James Cooper | August 8, 2023 |
Stock image.
I’ve taken the title for this article from the 2006 documentary film directed by Davis Guggenheim about former United States Vice President Al Gore’s campaign to educate people about global warming…
It was called An Inconvenient Truth.
So today, we’re going to deliver you perhaps a more pressing ‘inconvenient truth,’ one that’s set to undo our multi-generation assumption that energy supplies would remain cheap and abundant.
I set the scene back in June showing you why this energy crisis is being born out of years of under investment in the oil and gas industry.
If you haven’t already, I suggest you read that here.
Its why I believe storm clouds are approaching for global energy security…. The fossil fuel industry is running on empty.
It means we need to come up with an alternative base load energy source far earlier than the 2030 or 2050 targets mandated by western leaders.
Yet these governments have told us that renewables will naturally take up the slack from declining oil and gas output.
But dive into the data and it seems we’ve made a gross miscalculation on our ability to achieve net zero.
Why?
It centres around the lack of metal supplies sitting in the ground… Also known as mineral reserves.
That’s what the research from Associate Professor Simon Micheaux has uncovered.
Micheaux was engaged by the Geological Survey of Finland to calculate the entire volume of metals needed to bring one-generation of solar panels, windfarms, and EV’s into our energy mix.
Now, when Micheaux explains ‘one-generation’ this means the volume of raw materials needed to entirely replace fossil fuel reliance with renewables.
According to his research, these renewable energy sources have a service life of around 15-20 years.
Once that’s complete we’ll need to re-start and build the next generation all over again!
So how much metal do we actually need to create just that first round of renewables?
This is the part that will make most politicians shift uneasily in their seats…
Based on current annual output, Micheaux’s peer reviewed studies indicate we’ll need a staggering…
· 9,920 years’ worth of Lithium production
· 1,733 years’ worth of Cobalt production
· 3,287 years’ worth of Graphite production
· 189 years’ worth of Copper production
· 400 years’ worth of Nickel production
All condensed into 20-30 years!
But as I explained last month, thanks to a stranglehold on oil and gas development we’ll need to transition far earlier.
But as Micheaux’s data highlights, the crux of the problem is not so much the enormous increase in output but the fact we don’t actually have the metal in the ground to begin with.
Staggering!
Using data from the US Geological Survey, Micheaux discovered global copper reserves will fall short by 80%, global nickel reserves by 90%, and cobalt by around 96%.
Simply put, of all the cobalt we know that exists in the ground today, if we were to mine all of it then we’d have just 4% of the cobalt needed to achieve net zero.
It highlights a gross miscalculation by political leaders in their assumption that renewables would naturally pick up the slack from declining oil and gas output.
A problem they have created by penalising investment into fossil fuel industries.
It also points toward a disturbingly high probability of global energy shortages… This is backed up by Goehring & Rozencwajg’s recent report predicting multi-fold increases to energy prices set to manifest by the mid-2020’s.
This is as a complex problem that has the potential to erode global standards of living.
It’s also highly inflationary.
For over a century we have taken for granted uninterrupted access to abundant energy that has enabled technological innovation and improved standards of living.
But the seeds have been sown… An end to civilisations ‘era of abundance’ is fast approaching.
While this is set to be a monumental miscalculation with potentially dire consequences for the global economy…
There are perhaps a few key areas for investors to take shelter from a looming energy crisis.
The first and most obvious solution is gaining broad exposure through a highly liquid oil and gas ETF.
The iShares U.S. Oil & Gas Exploration & Production ETF (IEO) offers a market-cap-weighted ETF with exposure to companies engaged in the exploration, production, and distribution of oil and gas.
Assets under management stand at around $1.3 billion… The ETF also offers investors a 1.96% annual dividend yield.
With leverage to rising oil and gas prices it also enables investors to capture upside from future discovery.
Given the impetus to find more oil after a decade-long slump, holding exposure to both production and exploration should serve investors well.
However, the service-side of the oil and gas business is also set to capitalise on future energy volatility.
It offers investors a strategy for de-risking their exposure to production shortfalls and declining output among those companies that have chosen not to invest in future supply thanks to government net-zero mandates.
Should the global economy look to re-align itself with stabilising energy supply then capex spending will be enormous… Service companies will benefit the most.
The VanEck Oil Services ETF (NYSE: OIH) tracks the world’s largest O&G service companies… Including big names like Schlumberger (NYSE:SLB), Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BKR).
These are multi-national companies with a global reach.
That limits jurisdictional risk… Something that hangs over producers operating in countries committed to ending oil and gas licenses and development applications.
Another angle to this investment theme is to focus on mining stocks.
Despite the seemingly impossible task in finding enough critical metals, governments will continue to push the net zero mandate.
It means they’ll be abundant opportunities to gain upside from explorers and developers focussed on critical metals.
But the most important point to understand is this…
Our modern economy has been built on decades of abundance… Cheap and plentiful supplies of energy.
But poor planning and lack of investment is steering the global economy toward a much more difficult future… One that will be mired in scarcity and far higher energy costs.
It’s why commodity stocks… From oil, gas, nickel, rare earths to copper, offer enormous long term upside for investors able to look beyond these short term market pressures.
Given this sector has endured heavy selling in 2023 investors are well placed to snap up bargains before this long term theme gains momentum.
James Cooper is a commodities analyst and geologist.
No comments:
Post a Comment