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Last year’s great energy debate – to transition or expand – has a clear winner. It turns out that the energy transition, in which conventional energy was to be rapidly phased out and the use of renewables accelerated, did not amount to anything remotely significant other than losses in investor portfolios. Instead, we saw a hefty dip in net new inflows for responsible investing funds. They reached all-time lows, according to LSEG Lipper data.
Renewables and clean energy have a place in our economic energy future, but what’s emerging is not an energy transition but rather, an energy expansion. By definition, an energy expansion is the integration of conventional and new energy sources, with oil and natural gas set to power our world greatly for the foreseeable future.
That’s a far more suitable scenario for the current day for a few reasons.
Clean energy landscape
A significant amount of infrastructure must be built to support solar and wind-powered energy. Both Canada and the U.S. are not even close to completing – or truly starting – the build-out of new nationwide grids. For example, at the end of 2023, a wind farm and transmission line billed as the largest clean energy project in U.S. history was approved. Although that may seem like significant progress, this project took more than 17 years to happen.
As grids are being built, they will need to be constructed thoughtfully in a way that can handle transmitting a very large volume of energy. To electrify everything from cars to the broader economy, we will need at least double the clean power that’s available today.
At the point in time in which we will be able to ramp up clean energy production and transmit it efficiently, we will need to have figured out a way to store it for the long term. Long-duration storage solutions are currently being tested but, as it stands, we have no scalable solutions or enough of the critical materials needed to build an extensive number of them.
Finally, and probably the most important consideration to note, is that by 2030, population growth is anticipated to jump by more than one billion, taking us to 8.5 billion. To sustain this kind of growth, we must add new energy sources. There’s no doubt about that. However, these new sources of energy need to be layered on top of traditional oil and gas, not replace them. That’s the only way we can meet the population’s energy needs.
Investor disclosure: to hold or sell?
Today, the U.S. is the world’s leading oil producer. At the same time, it has declared ambitious climate goals. So, what does this mean for investors?
According to recent research from JPMorgan Chase & Co., we are heading toward the start of the next energy supercycle. The research states we’re a far cry away from the oil price collapse of 2020 when Brent hit a low of US$25.27 a barrel. In September 2023, the benchmark for global oil markets hit a 10-month high of US$97 a barrel and predictions for 2024 estimate oil to hit US$103 a barrel.
A recent United Nations report finds the world is planning to double the amount of fossil fuel production over the next decade. From an investment standpoint, investing in oil and oil exploration remains a lucrative strategy, and that’s not going to change any time soon because there’s still an exceedingly high demand for oil, globally.
European energy crisis
In Europe, we’re witnessing a stalemate between Russia and Ukraine. The political climate has changed since last year and, in the short term, Europe holds enough energy supply to sustain itself. That’s good news. But Ukraine holds more of Europe’s natural gas supply than any other country. That could end up putting the European Union in a precarious place if Russia makes any sudden and significant moves.
We must remember that the onset of Russia’s invasion of Ukraine led to an immediate and exasperated global energy crisis, and the current Israel-Hamas conflict caused oil prices to rise sharply by 7 per cent within a single week although there were no immediate threats to supply.
We’ve experienced moments in history just like this one in which oil production was thought to have peaked, but then, for example, the shale revolution in 2008 unlocked previously inaccessible resources. From an investing standpoint, that did wonders for portfolios.
In addition, the significant advancements made within the natural gas industry cannot be ignored. Machine learning and artificial intelligence have come into the fold and reshaped it entirely. We’re entering a new era of sustainable development. As Oil States International executive Brian Mizell says, “The entrepreneurial spirit in the space is pushing the boundaries of what is possible – and is now driving reductions in the carbon footprints of existing operations and assets.”
Oil and natural gas will continue to serve as a crucial cornerstone in powering the world when the sun is not shining and the wind is not blowing. Their significance in the world’s energy mix remains vital, even as alternative energy forms are employed.
James Hill is president and chief executive officer of MCF Energy Ltd. in Vancouver.
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