Inflation is coming, and so is the energy transition.
The last time any of us witnessed real, headline price inflation was in the 1970s.
I wasn’t investing at the time – I wasn’t even alive.
Sadly, that’s true for many investors today, and it can be hard to know where to start in terms of setting up a portfolio for the next 20 years.
The energy transition is going to be an upheaval of epic proportions. And inflation is going to upend many of the financial assumptions of the last 40 years.
How can investors bring the two ideas together, and where might the opportunities and threats lie?
Let’s say at the outset, the disruption is going to be unprecedented, in our lifetimes at least.
Decarbonising the planet is the second industrial revolution, no doubt about it in my mind.
After 200 years of fossil fuel growth, every piece of clothing, every meal, every appliance, every journey, every piece of work and every activity depends on them.
Forty different sectors emit over half a per cent of global emissions, according to Thunder Said Energy.
The way that we make steel and cement, the way that we generate electricity to power our lives, the way we move around and the way that we produce and consume everything is going to have to change.
Everything, everything is going to have to change.
Meanwhile, I believe a return to inflation of some kind is on the horizon. Looking at many financial asset valuations, and commodity prices in 2021, we may already be seeing it.
If so, the price of goods and money are going to fluctuate more wildly, rising in many more places and cases than we’ve seen for decades.
The energy transition plays into the inflation theme in a big way – mainly because it’s going to be the foremost global project of the next decade or two.
We are going to have to build ungodly amounts of solar and wind, back them up with lithium- and hydrogen-based energy storage solutions. The majority of global vehicles, from two wheelers to trucks, are going to have to be electrified or in some cases shifted to hydrogen.
A lot of people are mystified by the cost of all this.
The one ultimate truth is that the energy transition is a complex beast. So you cannot take a single example and use it to make judgements about costs.
Many people aren’t aware that solar and wind are the cheapest forms of electricity in the world. They have fallen dramatically over the last few decades, since 2010 especially. The same is true of batteries and energy storage, especially lithium-ion technology.
Given that renewables and electric vehicles are the foremost technologies in the transition, this is likely to be a hugely deflationary impulse.
Especially in places rich in natural renewable resources. Think wind in the UK, or sun in Sub-Saharan Africa. Many developing nations are hotter – and will benefit from the cheapest electricity in history replacing their dirty, polluting, unreliable and costly diesel generators and coal power plants.
Electric vehicles will also offer a lower lifetime cost than their petrol predecessors. Even today with slightly higher upfront showroom prices, the costs of running them are so much lower that over the lifetime of the vehicle, it will be cheaper.
The costs of those three key technologies are falling rapidly and are likely to continue to do so as long as the scale of production is being ramped up.
Yet, ich bin ein inflationista, as JFK might say today, were he to visit the European Central Bank’s headquarters in Germany today.
In my mind, this is primarily driven by the monetary expansion we have seen in the wake of coronavirus, and its marriage to fiscal stimulus by governments.
Linking to the transition, the central banks are pumping money out of the biggest hose we’ve ever seen. For the last decade, it’s been simply filling the reservoirs – going on to bank’s balance sheets, and filtering into financial assets (which have obediently inflated).
Now, governments are taking control of that monetary hose.
And where are they directing it? Towards the climate crisis.
This is an unstoppable force meeting an immovable object.
The biggest monetary hose of all time meets the most absorbent sponge ever.
The huge economic demands of the transition could counterbalance or even mitigate some of the inflation.
If inflation derives from there being more money than stuff in a single system, then it’s relevant to note that a huge amount of stuff needs to be done, just as the money taps have been gushing.
If its excess monetary growth we need to worry about, what if all the printed money is actually put to good use retrofitting homes to make them more efficient, building solar farms, planting trees and the rest of it?
So perhaps the energy transition could be a brake on the inflationary argument, as the key technologies fall in price and the enormous expenditure soaks up some of the excess liquidity floating around the financial system and the economy.
That doesn’t mean it’s all deflationary though. Quite the contrary, in fact.
On Friday, I’ll look into where some aspects of the energy transition could be drivers of inflation, and also offer inflation protection to people who invest ahead of time.
Don’t miss it. Until then, all the best from me.
Editor, UK Uncensored
PS The most obvious inflation protection comes from a more traditional place though. We’re hosting an online summit all about the number one commodity for protecting yourself against inflation. There has never been a better time to be looking at protecting yourself from the great global debasement, so sign up here.