To those of you who are joining me after watching the Planet Finance documentary in Europe, welcome. I hope you’ll find these occasional letters of value.
Energy markets are currently in a state of lassitude, caught between the systemic supply shortage of fossil fuels on the horizon (caused by Russia and other factors), and overwhelming economic pressures that are pushing the global economies of Europe and the US towards recession.
I have no crystal ball on what the timeline is or the possible severity of the downturn to come – if there IS a downturn to come. But let me give you my take from the most wide-angle lens I can using my lone area of expertise — the energy markets – and make the case that if you are worried about your money (and who isn’t?) and are trying to invest wisely for the future, that future must contain traditional energy stocks.
For this letter, I’m not concentrating on anything ESG, although those investments certainly have their place. In fact, I won’t bother to document proof of any of the theses that follow. This newsletter doesn’t give me the space or time and I’ve written three books attempting to do that. If you read this and have other, differing notions of the energy world than I do, I can only say that I have been an investor, market maker, commentator, observer and recognized expert in this area for the last 40 years, so my thoughts might still hold some value.
Oil is by far the most valuable commodity resource on our planet. Nothing else comes close. Look around you right now, wherever you are – and you will not help but spot oil in just about everything you see. At my desk at this moment, I have multiple products made of or containing plastic: computer devices, pens, locks, monitors, containers for all types of things, including water and food – all of it made from oil. My clothing contains synthetic fibers, I have both prescription and non-prescription drugs (in plastic bottles) in my desk drawer. Fertilizers for agriculture, rubber, lubricants, chemicals, refrigerants, paint, cleaners – the list is literally endless – it’s all oil. Our modern chemists can synthesize most anything from something else. But the one thing you cannot manufacture from something else is oil. It is the building block for our modern world. I look on oil and other fossil fuels and their role in our world the way we all view water and air. No one really wants to hear this, and I take no joy is saying it, but it’s true whether you like it or not: Oil is Life. And I don’t see how that ever significantly changes.
Renewables are, at least for the practical future, just a dream. It is also my dream, by the way, but still mostly a fantasy. Yes, sustainable energy technologies have made vast strides in recent years and yes, there is a ton of money and effort being devoted to them to make further strides which we all hope will emerge. But they are all, in real terms, coming from a zero point of contribution to the global energy portfolio, and making that first 2% and then 5% of impact on our energy needs is comparatively easy. After that, it starts to gets much harder. Infrastructure challenges abound as you try to implement and integrate sustainable energy sources for hundreds of millions of people, and not just a few wealthy folks. This applies for transportation with electric vehicles as well (where the electricity is assumed to be generated through sustainable sources), and even in this lone case of transportation where renewable energy seems to be making the most immediate impact, it must be remembered that transportation is only 25% of our total energy use in the US (and far less elsewhere).
Therefore, “peak demand” – that is, the theory that the amount of fossil fuel use is about to ‘peak’ and will begin to decline from then on (towards zero I suppose?) is another unlikely dream. On the contrary, even the most optimistic reasonably constructed projections I have seen don’t see oil demand peaking globally for at least the next 15 years. The decline that will arise after that is, also by every projection that makes logical sense to me, very slow indeed. This implies that instead of declining, oil demand will be rising instead. 15 years is an investing lifetime, during which fossil fuels will be, by definition, still a growth industry.
“Peak supply” is a similar misnomer. It is, of course, necessarily true that fossil fuels are a limited resource, but that limit is very, very deep indeed – like running out of sand. What is true is that easily acquired oil is getting more and more limited. For example, we’ve seen in the US the oil ‘shale boom’ fade after less than two decades, leaving only one dominant shale play left – the Permian. But total shale oil resources in the US haven’t really declined much in that time, only the portion of shale oil that was really cheaply accessed. This is essentially true worldwide – resources are not really getting more scarce, but they are requiring and will require ever increasing amounts of money and effort to get at them.
These last four paragraphs of mine have led me and should lead you to this one important investing takeaway:
Oil prices should naturally move in one direction – UP – just like virtually everything else has over time, including stocks, real estate and food.
But oil has gone up and down in price to extremes several times over the last 25 years, from $30 to $145, to $28 to $115 to a NEGATIVE $35 to recently $120 and down to $70. A straight line in oil prices has definitely NOT been the recent history of prices, that’s for sure.
Despite all this, I will maintain that prices are inexorably headed higher.
To put my three books and thousands of columns in a single sentence, the history of oil prices is a very slow moving, at times idiotic march of bad political and corporate priorities and decisions, all resulting in an enormous waste of resources and opportunities.
But that doesn’t change, to me, the ultimate trajectory of oil prices. If you have a commodity that is literally indispensable while it’s demand continues to increase and it’s supply gets less available and more expensive all the time, you have the makings of what I would call a very, very solid long-term investment.
The trick after that is to know where and how to invest.
dan@dandicker.com
