Energy special: part II

“Renewable energy was already a lay-up because its sticker price is so attractive, but when you start discounting future cash flows through a much lower interest rate environment then you’re looking at very favourable conditions indeed.”

So said Gregor Macdonald, one of the top energy experts in the world, when I interviewed him a few weeks ago.

We had invited Gregor, the author of a three-part book called Oil Fall, to fly from Portland on the US west coast to London to speak to us about the clean energy transition. The talk had been set in stone for a while, though as coronavirus and the resulting panic started to spread, Gregor’s trip had started to look in doubt… to us anyway.

In fact, Gregor himself was remarkably resolute. Offered the option to stay at home and delay the talk, Gregor said he would travel as planned. He had made a commitment and he would honour it.

He flew from Portland on Friday afternoon, arriving in London on Saturday morning. During his flight, Donald Trump tightened travel restrictions to include the UK and Ireland, meaning Gregor – a US citizen – would face certain quarantine measures on his arrival home. Again, we offered him the option of flying straight back to the US before the restrictions would be enforced and, again, he declined the offer.

We were really pleased he made the effort to fly to London, even though the social distancing measures meant we couldn’t shake his hand when he arrived at Southbank Investment Research HQ on that Monday morning.

I conducted two interviews with Gregor. One on the long-term trends in the energy markets, from an investment perspective, but sadly that one’s for subscribers to my colleague James Allen’s Exponential Energy Fortunes investment advice service only. Instead, I want to show you the conversation we had about more current affairs.

That’s because we know there’s a lot of market turmoil at the moment, so we wanted to provide some extra special content to try and offer some helpful analysis, and with it, hopefully, some reassurance and peace of mind.

As I said, Gregor is the author of a three-part book called Oil Fall.

Published in 2018 but conceived years beforehand, the book identifies some of the key tectonic shifts shaping up in the energy markets. Since publication, Gregor’s readers have watched his insights and predictions play out in high-speed ever since.

His work has been critical in understanding the nature of the transition away from coal and oil, using California and China as a leading light and key player respectively. The interplay between the EV transition and the push for renewables is a key part of his analysis.

While most people had cottoned on that it was peak oil demand we should be looking for, not peak supply (which would come much later), Gregor explained that it’s not as simple as seeking a decline in demand. Rather, a loss of demand growth would be the crippling thing for the companies in the industry, as cost of production is no longer matched by growth in demand.

As with coal, he showed that the plateauing of demand is far nearer than most people realise and, with it, a shift from oil growth to oil dependency, a crucial distinction.

I found Gregor’s talk fascinating. It certainly backed up exactly what I had been thinking: that the economic fallout of coronavirus, and the crash in oil markets, won’t be seen as a threat to renewables investment and the clean energy transition, but an opportunity.

On that note, and before I butcher and simplify Gregor’s brillaint work anymore, here is the interview. Just click on the video below.

I hope you enjoyed the video and agree that Gregor made some fascinating points. In particular, I found myself nodding along to Gregor explaining why, in a zero-interest rate environment, it is almost inevitable that the private market – capitalists, investors, whatever you want to call them – will pour money into clean energy.

As Gregor states, the great financial crisis of 2008-09 also gave birth to a very low interest rate environment, which actually laid the foundations of the great wind and solar expansion we can see the results of today.

“Wind and solar were for policy people ten years ago; now they’re for capitalists,” he said.

Remember, low interest rates are great for renewables investment as they make financing easier to get for companies looking to build infrastructure up front (to reap the free energy thereafter).

In the long term, they make renewable assets – solar and wind farms – incredibly attractive (especially to pension funds) as these assets offer long-term, predictable cash flow assets with great operating margins (the marginal cost of energy is zero, so operational costs are minimal).

“The oil price had been a lie all along”

On the oil price crash, Gregor said the OPEC-imposed oil production cuts that had long supported the oil price (prior to Russia and Saudi Arabia going rogue ten or so days ago) had actually long given us an artificially high oil price that had, in effect, been a lie.

Gregor has long predicted that the buildup of supply capacity would push oil prices down. Bearing that in mind, you might think the latest 30%-and-counting fall in oil prices is simply a reflection of a long apparent reality of bountiful supply and tepid demand. As Gregor states, the futures market had long expected the buildup of supply to be unleashed at some point.

Saying that, of course, we might see a rise in oil demand as and when economies start to look at Covod-19 in the rear-view mirror. However, as Gregor states, the trend for oil demand growth is incredibly clear, and it is steadily down. Outliers and one-off years will not change that.

And that concludes my two-part energy special, with a little help from a friend.

I hope you’ve found it interesting, as it’s a topic I’ll definitely be coming back to again and again as the story develops.

In the meantime, see you again on Wednesday, when I’m back “live”.

Best wishes,

Kit Winder
Investment Research Analyst, UK Uncensored

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