The Decentralisation of Global Energy

Well, how’s that for an eventful week!

Since I last wrote to you, the US Federal Reserve, the European Central Bank, the Bank of England, and the Reserve Bank of Australia met up…

And bang! One after another delivered interest rate increase after increase.

Markets believe interest rates will stop rising sometime soon. On the other hand, central banks seem intent on going higher…which, if they do, (and that’s a big if) won’t be good news for stocks.

The other big piece of news out there was the Chinese balloon ordeal. You’ve likely heard about it.

For days, the massive balloon crossed the US before being shot down on the east coast.

It may not be the only one out there.

There’s been reports of other balloon sightings in Latin America and Canada.

Asian countries are looking into previous flying objects reports:

There’s no denying that geopolitical tensions are also keeping markets on edge.

Antonio Guterres, the head of the United Nations, even warned this week:

‘The prospects for peace keep diminishing. The chances of further escalation and bloodshed keep growing. I fear the world is not sleepwalking into a wider war. I fear it is doing so with its eyes wide open.’

There’s certainly plenty of risk out there.

We’ve gone from a long period of globalisation and collaboration. Now countries are shifting into a reshoring of their supply chains.

And nowhere is this clearer than in the energy sector.

Global energy markets are completely interconnected, and any disruption, like today’s Ukraine-Russian war, can send energy prices soaring — as we’ve seen already.

On the other hand, almost every country can, in some capacity, produce renewable energy. Home-produced renewable energy can provide diversification and reduce the need of energy imports.

So, among all the doom and gloom, the need for energy security continues to push the energy transition forward

Two events have changed energy markets

Every year, British Petroleum (BP) releases its BP Energy Outlook report…and it’s a must-read.

As you may remember, in their 2020 report, BP famously declared that we could have passed ‘peak oil’.

In their recent report, they’ve updated their future scenarios to include the impact of two large events in energy markets last year: the Russia-Ukraine war and the US’s Inflation Reduction Act (IRA).

We’ve talked plenty about the IRA here. In my view, it’s one of the most significant events for the energy transition.

It’s a big deal that the US is looking to bring in clean tech manufacturing closer to home. But as mentioned, the IRA is causing some concern in Europe in that it will shift manufacturing capacity into the US.

But back to BP.

As they wrote in their report:

‘The role of hydrocarbons diminishes as the world transitions to lower carbon energy sources. The share of fossil fuels in primary energy declines from around 80% in 2019 to between 55-20% by 2050.

‘The total consumption of fossil fuels declines in all three scenarios over the outlook. This would be the first time in modern history that there has been a sustained fall in the demand for any fossil fuel.

‘Renewables expand rapidly over the outlook, offsetting the declining role of fossil fuels. The share of renewables in global primary energy increases from around 10% in 2019 to between 35-65% by 2050, driven by the improved cost competitiveness of renewables, together with the increasing prevalence of policies encouraging a shift to low-carbon energy. In all three scenarios, the pace at which renewable energy penetrates the global energy system is quicker than any previous fuel in history.’

In particular, BP sees oil demand ‘plateauing’ in the next decade and then going into decline as less cars on the road are fuelled by oil:

Remember, this is big oil talking. That they’re even saying this should give some pause for thought.

So, while things may be looking uncertain out there, there’s a big opportunity here…

A long-term megatrend

Batteries, electric vehicles…these are going to need plenty of raw materials.

In particular, demand for lithium — a critical material for lithium-ion batteries — is expected to keep increasing at a fast pace for some years.

On that note, my colleague Callum Newman may have found a ‘hidden gem’ in this sector. It’s an obscure lithium play in disguise.

You can learn more about this stock, along with Cal’s four additional best stock ideas, here.

In short, among all the uncertainty, countries are driving investment into locally produced energy and the tech needed for it to increase energy security.

It’s a megatrend that will play out for years to come.

Best,

Selva Freigedo,
Editor, Money Morning