The Enduring Appeal of Oil and Gas Equities

Today the world faces a critical challenge: making a global-scale transition to renewable energies, essential to ensure humanity’s long-term future.

It’s a huge challenge, far greater than is widely understood. That’s why I have been so passionate in arguing that it’s self-defeating to focus on climate change at the expense of securing all the energy, including fossil fuels, necessary to create the renewable energy infrastructure required.

Past Transitions Took Decades

The history of past transitions from one primary energy source to another throws light on the immensity of the task we face in moving to a new primary energy source.

In the U.S., the transition from wood to coal, and then from coal to oil, took nearly a century. Today solar, by far the most scalable renewable energy source, accounts for more than 25% of the world’s renewable energy output.

Solar energy consumption has grown nearly 25-fold over the past decade, an annualized growth rate of over 40%. Those numbers have fed the belief that we’re well on our way.

Yet this past decade barely counts as a start. In terms of primary energy (all the energy the world uses, not just electricity) solar accounts for only about 1% of the total.

Amazingly, wood, the original energy source, still accounts for 6% of the world’s primary energy, six times solar’s portion.

Moreover, those earlier century-long transitions applied just to the U.S. Today, the entire globe is involved. A big reason for wood’s continuing role is that much of the world still lives in abject poverty.

Developing Economies Play Critical Role

Along with accomplishing a massive energy transition, the world also needs to sharply raise the developing world’s living standards, meaning major investments in infrastructure, not just for moral reasons but because the developing world controls some 70% of the world’s natural resources.

Fortunately, when it comes to current climate-motivated efforts to curb fossil fuels, we think economics will have the final say. The recent climb in energy prices speaks to the futility of curbing carbon-based fuels before new energy sources are in place.

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Indeed, prices for renewables also have risen. Prices of polysilicon, the energy-intensive material in solar panels, have risen nearly threefold since their low last year.

The sharp rise in energy prices, and in virtually all other commodities, should be seen as a warning that the rush to decarbonize has been a mistake. The sooner we reverse course, the better our chance of achieving a self-sustaining world run by clean energies from the sun and the universe’s most abundant molecule, hydrogen.

Meanwhile, investors must reckon with the reality that the rise in commodities is unlikely a short-term blip from transitory factors. While the steepness of the rise may reflect some supply bottlenecks, by far the biggest bottleneck is that commodities are becoming increasingly scarce and more expensive to obtain.

The West’s cutting back on fossil fuels has likely made a tough situation worse. The U.S. asking the Middle East, and Europe asking Russia, to supply the West with more energy is more than just an admission of failure and of the need to change course. It signifies how dependent we’ve become on the developing world and the East. It tells us that the East and West no longer can be considered separate economic spheres.

The growing importance of the developing world means the current gains in commodities likely are the start of a long-term trend, not a flash in the pan. The fact that the dollar has remained strong in the face of rising commodities is a singular event. It’s further evidence that Western economies, which center around financial rather than real assets, are losing their influence in the world economy.

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