Underinvestment in the Energy Market Puts the United States (and Other Developed Countries) on the Precipice of Not Meeting the Needs of Their Citizens
June 2nd, 2024
Written by Matthew McKean, CEO and co-founder of Frontieras North America (LinkedIn)
Over the past 20 years, the United States and other developed countries have strayed from adequately supporting the energy needs of their citizens. Specifically, these countries, who should be leading the way have abandoned investment in core energy markets and in doing so, have adversely affected innovation that is impacting our ability to accelerate production of new energy.
This underinvestment has led to a significant decline in innovation by leading energy companies, a spike in energy prices, increased inflation, a fragile energy grid, and a renewable energy market that, despite government subsidies, is not ready to meet the needs of its citizens.
I contend that this investment lag is also hurting the individual investors that have concentrated on the energy market – whether with individual stock, ETFs, mutual funds or pension plans. The demonization of hydrocarbons eliminated gains and dividends and potentially the development of new technology that could change the conversation.
A recent article published in OilPrice drills down into how three years ago, Big Oil supermajors in Europe pivoted from their core business to a greater diversification into all things non-hydrocarbons (i.e. wind, solar, etc). The strategy was meant to capture a portion of the emerging ESG investor sector, compete against pure-play transition players relying on government support and appease the activist calls for a shift away from oil and gas. Today these companies are reversing course by investing in hydrocarbons to ensure shareholder profit.
Energy, a basic commodity, is the cornerstone of advancing civilization, powering everything from daily activities to groundbreaking technological innovations. The delivery of abundant, reliable, and affordable energy drives economic growth, improves quality of life, and enables scientific progress.
I recently came across a transcript of an interview titled “The Case for Commodities: ‘Super-Backwardation,’ Structural Demand, and Inventory Shortages” with Jeff Currie from late 2022. At the time, the world was emerging from COVID, and Jeff was the Global Head of Commodities Research at Goldman Sachs. With great insight into the commodities market, Jeff anticipated a changing market, decades in the making, that was coming to fruition and contributing to the current shortage of supplies across key commodities, including oil.
Outlined here are a few key takeaways I gleaned from the full article:
Current Market Dynamics and Backwardation: Currie emphasizes that commodities are spot assets, meaning their prices reflect current supply and demand rather than future expectations. He notes that many commodity markets are in a state of "super-backwardation," where spot prices are significantly higher than future prices, indicating critically tight supply conditions across various commodities, including oil, metals, and grains.
Supply Constraints: Currie highlights ongoing supply constraints due to poor returns on commodity investments over the past decade, ESG (Environmental, Social, and Governance) considerations diverting capital away from traditional energy investments, and logistical issues. He points out that even at current high prices, there has not been a significant increase in capital expenditure to boost supply, leading to persistent shortages.
Structural Demand and Policy Shifts: According to Currie, structural demand for commodities is being driven by policy shifts towards addressing income inequality, climate change, and deglobalization. These policies, he argues, are fostering increased demand from lower-income groups who are primary consumers of commodities.
Impact of Geopolitical Tensions: Currie acknowledges the potential impact of geopolitical tensions on commodity prices. At the time of the interview, Mr. Currie believed energy supply disruptions were unlikely due to mutual dependence. However, the Russia/Ukraine conflict has shut down Nord Stream 1 and delayed the activation of Nord Stream 2. This has placed Europe in a precarious position that has added a premium to commodity prices.
Investment Opportunities in Commodities: Currie is surprised by the lack of interest in commodity investments despite their potential as a hedge against inflation. He stresses that physical commodities, due to their intrinsic demand from actual consumers, provide a more reliable inflation hedge compared to financial assets. Currie believes that as the risks associated with decarbonization and supply constraints become more apparent, investment in commodities will likely increase.
Mr. Currie made an interesting point that ESG or Green investment had taken 99% of the roughly $300 billion in capital investment over the previous 12 months before this article. This has led to the massive underfunding that has “choked off” the capital that would have otherwise gone into old economy carbon-type investments, including drilling and mining, contributing to the shortages of key commodities we are seeing today.
Jump forward to present day, and the world has embraced something that Mr. Currie could not account for—Artificial Intelligence. And as the mainstream media is starting to realize, energy is the backbone of AI. Projections for U.S. electricity demand growth over the next five years have doubled from a year ago. According to a recent article, the major contributors include new artificial-intelligence data centers, federally subsidized manufacturing plants, and the electric-vehicle transition.
So, how will the energy market address the growing demand when, for the past two decades, a combination of legislation, underfunding, and general backlash has hindered its growth? We believe it will be through innovation that reimagines how energy is created, stored, and delivered. Frontieras North America is an energy technology company poised to revolutionize the sector with its next-generation fuel processing technology, FASForm™. Frontieras’ FASForm produces large volumes of market-ready liquid hydrocarbons from abundant sources like coal and waste plastics. Additionally, it yields high volumes of hydrogen, natural gas, and a designer carbon product suitable for various industrial applications, including steel manufacturing. The key to FASForm's success lies in its closed-loop continuous feed process, which boasts extremely low emissions, making it an environmentally friendly alternative to conventional crude refining.
In my next blog, I will discuss the value of energy in fueling scientific breakthroughs and how the investment community is abandoning the ESG movement as they look for a return to profits.
These perspectives on the global energy market are my own. If you are interested in learning more about Frontieras, its FASForm technology, or the Frontieras management team, please visit www.frontieras.com.