energy markets

Keeping a Singular Focus in a Global Whirlwind
graphic shows a whirl of light points circling a blue outline of the globe

Clients, some of you have reached out to talk about the latest global developments and their implications for our work together. 

We’re watching the news carefully, like everyone else. The hopeful view, if there is one, is in the vibrant and quick response by NATO, the EU, as well as what might be called a Western alliance and our allies around the world. These organizations are responding to a situation which could clearly continue to escalate. And those American politicians and media platforms most influenced by Russia do not seem to have much sway in shaping public opinion overall, thank goodness. 

Ukraine was said by some to be a threat to Russia, for talking up increased ties to NATO and the EU: this is a pretense to reframe aggression as prevention. Putin is like the farmer insisting he doesn’t want to buy all the land—just what adjoins his own. If Ukraine were assimilated by Russia, then would Poland pose a similar threat next? And then maybe Germany and France in turn? 

Russia’s economy is small, as a share of global trade. The problem is in the raw materials and energy on which the rest of the world has come to rely. Ukraine likewise is a significant exporter of crops and natural resources. The disruption to these markets will probably exacerbate inflation; a recession may well result. (Remember, though, that one is always on the way.) If energy costs, for instance, continue to rise—and they could—it is hard to see how the sales of all other goods and services avoid shrinking. 

It is also important to remember that, technically, a recession is a decrease of any size in GDP for two quarters running. So if we had a quarter where we were at 99% of the record quarter before, and then did 1% less again the next quarter, that’s a recession. So we should never assume “what the next recession will mean” without some context and perspective. 

The crosscurrents in the markets have been vicious. We’ve made portfolio changes cautiously, of course. We always want to make sure we can meet your needs for cash flow while keeping your long-term goals in the picture. 

The key thing is, we can meet your need for cash flow without selling anything at a bad time. We can wait out a downturn whenever it comes, and we’ll seek to make the best of it by swapping into holdings likely to recover the fastest. 

No guarantees. But clients, you’re watching things; we’re watching things. Call or email me with questions or concerns.

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Green Energy FTW!
photo shows a wind farm across hills

For years we’ve had the theory that the next energy revolution would come from the declining costs of solar energy and battery storage.

According to research by Bloomberg, the most cost-effective way to provide new electricity generation for two-thirds of the Earth’s people right now is either solar or wind. The pattern is clear: green energy is winning.

Green energy costs continue to drop. Battery storage is 50% cheaper than it was two years ago. Wind projects are benefitting from larger scale. Solar photovoltaics continue to improve efficiency as time goes on.

These studies are based on actual costs of utility-scale projects. Compelling economics are the key factor—not a shift in consumer behavior. It remains to be seen whether dispersed generation and storage in user-owned systems reshapes the utility industry in the future.

Battery technology improvement has an impact on the price of electric vehicles, since batteries can represent about 30% of the total vehicle cost. Despite advantages in maintenance and fuel expense, acquisition cost remains a hurdle to wider adoption of electric cars and trucks.

But current trends point to a future in which electric vehicles cost less than those powered by internal combustion engines.

We think about winners and losers as the future unfolds. Companies that produce and transport fossil fuels for electricity generation may face a dimmer future. Those that provide the materials needed for the new equipment may prosper. Less expensive electricity will have effects we cannot predict, just as past energy revolutions reshaped society.

We will continue to research and think about these issues. Clients, if you would like to talk about this or share your views, please email us or call.

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This Will Change the World

© Can Stock Photo / martin33

The human tendency is to believe that present circumstances will continue. The gap between expectations and unfolding reality is where profit potential lives. Therefore understanding unanticipated change is one of the key tasks in our quest for investment gains.

Two related trends are about to unleash massive change and opportunity. If we can puzzle out some of the ramifications, it may serve us very well.

Solar power, being a technology, is declining in cost about ten percent per year. In some applications, it is already competitive with more conventional sources. As the cost continues to decline, we may surmise that solar power will represent an increasing fraction of world energy production—and the overall cost of electricity may begin to fall.

The second trend is the declining cost of energy storage. Bloomberg recently reported on the ribbon-cutting of a power-plant size array of batteries, in California, for meeting peaks in demand. The cost of the facility is twice that of a conventional natural gas peaking plant.

Although paying double does not seem to be an economic threat to the old way of doing things, Bloomberg reports that the cost of storage on that scale has dropped 90% in a decade. Again, energy storage is a technology, and the cost of technology tends to drop over time. We know how this works, right?

Connect the dots: we soon may have ever-cheaper energy available when we need it, courtesy of what we might call the Next Energy Revolution.

Economic history is largely a story of new sources of energy. Water power and steam power launched the modern era more than two centuries ago, with the Industrial Revolution. Petroleum in all its forms was central to the astonishing change and growth in the 20th century. What changes will the next revolution bring?

• Given lower costs for energy, will households consume more of it, or spend more money on other things?

• Will less developed areas of the world modernize more rapidly, powered by the sun?

• Does this hasten the rise of electric vehicles?

• Which companies or industries will be helped by cheaper energy? Which will suffer?

• How much wealthier will the world be, as a consequence?

Change brings opportunities and threats. We have begun to identify winners and losers in the next energy revolution. Much more study and thought will be required. Please call or email us if you would like to discuss how this affects your situation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.