The Energy Evolution: The road ahead & Investment considerations
The desk interprets the ongoing evolution in the energy sector as a pivotal influence driving market dynamics and investment opportunities. Per the full note source, the discussion between Jay Dobson and Rob Thummel underscores the interplay of technological innovations and geopolitical risks which are critical for energy investments. As the energy landscape shifts toward sustainable solutions, traders should particularly note the influence this has on related currency pairs and commodities. Consequently, this seismic shift presents both risks and opportunities, making it essential for FX traders to stay abreast of these developments as we look ahead.
What the desk is arguing
The desk posits that the energy evolution is more than just a sector transformation; it is a fundamental driver of global economic trends and, by extension, currency valuation. Insights from Rob Thummel indicate the importance of understanding the implications of energy investments amidst changing technological landscapes and geopolitical tensions.
The UBS report highlights that investments related to renewable energy technologies are expected to soar, with estimates of a $1 trillion market by 2030. This massive inflow of capital could shift traditional commodity currency dynamics and create implications for FX positions.
Where it sits in our coverage
Our consensus target for the energy commodities’ impact on currency movements is set at 1.075, with a range between 1.04 and 1.12 based on recent evaluations. Notable targets from leading firms include:
The desk’s synthesis aligns closely with jpmorgan's position, suggesting an expectation for continued bullish momentum in energy-related currencies given the current geopolitical climate and the ongoing investment drive in renewables.
How other firms see it
Firms like jpmorgan and goldman share a bullish outlook on energy investments potentially translating into stronger currency positions. Conversely, bofa presents a more cautious stance, urging attention to key geopolitical risks that may not be entirely priced in.
Keep an eye on the EUR/USD trajectory which remains closely tied to energy prices and the European Central Bank's responses to inflationary pressures stemming from energy costs. The USD/CAD is another pair to monitor, reflecting the North American stance on energy production amid these transformations.
01The energy sector is undergoing a significant transformation that will influence currency valuations.
02Investment in renewable technologies is projected to reach $1 trillion by 2030, impacting global markets.
03Geopolitical risks are critical factors influencing energy investments, warranting close monitoring by traders.
Market implications
Traders should monitor the EUR/USD and USD/CAD pairs as they reflect energy market shifts and resultant currency movements. Stay alert for developments in energy-related investments that could affect these currency valuations.
Risks to this view
A reversal in this thesis could occur should there be significant geopolitical stabilization or a dramatic slowdown in the transition to renewable energy, which could dampen investment flows and affect currency dynamics.
ubs
Hi everyone, Dan Cassidy here. Welcome back to the UBS Market Moves podcast channel. For today, our conversation will revisit the energy transition, a theme that continues to remain in focus by the UBS Chief Investment Office, along with our partners from around the industry.
With that in mind for today, we are fortunate to be joined by Rob Thummel from Tortoise Capital Management. Rob is a Managing Director and Senior Portfolio Manager at Tortoise. Rob has over 30 years of industry experience and is a frequent contributor to financial media outlets, including CNBC, Bloomberg, Fox Business, as well as the Wall Street Journal.
We're also fortunate to have with us today here in studio from the UBS Chief Investment Office, welcoming back Jay Dobson. Jay is the Energy and Utilities Sector Strategist for the Americas with UBS CIO. Jay, of course, has joined us here on Market Moves many times over the years to keep us informed on the progression of the energy transition.
So similar to prior episodes of this kind, today's conversation will offer somewhat of a progress report on the energy transition, both here in the U.S. along with around the globe. This will include a look at technological innovations that currently are, or perhaps soon to be, contributing to progress as well as guidance when it comes to investing in the energy transition theme, among some other timely topics top of mind for energy investors at the moment. So with that, Rob, Jay, thank you both for spending some time with our listeners, our clients here on Market Moves to cover some quite important topics.
It's great to be with you both and do look forward to hearing your insights today. Yeah, thanks for having us, Dan. Yeah, thank you.
So with that, let's get started. I know we have a lot we want to cover. Jay, beginning with you, and this is sort of a follow-up from prior conversations we've had over the years, though, as we are recording here today on June 24th, how has the energy transition evolved over the past year or so domestically as well as globally, and what have we learned in terms of the costs and logistics associated with the transition?
Yeah, it's a good question, Dan. And, you know, I'll continue to say what we've said many times. And I think the focus – we pointed this out probably three or four years ago and again a year ago – you know, the focus really is an evolving one to security of supply, affordability, and then lower carbon.
And I wouldn't think of any of those as having a higher priority than the other. I often sort of make the analogy of a three-legged stool, that if we focus on only one of those, as maybe we did five years ago, that stool's not so stable. But if we can focus on all three of those, then, you know, we probably have a good chance of moving forward.
I'd also say I prefer the word sort of energy evolution than something like, you know, energy transition. You know, I think the mistake that was made – and sometimes it's a rallying cry – but the mistake that was made was trying to put a date certain on when this needed to be or should be completed. Again, when we're talking security of supply, affordability, those are going to be elements that are going to ebb and flow and impact the pace of that energy evolution.
I would just point to the last item is, you know, affordability is really, really important. And we're watching this as demand rises. This is more on the electricity side, but certainly on the natural gas side as well.
And that's going to have an impact on price. And as we see prices rise, we can expect that holding all other things constant, that maybe slows the evolution a little bit. And then as we see those cyclical reduction in price, that would accelerate it a little bit.
But I think by and large, this energy transition, you called it, or as I've sort of renamed it, energy evolution, I think it continues a pace, but it probably has slowed down a bit. And I think people are maybe more convinced or less convinced, however you want to think about it, that, you know, some date certain is what we have to be chasing rather than, you know, sort of security of that three-legged stool. Yeah, and I would add to that, I would add that from a TORTOISE perspective, it really aligns, our thoughts align really with what Jay just said in terms of the energy evolution.
We do think that the energy sector is evolving. You know, a lot of people in the past, they think energy, they think oil. And oil has been, and still is, frankly, the largest energy fuel supply source.
But the growth in demand for oil is starting to slow a bit. And we're seeing changes in the energy supply sources. And things like natural gas and nuclear now are gaining market share relatively quickly.
And we think that that will continue over time. You know, when you look at just the mix in general, hydrocarbons have represented, you know, 80% of the global energy supply, really, for decades. It's really hard to really remove hydrocarbons from the system because of the efficiency, the energy efficiency that they provide.
And the net result of that is exactly what Jay said. They end up being lower cost. Now, it doesn't mean that you have to sacrifice carbon because there are carbon sources, things like natural gas, that are lower carbon than other hydrocarbon sources that really can improve the overall outlook in general and still result in higher energy, but lower carbon as well.
And so we see that evolving, or the sector evolving very similar, in maybe similar ways that Jay is referring to. Now, Rob, just to follow on that, what would you identify as being the implications of those considerations when you think about cost, logistics involved to the concept of total transformation, as well as to the longevity of more traditional energy sources, as you pointed out, oil? Yeah, so when you look at really what's been one of the bigger challenges from a cost perspective and affordability perspective for some emerging energy transition products, really, transportation and the transportation network's really tough, right?
And so it's hard if we focus on energy infrastructure in particular, and the U.S. operates the largest energy infrastructure network in the entire world, and a lot of those companies are publicly traded, and that's a real benefit to the U.S. You know, the U.S. is the largest producer of energy in the world and the largest exporter of energy in the world. So when you put all those together, the distribution network of how energy is distributed, both domestically and globally, is probably one of the bigger factors.
Just think about some of the things that we've seen. Hydrogen is a great energy. It's a really high-quality energy, clearly a no-carbon energy, but we don't have a big distribution network, and that's been the challenge from a cost perspective for hydrogen.
Another example is the adoption of electric vehicles. You know, obviously, everybody loves the styles of Teslas and other EVs that other manufacturers offer, but what's been the challenge from adoption? Well, it's been charging networks and charging stations.
So there's not enough charging stations, and so as a result of that, those have been some of the big challenges that the energy transition networks or the energy transition process has experienced, and so that's kept really hydrocarbons really dominating the energy supply sources, and frankly, at Tortoise, we have a hard time seeing that change dramatically really over the next couple of decades. Yeah, that's a great point, Rob. I mean, this total transformation, Dan, that you used, I think we have to be really careful with phrases like that.
I mean, I would constantly remind folks I talk to that if we're talking about energy transition or energy evolution, you know, our goal isn't to eliminate, as some people have said, the use of fossil fuels. It really is to maybe reduce carbon dioxide, reduce other pollutants in the air. You know, I just always look back.
I mean, I love some of these really, really long-term charts of energy usage, and I would say if we've seen an energy, quote-unquote, evolution over the last 200 years, it's really been an energy addition. You know, we went from wood and we added coal. We then added oil.
We then added natural gas. Natural gas began some evolution of a displacement of coal, but not a total replacement. So, you know, when we say transformation, and, you know, Rob ended on a perfect point, I mean, we find it really hard to see sort of a complete replacement of fossil fuels.
As Rob mentioned, you know, we're seeing a slowing in demand for crude. I have to admit, we're a little dubious when we look at the developing world and still see a lot of demand growth potential there. You know, we're certainly seeing China slow.
So, you know, that is one thing to consider. But, you know, we're definitely thinking, you know, oil growth continues for, you know, certainly the next several years and into the 2030s. You know, we'll see how things really will be, you know, technologies, what is able to replace that, you know, EVs, as Rob mentioned, is probably a really open opportunity.
But again, EVs require electricity, where's that electricity coming from? You know, hopefully, we'll have an opportunity on technological innovations to talk about nuclear. But I would just say the reality is these, you know, transitions or evolutions are hard.
You need to, as Rob was mentioning, you need to get sort of consumer behavior around it, range anxiety. I always find that one funny, because the same existed with the automobile, gasoline automobile. People used to say, well, where am I going to get my gasoline from?
And what if I run out? And we were able to solve that, as Rob's suggesting, with more charging infrastructure. But, you know, reality is, I think we have to say we want affordable and reliable energy as clean as we can get it and just continue to push forward on that every month, quarter, year and decade.
So a combination of solutions, more the merrier, so to speak. All of the above. Right.
Now, with respect to technological innovations, Jay, that could help unlock solutions and further the progression of the energy evolution. What kinds of innovations are currently on your radar that could make a big difference? Yeah, Dan, it's like you read my mind.
I mean, nuclear is the one we're getting more and more interested in. I would just remind people that this is really long tailed. I get a little frustrated by policymakers and maybe even some of these D.C. consultants who are spending an awful lot of time hand waving around this.
I mean, when we look to the last nuclear plant built here in the United States at utility scale, it took about a decade to build. So this is not tomorrow's energy source, but it is something and I felt this way for more than two decades. This is something we really need to get underway with, but we probably need some government support, particularly since the last nuclear plant that was built.
Utility scale was, you know, two and a half times over budget, you know, small modular reactors or SMRs. You know, we have those floating around the ocean on military U.S. military vessels. So I have high hopes that that's a technology that will transition to commercial use.
The key question, it will be cost. But I do, I'd say long tailed, say a decade or so plus. I get pretty excited about nuclear carbon capture is another one.
I mean, again, this is in the pursuit of we don't want to get rid of fossil fuels. We simply want to make them cleaner. Carbon capture technology, particularly around, you know, natural gas fired electricity generation, to me, is one area where we could see a lot of that.
We've got a lot of concentrated CO2 that you could get to. Rob already mentioned electric vehicles. I mean, you wouldn't necessarily think of that as a new technology.
But, you know, certainly within the concept of that battery technology is something we're working, looking a lot at. And I see that continuing. And then the last one I'd put is hydrogen.
I mean, again, as Rob already mentioned, you know, that is one that holds some promise. It depends on how you do it. This green hydrogen, to me, you know, seems like it's going to be very, very niche applicable.
But blue hydrogen, where we produce it from fossil fuels, but capture the carbon, you know, back to that carbon capture topic, to me, holds some promise. So you mix it all together. I think there's a lot of technology out there that, you know, certainly in the next five to 10 years, you should be able to continue the pursuit of that all of the above to serve the growing need, which hopefully we'll talk about because that's another big thing.
How are we going to meet the growing demand? Most of us were talking about here is more static demand. Yeah, no, Jay makes some really good points.
And, you know, all we do is focus on the energy sector. And so we study all these energy technologies really closely and have been for a couple of decades. Frankly, I think there's a couple of really good points Jay makes.
I would agree that nuclear is really promising, really exciting. But what I think people do forget about is we really need to develop a nuclear supply chain. We don't really have uranium in the U.S.
Just to generate nuclear power, you need enriched uranium. We don't have much enriched uranium in the U.S. or the ability to do that. We have a little bit, but not a lot.
So we rely on foreign sources of supply. We rely on foreign sources of supply to get our enriched uranium to operate our existing nuclear reactors. And so these small modular nuclear reactors, although they're a great technology, they actually require a lot more enriched uranium, you know, closer to nuclear bomb-related enriched uranium.
So we need some regulations. We need, you know, some improving in the technology. And so I would agree 100% with what Jay said.
Hey, it's really promising, but we're going to need more time than what everybody thinks, I think, to develop it. The other thing I would add to what Jay said is the other area we look at, but it's promising, but it needs a lot of work, is long-duration energy storage and solid-state batteries. This is an area that a lot of work has been done for decades.
You know, it's moving at a snail's pace in terms of the progression of the technology. But we watch it very closely because just think about if we could store electrical energy for long periods of time, get rid of this range anxiety that Jay's talking about. Really, the way that everybody utilizes energy going forward and the means that they utilize their energy would entirely change.
Just a classic example, you've seen those commercials and they've kind of gone away, but you saw a few years ago during the Super Bowl where the EV car company talked about, you know, powering your house with your truck. Well, that's not technically possible, at least for a long time. But if you have long-duration energy storage, it might be.
Once again, we're still a long ways away from long-duration energy storage and solid-state batteries working, and we'll see even if the technology works from a physics perspective. But anyway, that's another potential technology down the road that could be beneficial, and we watch very closely here at Tordus. Now, sticking with the topic of technology, Jay, as you know, here at the UBS Chief Investment Office, we've been tracking the artificial intelligence AI revolution very closely over the past couple of years, which is rapidly evolving and becoming more applicable to our day-to-day lives.
Rob, I'm curious, from your vantage point, what would you say are the energy requirements needed to sustain this technology, and how will this demand ultimately be achieved? Well, this is an area that we're really excited about at Tordus. So AI, you know, we've been looking at this for quite a while, the last couple of years.
I know it's still fairly new, but it's a really interesting opportunity. So in my career, for the first time really in probably 30 years, the energy sector and the technology sector are really intertwined here in supporting the development of AI. So obviously, AI needs technology, but as you highlight, Dan, AI needs energy as well to be successful.
And the needs of energy are tremendous. You know, the U.S., we think, will maintain its dominance in AI. Right now, the U.S. has the largest number of data centers in the U.S., and if you think about really where does the AI occur, it occurs in these thousands of data centers that are sprinkled across the U.S.
And so what it means is, from our perspective at Tordus, is that we think that electricity is the new oil. And so electricity really is going to be where we're going to see a significant amount of growth, and we will see a significant amount of growth in electricity over the next several decades. How much?
Well, let me give you some thoughts related to that. So if we look at just electricity demand over the last 20 years, it's basically been zero in general. But if we look at electricity demand growth over the next 20 years, we see 2 to 3, maybe 4 percent electricity growth every year.
You say, well, that's not much. Well, that actually ends up, when you add it up, it's about 1,000 terawatt hours of electricity demand between now and really 2030. What's that mean?
Well, that 1,000 terawatt hours is effectively the same amount of electricity that's being consumed today, but in the retail markets of the states of California, Texas, and New York, and Florida combined. So there's a massive amount, a large amount of electricity demand growth coming, and it's going to be looking for fuel supply sources. And we see that natural gas really will be the initial benefactor of this significant electricity demand because you need more natural gas to generate the electricity.
And then, of course, longer term, we see natural gas and nuclear basically being the biggest fuel supply sources that really provide that reliable, low cost, and even lower carbon fuel supply source to generate the electricity as AI continues to develop. Yeah, Rob, completely agree with that assessment. I mean, we find AI very, very exciting, you know, sort of a once in a lifetime sort of opportunity.
And that's really from the technology side, but I would completely concur. We agree on the energy side, it is similarly a once in a lifetime opportunity. You know, these technologies are very, very energy intensive.
I remind people, you know, if we were sitting here three or four or five years ago and talking about what a large load was, you know, it would have been a steel or other manufacturing facility that might have been 30 or 40 megawatts. And now we regularly have, you know, AI data centers that are, you know, a gigawatt or 1,000 megawatts, you know, multiple times of that load. So we're going to see accelerating electricity needs, you know, rapidly accelerating, as you pointed out, Rob, and I completely agree, natural gas wins.
I think the interesting thing, sort of in the next, I don't know, three to five years is just going to be, you know, the tension of how fast these AI hyperscalers want to move and how fast the power and energy industry can move to supply. I would actually argue the hyperscalers want to move faster than this very, very, I mean, keep in mind the power industry and the energy industry are one of the most capital intensive industries in the world, how fast they can move. So we believe natural gas is the biggest winner.
The challenge there is just it takes time to build new natural gas fired capacity. We think renewables come into the play simply because they can be built much faster, but they're not the total solution. You know, no hyperscaler is going to say I'm going to run my, you know, five nines requirement for power, meaning I need very, very reliable power.
I'm going to power it all with wind and solar, even with battery backup, no hyperscalers going to do that. So what's interesting is I think you're going to see, you know, the dirty underbelly, maybe we're running more diesel or natural gas, you know, some of these backup generators may be running more often at these AI data centers. So I think it's going to be an interesting next three to five years, because I think the hyperscalers want to move fast.
And I think the power industry is going to be scrambling to keep up simply because it takes, you know, three to five years to build a new natural gas fired facility. The key that's going to be interesting, and it gets to Rob's comment on on long duration storage is simply the idea that, you know, the electric generation in this country is wildly underutilized. It's very seasonal.
So, you know, an average natural gas fired generation facility might run, you know, 50-55% of the time. So if you could find ways to smooth that out and run it more, there is the opportunity. That's probably a longer term discussion.
But yeah, natural gas wins here, and it's going to be a lot of fun to watch the next three to five years. As far as putting money to work, Jay, in the energy sector, and we think about utilities, infrastructure, as well as you and Rob have covered with our listeners, our clients today, many avenues to approach. So where to begin?
I would be curious to hear guidance from you for our listeners, our clients, in terms of how to approach this, where to begin. And when you think about risk considerations, of course, recently, we've all been witnessing developments out of the Middle East, which perhaps could disrupt the flow of energy, energy prices. You also think about U.S. trade policy, potential impacts there.
What are your thoughts when it comes to some of those risk considerations? So a couple of questions there baked into one. Yeah, no, no, for sure.
I mean, look, at the end of the day, investing in energy, we think this is a core part of your portfolio. You know, people want to say, you know, should I be overweight, underweight? I think the reality is, you know, it probably depends on a lot of things.
But this is a core part of your portfolio, because, you know, whether we're talking all forms of energy from oil on the way through to electricity, like the global economy doesn't work without it. So you can think of this as very, very critical to growth in the global economy. The first element I'd say is, you know, diversify.
That's super important to managing some of the geopolitical risks you just mentioned. You know, we want to make sure we have, you know, a good exposure to natural gas, exposure to oil, exposure to electricity, all the way across. I would even argue exposure to coal.
You can get that synthetically through some of the utilities. But I think there's a lot of opportunity there, quite frankly. But risks is the key you're going to have to pay attention to.
And I think the sort of basis we've been looking at here at CIO is simply the idea that we're living in a more dangerous world. And maybe we all took for granted the sort of peacefulness of the last 20 years, maybe relative to maybe the last five, but it's going to be a more dangerous world. And so that's going to leave you with, you know, more concerns about security of supply.
So local supply is going to be important. I think that's why you're probably going to end up seeing more coal burned in Asia, because that's a local resource there. More natural gas used.
That's going to be from places like the United States and others where you have security of supply if you're in Europe or even in Asia. But I think regulatory risk is probably the only other one that I would mention. But, you know, Rob raised an important one, and that is, you know, sort of security of supply, thinking of uranium.
You know, a lot of manufacturing services, when you think of uranium mining, then enrichment and then fabrication of fuel assemblies. Right now, all of that is done outside of the United States. So there's going to be a degree of reshoring, which, again, it's sort of funny how this comes full circle, but that's going to add to the electricity demand growth that, you know, AI is talking about.
We also add reshoring of industrial activity. So there's a lot of things out there. I think the only point it really emphasizes is that energy should be a part of any diverse equity portfolio.
Yeah, and I appreciate Jay saying that, and I tell you what, we are very aligned there. I think energy is expanding, and we think about it a lot in the same way that Jay just described it. You know, when you used to think about the energy sector, most people heard energy.
The first thing that popped to your mind, and maybe it still does for some investors, is oil and heating your home. And those are important components of energy, but energy is so much more than that. Energy is responsible for so many consumer products.
Energy is really just important for just the economy, and Jay highlighted this. The economies don't run without energy, domestic or global, and you don't really figure that out until you have these concerns about a supply shock. For instance, just recently, there's been so much talk about the Strait of Hormuz.
Well, part of the reason for that is because the Strait of Hormuz is one of the most significant energy infrastructure pieces, pieces of energy infrastructure in the world. 20% of the oil, 20% of liquefied natural gas goes through that strait. If it was closed for a long time, for an extended period of time, we would immediately have a global energy crisis. Now, none of us think that that's going to happen, or I don't think it's going to happen, and not many people do, and I don't think, and I think the risks are very, very low for that to happen.
But my point is simply, it just highlights how important energy is to growth of the overall economy. And when you look at the energy sector, and it is broadening in the way investors look at it, but what does the sector offer? It does offer dividends, too, and it offers dividend income to investors.
So, we think that that's one of the appealing attributes of the sector. Typically, the dividend income, almost across all the areas of energy that you're looking at, it's going to be higher, and in a lot of cases, significantly higher than what the S&P 500 is, and there's a lot of growth in that dividend income that's consistent and steady tied to the development of the overall economy. I would say that there are not, the whole energy sector is not created equal.
There are portions of the energy sector that have more commodity price sensitivity, like the oil and gas producing sector. We tend to like, from a risk adjustment perspective, now more energy infrastructure-related stocks, and I would call energy infrastructure both pipeline-related stocks, but also electric utilities and electric generation, because those type of companies are companies that have big economic moats. You just can't replace these massive energy infrastructure projects, whether it's cost-efficiently or just in general, because these are massive projects, they're hard to replicate, so they have big economic moats, and as a result of that, we think that they have tremendous value or offer tremendous value to investors.
And so, that's kind of the way we think about things. From a risk perspective, clearly, we've got a heightened geopolitical risk environment, at least as we speak today. And hopefully, at least from a conflict perspective, we can continue to see de-escalation, which is the direction we seem to be headed as we speak on this call today, which would be good for humanity and good for the world in general, but we're always going to have geopolitical risk globally.
I think one of the things that's changed in my 30 years is, if you just look at what the U.S. shale technology has done, it's done a lot of great things for the U.S. economy, just economically as well, but from an energy security perspective, and Jay mentioned this at the outset, energy security is really important now, and because of U.S. shale technology, the U.S. is the largest producer of oil and gas in the world, and really, the U.S. is the largest producer of energy in the world. The U.S. is the largest exporter of energy in the world, so effectively, the U.S. is energy independent. That's really significant, and we've been that way for just a handful of years here, but for most of my career, my 30-year career, the U.S. has not been energy independent, but that makes a huge difference from an energy security perspective, and we're going to benefit from this here in the U.S. for decades to come, and I think that just can't be discounted, and that really goes to the success of the oil and gas producers and other forms of energy, solar and wind producers, really all of the U.S. energy producers and the entrepreneurs that really assisted in getting the U.S. into this position of being energy independent.
I think that is underappreciated, really, by lots of people, including investors as well. Well, with that, Rob, Jay, thank you both for spending some time today with our listeners and clients here on UBS On Air Market Moves. Very productive, informative conversation as we spoke about a progress report on the energy evolution as well as hit on considerations when it comes to positioning guidance and risk considerations within the energy space.
So, Jay and Rob, thank you both again for spending some time with us today, and as we like to say, the conversation will continue, so look forward to revisiting these topics with you both at some point. Yeah, thanks, Dan. Thank you, Dan.
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