent down cycle that relegated the BRIC narrative to the trash bin of market history. This shift from a narrative of energy insecurity and scarcity during the BRIC market cycle to energy security and abundance during the FAANG market cycle was a critical swing factor. The shale boom and massive expansion of Chinese production, most of it powered by cheap thermal coal, were effectively massive deflati …

Article Attribution | Read More at Article Source

Share This