GEOS Insights: Now More Than Ever

By Robert J. Uek, CFA
Co-Portfolio Manager, Essex Global Environmental Opportunities Strategy

Now More Than Ever

Current global energy demand is roughly 100 million barrels of oil equivalent per day, with about 20% of this produced in the United States. Thanks to the widespread use of unconventional drilling and the prolific output of the Permian Basin, the United States is now the largest producer of oil and gas in the world, and over the past five years or so, the U.S. has been a net exporter of energy. While these are impressive statistics given where we stood 15 years ago, they mask the unpleasant fact that we are still dependent on global oil and gas trade. First, much of the crude oil that we produce is of the “light and sweet” variety whereas our refineries which were built decades ago are better suited to processing the “heavy and sour” variety of oil. And second, oil is a global commodity and is priced based on the global supply and demand picture – international events causing energy price spikes might not interrupt our domestic production but will still negatively impact our economy.

The Iran conflict and closing of the Strait of Hormuz have highlighted the fact that our economy is still far too dependent on fossil fuels as an energy source, especially transportation. Whether the Iran conflict ends in the next several weeks or lasts longer, it is clear that we need to push to embrace clean technologies and alternative energies. We do not need subsidies to make this happen as these technologies already are at cost parity or better than that of older technologies.

After a bout of early enthusiasm, many clean technologies and especially electric vehicles now reside in the proverbial valley of despair. It seems to us that now is the time that the U.S. auto companies should be expanding their offerings of electric vehicles. Instead, the U.S. auto industry has been sharply scaling back its electrification efforts and risks being completely wrong-footed at a time when oil prices could be meaningfully higher for an extended period of time, echoing the industry’s existential challenges of the 1970’s and the oil embargo that allowed cheap, fuel-efficient Japanese cars to grow share rapidly at the expense of Detroit OEMs. China and the rest of the world have been moving forward to newer and better cars based on emerging battery technologies that have extended ranges, better creature comforts and cheap prices. In the U.S., we continue to delude ourselves into thinking that these new technologies are “green frauds” and are overly expensive and only capable of driving short distances. These are all falsehoods. We think pump prices above $5 per gallon will stir renewed interest in fuel efficiency and EVs.

There are U.S. companies that are well-positioned and poised to succeed. Rivian Automotive (RIVN) seems especially well-positioned for this moment as they are launching a new cheaper model (the R2), which is reminiscent of the launch of Tesla’s Model 3 which propelled that company to profitability and a period of significant growth.

We see similar opportunities in this moment with solar energy and wind energy. The costs of electricity from these technologies are already among the cheapest sources of energy in the world. Importantly, the use case of these renewable energies is vastly expanded by the huge decline in energy storage costs over the past five years. Renewable energy no longer needs to be intermittent. These are sources of energy that will be immune to global fluctuations in energy prices, whose operating costs are limited to routine maintenance.

The opportunity to change our energy dynamic and strengthen our economy is upon us. The case for alternative energy sources and energy technologies is stronger and clearer than ever. It is disturbing that the headlines in the past week included stories of Alabama considering a ban on utility-scale solar plants and the U.S. government’s plan to pay TotalEnergies $1 billion to halt an offshore wind energy development. Political rhetoric against clean technologies has never been more misplaced. But forward thinking companies that “get it” are embracing these technologies. Utilities such as NextEra Energy, Inc. (NEE) continue to develop institutional-scale solar and wind farms, often with attached energy storage arrays.  NextPower Inc. (NXT), a provider of technology to increase energy production from utility scale solar plants, continues to invest in new technologies that expand target markets. And Enphase Energy (ENPH), which designs microinverters for solar panels, is successfully adapting to the end of residential solar incentives in the US and also developing new power technologies such as EV charging and battery storage.

The huge inflection point in energy demand driven in part by power-hungry data centers, re-onshoring of manufacturing and the electrification of everything has driven the realization that the world needs increases in power from all sources. The Iran conflict and subsequent spike in oil and gas prices is a sharp reminder that we have cost-effective solutions to the pending energy crisis. The energy transition is accelerating and the need for solutions is needed now more than ever.

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Disclosures:
This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.

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