The world will never be the same.
The days of cheap, “dirty” fuel are gone.
In the past, businesses and consumers had a difficult choice. On the one hand, they could buy cheap energy produced from coal and oil. It was cheaper but not environmentally friendly.
On the other hand, they had clean sources of energy, such as wind and solar.
They produce no emissions, so there is no environmental cost.
The cost to the consumer, however, was high.
“New” energy sources were more expensive… and they couldn’t maintain the energy supply consistently.
Wind installations don’t work 24/7 as a coal plant does. Solar energy panels only work throughout the day.
But recently, this situation changed dramatically.
Shocks Lead to Change
Last year, the world went through several shocks at the same time.
The war in Ukraine and the changing macroeconomic environment—higher interest rates being the main source of anxiety—produced positive results as well as negative ones.
Among these positive results was an extremely important one…
The shocks of 2022 made fossil fuel prices soar. The energy produced using fossil fuels became prohibitively expensive.
Lately, OPEC+ (a government cartel of oil-producing nations that also includes Russia) announced an oil production cut.
Oil prices rose, and the world was reminded again that even though fossil fuels can be reliable in delivering “baseload” energy, some of the counterparties in the global oil trade are not reliable at all.
They have their own interests, which mostly have to do with maximizing fossil fuel revenue.
That’s now what the world wants anymore.
And it has the technology to obtain clean energy at affordable prices.
This change is accelerating. The International Energy Agency projects that the world will reach peak oil demand by the end of this decade.
After that, every year, the world will consume less and less fossil fuels.
Investors need to be cautious.
High oil prices prompted large-scale investment in new oil projects.
According to the IEA, some of them will not start delivering fossil fuels to the market until the end of this decade… exactly when the global demand for fossil fuels is projected to start declining forever.
Investors need to keep this in mind. The market for “dirty” sources of energy will start shrinking, and it could happen even earlier than the end of this decade.
The global demand for petrol, for example, peaked in 2021 as the share of electric vehicles in the global fleet continued expanding.
But there are other problems that the oil industry has to deal with.
Regulation is one. New oil projects will face scrutiny from both governments and communities. Even if they can be potentially profitable, they could face legal opposition for years, if not decades.
Nobody wants to see an oil rig in their backyard anymore. An oil production company will be an unwelcome presence pretty much anywhere in the developed world.
Investors who aim to benefit from temporarily high oil prices could see the value of their capital fall because of market dynamics and regulatory issues.
Betting on the multi-trillion-dollar clean energy trend is a better option, in our view.
Thank you for your loyal readership,
The Financial Star team