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The sky is not falling, Part 3

The best investment opportunities occur when negativity rules

World total energy consumption has been steadily rising, increasing 3.5 times in the last half-century. This is driven by the more than doubling of population, increasing economic growth and prosperity. Energy consumption temporarily declined twice in the last half century — during the 1980-82 recession and the 2007-09 Great Recession.

Energy consumption and economic growth are highly correlated. Those who hope for significant reduction in energy use are thus knowingly or unwittingly in favour of recession and lower standards of living. Most people don’t like recessions, which unfortunately have a greater impact on lower-income families than higher-income families.

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Most of the facts in this article come from a fascinating report titled “Energy Production & Changing Energy Sources,” written by an organization called Global Change Data Lab. This organization is a charity registered in England and Wales. Its purpose is “to advance education in how global living conditions and the earth’s environment are changing, through the production and maintenance of public online resources and related products.”

According to the Global Change Data Lab, in 2018, 93.8 per cent of the world’s energy consumption came from the Big Three: oil made up 37.5 per cent, coal made up 31.6 per cent, and natural gas made up 25 per cent. The fourth-largest source was hydroelectricity, making up 2.8 per cent. Then nuclear at 1.9 per cent, wind at 0.6 per cent, other renewables at 0.4 per cent, and solar at 0.2 per cent.

Those of us who farm know it would be impossible to feed 7.7 billion mouths without widespread adoption of modern genetic, crop protection and fertility products. Likewise, it would be impossible to move, keep warm and provide light without the use of the Big Three energy sources. Despite massive investment in renewables, their share of the energy mix remains small, and their overall growth, while larger in percentage terms, is significantly smaller in absolute terms than growth in the Big Three.

The most fascinating chart in the report was titled “Energy Intensity of Economics,” which outlined how much energy is used to produce one unit of growth in Gross Domestic Product (GDP). In the quarter century from 1990 to 2015, the world managed to reduce the amount of amount of energy needed to produce one unit of GDP growth by about 33 per cent. More fascinating is that high-income countries produce almost twice as much output per unit of energy than low income countries, and most fascinating was that China, with its dramatic growth in economic freedom and prosperity, reduced its energy intensity by two-thirds from 1990 to 2015. This data illustrates the profit motive’s relentless drive to efficiency.

The Big Three will be difficult to displace in the short term, as they remain very efficient energy sources. They have excellent EROEI’s (energy returned on energy invested). Solar and wind power are getting better, but have a long way to go when you look at the entire life cycle. Nuclear and hydro power have excellent EROEI’s, and despite the public’s perception, nuclear power has far and away the best record on death rates resulting from energy production.

Energy and the markets

The crescendo of negativity around the Big Three energy sources has never been louder and company valuations have rarely been lower. Apple now has market capitalization similar to the S&P 500 energy index. Investors think Apple is worth as much as the entire U.S. energy industry. What would you sooner live without, energy or your iPhone? I can live without my iPhone but not without energy which wouldn’t exist without oil as an ingredient. Surprisingly, less than half of the oil consumed is to fuel automobiles.

The weighting of energy in the S&P 500 peaked in 1980 at 25 per cent, declining to five per cent in 2000. It increased to 15 per cent in 2008, and is once again five per cent. The energy sector decline eclipses the 2007 to 2009 market crash. Before thinking of selling your energy stocks ask yourself, “Is the sky really falling?”

The Great Recession represented an entire market, “sky is falling” scenario. But did the sky really fall? We have now had a decade of relatively uninterrupted economic growth; the U.S. stock market is double its 2007 high, and five times its low of 2009. The TSX, on the other hand, is just 15 per cent above its 2008 peak and just over double its 2009 low, performing poorly partly because of its heavier weighting towards oil, which has declined from 30 to 15 per cent of the index.

The Great Recession represented the best buying opportunity in a quarter century. Even though the crescendo was deafening the sky didn’t fall. Will this repeat in the energy sector? I certainly don’t pretend to know exactly what will happen. Like in 2009, 2015, last December and with energy today, I try my best to prop up the sky when it’s falling, and have generally profited nicely from those efforts.

Find the paper by Hannah Ritchie and Max Roser that is referred to in this column online at OurWorldInData.org. Search for “Energy Production & Changing Energy Sources” in the search box at the top right.

About the author

Contributor

During a 35+ year career in ag sales and management, Herman VanGenderen became an active investor and stock and real estate, building portfolios in both. His latest book is “Stocks for Fun and Profit: Adventures of an Amateur Investor.” Visit his website at www.you1stenterprises.com or email Herman at [email protected]

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