Escape the Energy Trap

to build real wealth

Forget the wind power-bashers and keep it in the grounders. There’s no such thing as a “good” or “bad” source of energy.

But there definitely are winners in energy—investors who are right now maximizing efficiency to generate real savings, which they’re investing to build wealth in the stock market’s hottest sector. And there are losers as well, who by falling prey to growing scarcity will see their lifestyle suffer.

Whether you’re talking about electricity and heat for homes, businesses and factories—or fueling the world’s rapidly growing fleet of vehicles for transport—global energy reality today is being shaped by three major forces:

·       Relentlessly rising demand that shows every sign of rapid acceleration in coming decades.

·       A widening supply gap as an unraveling political consensus and tightening regulation has combined with hostile capital markets to suppress investment needed to keep with demand.

·       A growing imperative on the part of energy consumers for sources used to be sustainable, both in terms of simple supply and environmental concerns.

In the previous decade, a popular knock against US utilities was that electricity demand had stagnated in this country. No one is talking about that anymore, with some forecasting a tripling of usage by mid-century, as electric vehicles, data centers and power hogging artificial intelligence applications proliferate.

Similar boosts are expected across the developed world, including China. And developing countries will see even bigger increases, as they move toward developed world living standards and hence similar levels of energy intensity and per capita usage.

Over the past several years, solar has become the energy source of choice around the world. One big reason is plunging component prices and meaningful advances in absorbency/efficiency of solar panels, thanks to a massive increase in Chinese production capacity along with other countries’ efforts to diversify supply chains. Another is government support, including renewable energy mandates and tax credits—such as from the Inflation Reduction Act in the US and similar legislation in Europe.

A third reason for solar’s growing primacy is simply much shorter times needed to site, permit, finance and construct facilities, as opposed to other sources of energy including wind. And a fourth is accelerating demand from major corporations, anxious to lock in future energy costs in an era of rising adoption of electric vehicles, data centers and power-hogging artificial intelligence applications.

Solar’s growth, however, hasn’t thus far slowed demand for other sources of energy. In fact, despite the fact the US utilities are phasing out their use of coal, peak demand for the black mineral globally increasingly appears to be years away. And even countries with the most prolific rates of EV adoption have yet to see meaningful rates of decline in use of oil and gas.

As for supply, oil and natural gas are still by far the world’s dominant energy sources. And rarely if ever has the environment for developing needed reserves and production been so uncertain. That’s for myriad reasons—stifling regulation, well-funded opponents tying up projects in court until they’re abandoned, hostile capital markets including higher for longer interest rates to name a few. But the upshot is industry investment continues to lag well behind levels typical of an energy price up-cycle that’s now three years in and counting.

It now appears that two New England offshore wind facilities under construction by EverSource (NYSE: ES) and Orsted A/S (Denmark: ORSTED, OTC: DNNGY)—Ocean Wind and Revolution Wind—will go ahead. That means the US will have four such facilities off the Atlantic Coast in the next 3 years, including Avangrid Inc’s (NYSE: AGR) Vineyard 1 coming on stream next year and Dominion Energy’s (NYSE: D) Coastal Virginia Offshore Wind (CVOW) in 2026.

These facilities were able to lock in costs early enough to avoid the worst impact of inflation and higher borrowing costs the past couple years. But the new power generating capacity they’ll bring is only a fraction of the 30 gigawatts initially envisioned to start up by 2030. And it will scarcely dent New England states’ demand for natural gas, which will have to be largely imported as pricey LNG despite a glut of cheap Appalachian gas a couple hundred miles away.

That’s the result of government policies blocking badly needed natural gas pipelines into the region. And it will be the reality for the foreseeable future, with Equitrans Midstream’s (NYSE: ETRN) the Mountain Valley Pipeline likely to be the last major new US pipeline.

The fierce opposition making it literally impossible to build oil and gas pipelines—however needed—is of course part and parcel of the third major force shaping the energy sector now. That’s the mandate of energy consumers for sustainable supplies, meaning reliable sources, stable pricing and minimized environmental impact.

During ExxonMobil’s (NYSE: XOM) Q3 earnings call, the company’s CEO again addressed ongoing efforts to reduce emissions of methane and CO2. That’s the latest evidence the debate about decarbonization is now about tactics, rather than whether it’s a worthy goal at all.

Coal, however, remains popular in much of world precisely because it’s the only energy source available locally at scale, limiting need for expensive imports and/or technology—i.e., it’s both currently affordable and reliable, two key elements of a sustainable energy source. And as countries like India and Vietnam, for example, attempt to raise their populations out of poverty, they’re going to continue to use the black mineral to get there, until more environmentally friendly sources are both affordable and available.

Add up these three factors and the result is higher energy prices ahead. And when politicians shake up the investing environment—adding or subtracting regulation, imposing tariffs, boosting or cutting subsidies and tax credits, fighting inflation with higher interest rates—they’ll further undermine future supply, increasing scarcity and pushing up prices even more.

There’s nothing more bullish for energy sector earnings and share prices than a rising energy price environment. Not every company will benefit. Prices do not move in a straight line up even in the most dramatic of cycles. And some will get caught out with too much debt during the inevitable downturns, or by sudden shifts in government policies particularly as higher prices bite consumers and business.

But restrained investment in supply now means best in class energy companies—from solar to oil and gas—are still in the early stages of what’s shaping up to be their most explosive bull market perhaps ever. And by adopting a strategy of adding to and sometimes subtracting from positions in these stocks, investors will have the opportunity to build real generational wealth—in an era where major stock market averages are likely to lag well behind inflation.

Investors who carefully consider their own energy situation have the potential to do better still. With still limited ranges for batteries and hefty price tags for the best models, EVs at this point aren’t for everyone. And not all homes are ideally suited for solar and battery systems.

Equally, however, there are more options than ever before for consumers and businesses to take control over how we use energy, as well as where we get it from. And the potential savings can be staggering—including accompanying reliability of costs in a rising price environment.

So here’s an idea: Take an inventory of your energy options to identify ways to become more efficient and self-sufficient. Then resolve to deploy proceeds realized from these efforts to build positions in the best in class energy stocks when they sell at good entry points.

You won’t just escape the emerging energy trap of rising prices and growing scarcity. But the funds you’ll save will provide the means to build real wealth for years to come.