ESG and Energy
First, I need to state that I’m biased toward hydro-carbon energy, as it is by far my largest personal holdings through mineral rights and drilling related partnerships. For myself and investors this is not a recent phenomenon, as we began significantly investing in the energy sector in 2017. I bring this up as “confirmation-bias” is always on my mind!
As ESG (Environmental Social Governance) was pushing devesting in oil/gas, Legacy Wealth Management (LWM) and myself were continuing to add to portfolios at discounted pricing. The ESG tide is starting to turn and even EIA (US Energy Information Administration https://www.eia.gov) is recognizing that renewables are not the panacea being marketed. One of the large investment banks pushing ESG, BlackRock, lost $1.7 trillion in the first 6 months of 2022, mostly due to technology investments. They had embraced ESG/ progressive movement, meaning the ousting of conventional energy from their portfolios. This “Greenwashing” has led several state pension plans to remove them from their portfolios as the losses could have been mitigated had BlackRock taken a more balanced approach to investing and not pushing their ESG/non-oil agenda.
Engine #1, an ESG activist group, forced Exxon to change course (took over 3 board seats) and reduce their focus on acquiring new reserves/exploration. Chevron and others saw the influence of Engine #1 and have followed suit. This translates to less capital being deployed toward the traditional oil/gas sector. Instead, they are providing higher returns to investors at the expense of consuming their reserves. Likewise, this translates to less oil/gas coming online, leading to higher prices. The Biden administration is frustrated (at least publicly) that big oil isn’t stepping up exploration; but why would a CEO be inclined to invest when the same administration shut down a pipeline and hampered the Federal Lease program? It is estimated that the world needs $4 trillion of drilling funds to recover. The world was heading into an energy crisis before Russia invaded Ukraine, Putin simply moved the timetable forward.
Cheap Energy Fuels Growth
Wind/Solar is starting to be recognized as requiring high levels of oil/gas to produce and are just “less harmful.” Goehring and Rozencwajg studied the return on energy, meaning for every unit of energy put into a system what amount of energy is returned; Energy Returned on Energy Invested (EROEI). Go back to pre-coal days in Europe, a considerable amount of energy was required to feed animals, gather wood; think substance living. Then coal was discovered, and this freed up resources to pursue economic growth; think cheap energy. This eventually translated to oil and the industrial revolution.
For every unit of energy to bring on Oil/Natural Gas, 30 units are returned 30:1. For most of human history it was 5:1, when considering the energy required to produce food for animals, wood, and etc. Early coal-driven steam and biomass are estimated to be 10:1. The top-performing wind turbines are 12:1 and solar at 8:1, however, add in the infrastructure to support them and it drops to 4:1 (after adjusting for intermittency (storage) and redundancy (power grid in the background). Nuclear is 100:1 (I have yet to find a risk/adjusted pure play way to invest in what I feel is the future).
Often overlooked is the time required to recognize the return; drill a well and within months it is producing considerable energy. Build/install renewables and the energy output is considerably less but goes on for 20 years. Throwing money into renewables to solve an immediate demand is counter-productive; the energy input requires several years of output to break even.
Even setting my bias towards hydro-carbon energy to the side, the market conditions and demands, seem to indicate that now is still a good time to be investing in this sector and we at Legacy Wealth believe this is an important piece of a well-balanced portfolio.