Barely a day goes by without a news story featuring a dire warning regarding the climate and how we need to switch to low or zero carbon energy sources. Certainly, much investment has gone into renewable energy projects, such as offshore wind farms, in recent years. And if you watch a TV advert for a car company these days, more often than not they will be trying to sell you an electric vehicle.
However, the fact is that fossil fuels continue to dominate the global energy mix, and this is not going to change for some time. Renewables will continue to take market share from fossil fuels over the coming decades, but from a very low base as this chart shows:
Source: Our World in Data; 2020
At the same time, total global energy demand is likely to continue to grow, driven in large part by individuals in emerging markets becoming wealthier and living more energy-intensive lives, as well as by the need to create the green economy. As a result I would expect that, in absolute terms, the amount of energy supplied by coal, oil and natural gas will rise over the next ten years.
Energy companies in developed markets evidently disagree. The oil majors have been rushing to change the public’s perception of them by pivoting into renewable energy projects. Mining majors have been offloading their thermal coal or oil and gas divisions while focusing on metals of the future, such as copper. Their management teams no doubt see this as future-proofing their businesses by investing in the ‘energy transition’, and it is far too early to judge how successfully they will execute these pivots.
But in the shorter term, I think there is a significant risk that the industry underinvests in fossil fuel production and that we could be sleepwalking into a global energy crisis. In the US, ‘front month’ natural gas prices are now at their highest in a decade (excluding a very brief spike in 2014). But at $5/mmBtu they are still far below the prices being paid elsewhere. European natural gas prices have hit record highs, which is feeding into record electricity prices in the UK as well as Continental Europe. Further afield, Pakistan recently paid $15/mmBtu for September LNG deliveries, which is the highest since it began imports in 2015. At the same time coal prices in Asia recently hit new highs while inventory levels at Chinese and Indian coal-fired power plants are reportedly at critically low levels.
I think we may hear quite a bit more about tight energy supplies as well as rising electricity and heating prices over the northern hemisphere winter, especially if it turns out to be a particularly cold one.
Andrew Fargus, Investment Manager