Question: How is our portfolio going to be impacted by the transition to new “greener” energy sources? (VK: I rephrased the question.)
Answer: The transition to “green” energy will be rocky, expensive, and not-so-green – our CO2 emissions will likely go on rising. The beauty of being in my seat: IMA clients are not paying me for political views or political correctness. I am getting paid for pragmatism. Let me make this point clear – I want clean air and I don’t want temperatures to rise. Really, my coworkers at IMA put a parka on when they come into my 65 degree overly-air-conditioned office. Spending the formative years of my life in Murmansk, a city located above the Arctic Circle, where the ground was permafrost, must have rewritten my DNA. As you can see, I have personal reasons not to be a fan of global warming. I also very much want to leave a better planet for future generations.
Now that I have hopefully convinced you that “Big Oil” is not my middle name, let’s discuss a topic that should not be politically sensitive but somehow is – energy.
Solar and wind are not good sole sources of energy – they are intermittent, relying on the kindness of Mother Nature, who is temperamental and not always kind. To compensate for this weakness in our green sources, when Mother Nature takes a break, we need either cheap and ample batteries (we have neither), or to turn on peak demand power plants that run on natural gas (if we are lucky) or coal.
Being rich has allowed us to develop what some call “luxury beliefs” – ideas and beliefs that make us feel good about ourselves but that horribly fail upon contact with objective reality. We ignore inconvenient truths about our green energy weaknesses and keep marching on, trying to convert an even larger portion of our economy to wind and solar power.
The US is not the only country that is inhibited by luxury beliefs. Take Germany for instance. After Japan’s Fukushima incident, it gave up nuclear and went “green.” Except that “green” was anything but. Germany’s CO2 emissions went up and so did its electricity prices. Yes, the coal-fired peak power plants that Germany uses to provide electricity on the days when the wind doesn’t blow or the sun doesn’t shine are more expensive and produce more greenhouse gasses than nuclear power plants. Another example, just a few months ago, electricity prices in Europe skyrocketed because (I kid you not), the wind stopped blowing in the North Sea.
When it comes to power generation, luxury beliefs are dangerous. Electricity is anything but a luxury; it is a necessity. In addition to powering the internet, which allows us to watch cat videos on Facebook, it is what separates our society from our ancestors in the Stone Age. As we keep decommissioning nuclear power plants and going “green,” in the end we’ll go “brown” as our CO2 levels mount, or in the worst case it will simply be lights out as we are forced to ration power.
China is not as rich as we are and struggles with horrendous air pollution which must be killing tens of thousands of people a year. China cannot afford luxury beliefs; it is pragmatic. It has announced that it will be building 150 (!) nuclear power plants over the next twenty years.
Still, I am optimistic about future greener, more stable sources of energy. Billions of dollars are being poured into research and development of alternatives to fossil fuels. Just as we have seen with Covid vaccines, if incentives are high enough, scientists and entrepreneurs make great efforts and success follows. This is the beauty of capitalism. Unfortunately, for the short run, and fortunately, for the long run, there is a good chance these incentives will only become greater over the next few years, as energy costs globally are likely to skyrocket.
Doubling or tripling electricity bills and $6-9 gas prices will bring pragmatism back and divorce us from luxury beliefs in solar and wind. I have a hunch higher energy price will trigger more politicians calling for FTC investigations into utilities and energy companies. Politicians know the true cause of high energy costs: the capital cycle (low oil and natural gas prices result in less exploration and production of oil) and their own policies (throwing sticks in the wheels of energy and pipeline companies, decommissioning nuclear power plants, doubling down on wind and solar). Politicians will deflect their responsibility onto “evil big oil.” I really don’t want to come back in my next life as an oil company – I am damned if I produce and damned if I don’t.
These are my thoughts on investing during climate change – in the short run we’ll most likely have higher energy prices, which in the future will bring us more truly green energy.