The big call for investors is energy

The writer is a financial journalist and author of ‘More: The 10,000-year Rise of the World Economy’

If 2022 proves to be anything, it’s that the abundance and price of energy is vital to the health of the global economy.

The Industrial Revolution that emerged in the 18th century had many causes, but the necessary prerequisite was the replacement of human and animal power with carbon-based fuels in the form of coal. During the 19th and 20th centuries, the global economy was transformed by the use of oil in transportation and elsewhere and by the extraction of electricity.

In the modern era, the post-1945 recovery in Europe and the US was aided by a quarter century of cheap oil. Stagnant inflation in the mid-1970s was linked to Opec’s quadrupling of oil prices in 1973, and the 1980s rebound coincided with another drop in crude prices. Finally, oil prices rallied even further before the 2007-09 financial crisis.

The current climate combines both sharp increases in energy prices with limited supply, in the form of reduced Russian gas exports to Western Europe. If it’s an echo of the 1970s, it’s also a combination of soaring inflation and sluggish economic activity today.

Some of these fluctuations are related to the concentration of energy resources within the borders of authoritarian and sometimes hostile states in Russia and the Middle East. One could see this as a geopolitical dilemma – a variation on the “resource curse”. If a country has energy reserves, this creates the potential for a dictatorship to usurp those reserves and maintain its power.

All of this means that any attempt to take a long-term view of the outlook for the market or the economy must take into account possible developments in energy prices and the nature of supply. energy supply. Encouragingly, history shows that, in the medium term, energy price peaks sow the seeds of their own destruction. Regulated demand (for example, consumers switching to more fuel-efficient cars after the 1970s) or manufacturers inspired by high prices to find new sources of supply (such as kerosene) shale and gas).

But the current crisis has come as the world is trying to grapple with another problem: climate change. And many countries have set ambitious targets to reduce their dependence on fossil fuels by mid-century. This policy will require significant changes in the way the world organizes its economy.

In his book How the world really works, energy expert Vaclav Smil points out that modern food production relies heavily on fossil fuels, especially through nitrogen-containing fertilizers that have enhanced crop yields. As a result, the world has gone from feeding about 890 million people in 1950 to 7 billion in 2019.

It would be impossible to feed so many people with an agricultural industry that depends on recycling organic waste. Switching from a meat-based diet to a vegetarian one can help a bit. But some plants, such as tomatoes grown in a heated greenhouse, have very high energy requirements.

Smil also points to widespread energy being used to make plastics (essential for the healthcare industry and many others) and to make steel and concrete, which are essential for infrastructure. Wind turbines can provide an alternative to fossil fuels as an energy source. But their foundations were built of concrete, the towers and propellers were made of steel, and the propellers were manufactured from plastic.

All of this may explain why politicians are so quick to make promises to reduce fossil fuel use at a distant time and so slow to push for practical measures to cut consumption. consume fossil fuels immediately.

Even governments are willing to fight to solve the problem. Despite an extensive program of renewable energy production, Smil writes that the share of fossil fuels in Germany’s primary energy supply has only fallen from about 84% in 2020 to 78% today. . Even after all the international protocols and summits, global fossil fuel consumption has increased by 45% in the first two decades of the 21st century, thanks largely to China’s economic growth. Country.

Even if the technical challenges of transitioning to new forms of energy can be overcome, the upfront capital investment will be huge. And there’s a heated debate about whether new energy sources will be “more efficient” (in terms of energy return from invested energy) than older energy sources. In short, the economic impact of the effort to go net-zero could be huge.

Investors cannot ignore this issue. But they must calculate the difficulty of whether governments will try to stick to their carbon emissions targets or back down in the face of hostile voters. And if governments back down on their promises, investors must then calculate how the harm caused by climate change (crop failure, floods, disputes over scarce water resources) will affect how about economic growth. Making the right energy call is a big decision in the long run.

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