Subsequent to the election of Biden as president, the mainstream media have been full of stories heralding the robust flowering of green energy and an accelerating decline in the use of hydrocarbons, mainly oil and gas. I instinctively distrust anything the mainstream media have to say since I am convinced, they see their role not as seekers of truth but as promoters of the narrative favored by leftists, big tech billionaires, big government, and big business. So, having years of experience trying to understand energy markets, I decided to investigate for myself. My inquiry was strongly spurred by the fact that last year I had started investing in energy companies on the theory that by conventional measures, they looked quite cheap. It turns out I was premature. I wanted to determine whether I was not just early but wrong.

I was fortunate enough to come across some truly superb research, grounded in good data and sound logic. I came across the work of Leigh R. Goehring and Adam A. Rozencwajg (G&A). http://gorozen.com/research/commentaries/4Q2020_Introduction They have never heard of me, and I do not now nor will I have any financial relationship with them. Nonetheless if you want to separate truth from nonsense in the natural resources sectors, I urge you to read what they have to say. What follows is a distillation of some of their thoughts on the prospects for clean energy.

Green energy: a triumph of hype over reality (in the short run)

Green energy, shorthand for wind, solar, electric vehicles and associated battery technologies, is not only uneconomic relative to energy from fossil fuels, it will not fix the CO2 problem it is intended to solve. (I don’t think that man-caused emissions of CO2 are a problem to begin with, but that is the subject of past and future blogs.)

What evidence is there to support this assertion?

• Germany over the past two decades has gone from getting 2% of its electricity from renewables to almost 40%, but carbon emissions per unit of energy have fallen by only 12%, no better than the United States whose carbon intensity over the same period fell by 13%, even though renewables accounted for only 10% of electricity production as of the end of 2019.
• Electric vehicle sales in Norway rose from nothing in 2010 to nearly 60% in 2019, but carbon intensity declined by only 10%, three percentage points less than in the U.S. where electric vehicles (EVs) are less than 2% of vehicle sales.

What accounts for these results? Electricity generation from wind and solar are extremely inefficient because of their low energy density (amount of energy stored in a given mass or volume) and intermittency. When the wind doesn’t blow and the Sun doesn’t shine, green energy generators are nothing more than inert, useless lumps. A solar panel, for example, generates between 12% and 20% of its rated capacity; a wind turbine typically operates at less than 25% capacity. The result, as A&G note, is that, “As much as 25-60% of the energy generated in a renewable system is consumed internally compared with 3% for a modern gas plant.”

Because of their inherent inefficiency, solar and wind power generation facilities require very high capital investment per unit of electricity generated relative to gas fired plants. The construction and maintenance of green power plants are themselves highly carbon intensive: “To the extent overbuilding and battery backup [are] required to allow for baseload power, CO2 emissions increase dramatically. This partially explains why German carbon intensity only fell by 12%, despite having among the highest renewable penetration in the world.”

A&G estimate that the build-out of renewable power generation facilities combined with the proliferation of EVs would result in the production of an incremental 45 billion tons of CO2. This is equivalent to about ten years of carbon “savings” from renewables and EVs relative to the next “cleanest” option which is power from natural gas. Furthermore, the estimated reduction in CO2 from a push to renewables is highly dependent on assumptions as to the expected lives of wind and solar installations, which so far are failing at higher rates than expected.

Advances in technology may improve the efficiency of renewables and EVs at the margin. Yet, I am aware of no technology on the horizon that would make a meaningful improvement in the relationship between energy in (capital investment and operating efficiency)  and energy out (power production).

Fossil fuels: doom and gloom overdone

Until recently, fossil fuels stocks accounted for about 3% of the market capitalization of the S&P 500, down from 30% in 1980. This drop seems excessive. For example, stories about peak demand notwithstanding, global demand for oil should grow modestly, as a possible decline in developed markets is more than offset by demand growth in emerging markets. Supply at current prices will not keep pace. Most of the “low hanging fruit” (low cost sources of production ) has been picked. Just to keep global production even, oil producers have to find new production of about four million barrels annually to offset depletion. This is becoming harder and harder to do. Higher prices are in the offing or supply will fall short of demand. Furthermore, the value of the energy from fossil fuels is so high relative to price that there is considerable room for price increases before price itself starts to impact demand.

In sum, hopes for a fast and smooth transition away from fossil fuels are unfounded. Energy expert Daniel Yergin summed up the situation thusly:

“Yet the notion of a fast track to a wholesale energy transition runs up against major obstacles – the sheer scale of the energy system that supports the world economy, the need for reliability, the demand for mineral resources for renewables, and the disruptions and conflicts that would result from speed.”

“… oil will maintain a preeminent position as a global commodity, still the primary fuel that makes the world go round. Some will simply not want to hear that. But it is based on the reality of all the investment already made, lead times for new investment and innovation, supply chains, its central role in transportation, the need for plastics…, and the way the physical world is organized.” https://www.amazon.com/dp/B084GDG8DG/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1

I decided that

there was a huge disconnect between market perception and economic reality.

• if I was wrong, I wouldn’t lose much because energy stocks had become pariahs among investment professionals and the public alike.

I now have about a quarter of my financial assets invested in the energy sector.