Right now there’s an opportunity in the energy markets which hasn’t been seen for a century or more – and probably won’t come around again in our lifetimes. Today I’m going to show you what it is. Understand what it means for the world and there are some enormous returns to be made – short and long term. So listen and listen good!
You probably know that markets move in cycles. The business cycle, the commodity cycle, the credit cycle, Kondrateiv’s long wave cycle, Gartner’s hype cycle… I could go on. It’s all interesting stuff I’ll go into in a future issue. For now my point is that the world moves in cycles and that there’s more than one cycle unfolding at any one time.
Think of it like the solar system: the Earth rotates on its axis every 24 hours, the Moon moves around the Earth, the Earth moves around the Sun, and the Sun is part of an even bigger “cosmic cycle” within the milky way. There are cycles within cycles, all with very different timescales.
My argument to you today is that the energy market is at the start of both a short-term energy/commodity cycle and the start of a long-term, century-long cycle that’ll change the face of it completely.
Both cycles matter, though over different time periods. Understand them both together and you have a powerful and profitable way of looking at energy.
The traditional energy industry – much like the commodity industry – has been crushed in recent years. After booming off the back of the rise of China and other emerging markets through the last decade, oversupply and falling demand smashed prices lower.
Oil is the best example of this. Prices reached nearly $150 before the financial crisis, levelled out at $100 as the recovery kicked in, then collapsed to $30 over a two-year period.
That’s the story of the short-term energy cycle in a nutshell. And you’d see a similar pattern over a similar timeframe for many other key energy sources – like coal for instance – as well as most of the commodity market.
Now it seems the pain is over, for the most part. We’ve reached the end of that cycle and a new one is beginning for traditional energy sources.
For instance, guess what Goldman Sachs and Citigroup both recently branded the “hottest” commodity of the year? It’s good old-fashioned coal. Prices have almost doubled in a few months.
That’s to be expected: we’re at the start of a new cycle, prices are coming from a much lower base because of the slump at the end of the last one, so we’re seeing more volatility and faster, highly profitable upswings.
The same is true of oil, though it may not last. Prices have moved from their low of $30 to closer to $50. That’s a pretty dramatic move. If prices almost doubled from $100 everyone on the planet would feel it.
But moves like this are normal at the start of the cycle. And they can be pretty profitable if you understand what’s going on.
That’s not all that’s happening though.
Just as the world’s traditional energy industries are renewing themselves ready for the next cycle, they’re being challenged – en masse – by new energy sources. This is the kind of thing that happens every 50 or 100 years, when a new, disruptive energy source arises and challenges the current system. I’m talking about renewables: solar, wind, tidal and others, backed up by battery technology.
These new technologies aren’t able to challenge traditional fossil fuels right away – which is why the short-term cycle matters. But longer term they matter in a big way. As the technology improves and scales, leading to lower prices, the traditional energy system is going to come under pressure, see its business model disrupted and ultimately buckle.
That’s the bigger cycle. And there are plenty of signs we’re right at the beginning of it.
The great energy disruption
They say the future is here it’s just not equally distributed. You have to look at pockets of the world where the conditions are right to understand how a trend may unfold. Visiting Detroit in 1910 would have shown you more about how the car would change things than visiting Manchester. Visit Chile today and you get a glimpse of the world that could be.
Earlier in the year Bloomberg reported that Chile now has enough solar energy infrastructure that the price of electricity routinely hits zero. At the end of April, there’d been 113 days of zero-cost energy. In the whole of last year it was 192.
Think about that. We’re talking about 113 days when energy is so cheap and abundant you literally have to give it away for free.
That’s actually a problem for the industry. Such low prices are a major disincentive to invest and build more infrastructure. That’s why battery technology is so important – to get the energy from the places where it’s abundant to where it’s needed. I saw some pretty interesting stuff on the battery industry in Boston last month. More on that in a future issue.
Problem or not, examples like this show you what’s possible – and what’s coming.
Then you have other glimpses of the future, like Tesla’s newly announced solar roof panels. If you haven’t seen them, go look them up. They look nothing like solar panels. They look like nice roof tiles for your house. It just so happens they turn your house into a mini power station.
What Tesla is doing isn’t revolutionary technology. It’s commercialising and branding existing technology in a way that makes people want it – just as Apple didn’t invent the MP3 player, but made the world’s most popular one in the iPod. That’s an important sign too. It shows that the technology and the market are at a point where – potentially – it is commercially viable to go all in on renewables. It’s the start of the cycle. This is basically another way of saying Elon Musk = Henry Ford.
Then you have even more experimental energy technologies. For instance, did you know that the act of walking can generate energy – kinetic energy harvested by special panels in the floor using electromagnetic induction?
It’s not much. One person walking a set distance may only generate five watts. But scale that up and think about something like a London train station at rush hour. The sheer number of people is what makes commuting so unpleasant. Turn those vast numbers of people into a power supply you can store or sell and you’re on to something.
It’s the same idea again – the start of a new long-term cycle that will ultimately disrupt the traditional energy industry.
Attacking from weakness
And I think the incumbent industry, based mostly on fossil fuels, knows it. Being the incumbent is a powerful position. Someone still has to knock you off your perch, to paraphrase Alex Ferguson. The shift from one way of producing power to another won’t happen overnight.
But it’s coming. You could even argue that’s why Opec doesn’t want high oil prices again. High prices lead to investment, innovation and alternatives. Oil above $100 leads to shale oil and fracking – essentially new technology – which threatens the traditional oil industry. What happens if we go above $100 again? There’d likely be a flood of capital into alternative sources of energy. $100 oil could be the best thing that ever happens to solar!
In professional bike racing it’s often said that an attack is a sign of weakness. If you’re riding in a small group and feeling awful, it’s sometimes better to attack in a last ditch effort to get away, rather than ride to the finish and have the stronger riders pass you. Your attack shows your weak hand.
Same thing goes for business. For instance, I saw an interesting development last week in Florida, in which traditional energy companies had backed what appeared to be a “pro-solar” constitutional amendment… when in reality it actually limited the potential growth of solar by making it more expensive. In the courts, Justice Barbara Pariente called the move “a wolf in sheep’s clothing” and claimed it was “masquerading as a pro-solar energy initiative”.
If you have a weak hand you can attack. It may work. But it may show everyone just how weak you are.
Short term, the traditional energy industry is renewing itself for a new cycle. We’ve seen that before and we know what kind of money can be made. Longer term, the whole industry will be threatened and disrupted. No one on the planet has seen that happen on a large scale before. Understand both those ideas – and invest accordingly – and the returns could be enormous.
Associate Publisher, Capital & Conflict
Category: Investing in Technology