Watching the reports on Irma and Harvey, rubbing my eyes from the haze that covered much of Seattle, and having the wettest winter in Seattle’s recorded history to this summer’s longest period without rain all feels like climate change to me.
Yet we seem to be plunging forward into a future which will require more natural resources and more energy than ever. I am an optimist, and am confident that we will solve the problem – we will find a way to produce more energy with less damage to the climate. There will be investment opportunities on both sides (energy needs and climate change), and that is what I wanted to discuss today.
On the radio program, I have illustrated the impact of greenhouse gases by relating an analogy. Think about when the outside temperature is 75⁰ and you drive to the mall to do some shopping. You have the air conditioning on in the car set at 69⁰. You park the car and go shopping for an hour or two, and when you get back to your car and open the door. The temperature is not 69⁰ or even 75⁰; it is boiling in the 90s. What happened? The sun rays shined into the car turning to heat when it hit the seats and interior of the car. Some of the energy bounced back, but was blocked by the roof of the car. If you have a convertible with the top down, none of that happens. The heat from the sun escapes.
That is similar to what happens with greenhouse gases. The sun rays hit the earth and without the greenhouse gas, would bounce back. But the greenhouse gas acts like the roof of your car, keeping the heat of the sun from escaping.
I’ve written about the impact emerging markets are having on the market and the middle class before – that by 2030, 93% of the world’s middle class will be in countries like China, Brazil, and Russia. As affluence around the world increases, logically, energy use per capita grows. China alone, for example, is currently responsible for approximately 23% of global energy use compared to the US’s 17%.[1] By 2035, the world energy demand is estimated to increase by 30%.[2] That is the repercussion of “First World” technology and comforts becoming common worldwide. Our current response, burning coal, oil, and natural gas, will continue to wreak havoc on the planet; it is estimated by the International Energy Agency that by 2025 it will take $45 trillion invested in global energy to meet the necessary levels of greenhouse gas reduction.[3]
In my opinion, $45 trillion may be too high and does not take into account the changes in technology we will see over the next ten years. In any case, there will be significant capital directed toward energy producers and that creates opportunities for investors if they choose the right opportunities.
Although climate change has found its way into the realm of political controversy, the reality is that 99% of scientists who have spent time on the problem agree it exists. In the end, I believe that climate change is not about political stances, but about fact and scientific study.
Climate change began with the Industrial Revolution, when humans began using coal, oil, and natural gases to power their innovative new technologies. The CO2 concentration at the beginning of the Industrial Revolution was 280 ppm – we know this because scientists are able to drill into ice caps and measure time and carbon content. In 2011, the CO2 in the atmosphere was measured at 402 ppm.[4] The CO2 traps the heat inside the atmosphere (hence the title “Greenhouse Gas”) and slowly heats the earth.
We have seen that between 1880 and 1970 that the average temperature increase was only about 0.03⁰C each decade (which means about 1⁰F over 190 years). But since 1970, the average temperature has increased 0.13⁰C (meaning 1⁰F every 40 years)![5] The global temperature increase is responsible for dangerous storms like Hurricanes Harvey and Katrina, the wildfires, melting ice caps, and dozens of other symptoms.
If we look at coal, which represented a full third of US electricity generation in 2016,[6] we find that our coal plants are only on average 37.4% efficient.[7] That means that our current technology is only able to capture and use a certain percentage of the kinetic energy available in the fuel source. We are outpaced by Japan, China, and the EU. To compare, the most efficient power station is the Nordjylland Power Station in Denmark, which clocks in at 47% efficiency.[8] I doubt that any other industry would boast about efficiency under 50%; all the more reason to rethink how we approach energy production, and perhaps there will be investment opportunities
Oil and natural gas will have their place in energy production. But demand growth will probably slow down.
Clean energy, for all the political babble surrounding its implementation, is well on its way to being the most practical means of production. You have likely already heard that in 2016, solar became “cheaper” than fossil fuels; the situation itself is not so simple that it can be calculated out “apples to apples” because government subsidies and location must be factored in as well.[9] Even without the subsidies, the payback for solar is equitable in 46 of the 50 US states. Estimates are that solar will grow at 30% annually. That said, that the debate even exists gives valuable insight into solar’s growing competitiveness. Likewise, wind and hydro energy have become more efficient. Even nuclear is becoming more and more viable. The area I find most exciting is bioengineering – companies which are altering bacteria to create the compounds found in fossil fuels in a fraction of the centuries it takes for them to be produced naturally.
It is in these alternative energy producers that I believe the key to future investments lie. Many US Corporations committed to the Paris Accords even after the US officially pulled out, and will be investing heavily over the next decade in renewable energy. Ford has announced that they intend to up their production of electric cars to 50% by 2020. California hopes to be run by 60% renewable sources by 2030, and Hawaii, which is currently the most oil-dependent state in the US, wants to be 100% dependent on renewable energy by 2050.
Remember, $7 trillion USD has been spent annually worldwide on energy. It is an industry that, by necessity, will see enormous growth, although with changes almost certain, previously unknown investment opportunities may present themselves.
[1] U.S. Energy Information Administration. Annual Energy Outlook 2016 with Projections to 2040. August 2016. https://www.eia.gov/outlooks/aeo/pdf/0383(2016).pdf
[2] U.S. Energy Information Administration.
[3] International Energy Agency. https://www.iea.org/. Accessed on 9/5/2017.
[4] Global Climate Change: Evidence. (2008, June 15). Retrieved September 5, 2017, from http://climate.nasa.gov/evidence/
[5] Global Climate Change: Evidence.
[6] “What is US electricity generation by energy source?” US Energy Information Administration. April 18.2017. Accessed on September 5, 2017. https://www.eia.gov/tools/faqs/faq.php?id=427&t=3
[7] “How Does US Coal Power Plan Efficiency Stack Up?” Process Barron. March 2, 2017. Accessed on September 5, 2017. http://processbarron.com/news/u-s-coal-power-plant-efficiency-stack/
[8] Process Barron.
[9] Richardson, Luke. “Solar energy vs. fossil fules: how do they compare?” EnergySage. December 29, 2016. http://news.energysage.com/solar-energy-vs-fossil-fuels/
