I was surprised to read the other day that sales of heat pumps across Europe dropped 47% in 1H24 versus a year earlier. The EU has adopted more aggressive policies to combat climate change than any other region. Residential adoption of heat pumps is part of their green agenda.

We recently replaced an oil furnace with a gas one – doing our part to reduce emissions since the new furnace is more efficient and gas generates less CO2 per unit of energy output than heating oil.

Heat pumps utilize an ingenious technology which relies on increasing the pressure/temperature of a refrigerant inside a coil, warming the air passed over it.  This cools the refrigerant, which is recycled back through a compressor which raises the temperature back up. The same equipment working in reverse provides air conditioning.

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The electrification of energy consumption underpins the energy transition. Heat pumps use less energy and generate CO2 dependent on the source of electricity. So in the utopian vision of climate extremists, we’ll all heat our homes with solar panels and windmills.

We never seriously considered installing a heat pump. Because they work like a/c in reverse, they rely on ductwork to warm the house. Our 1928 home has radiators, and we weren’t interested in tearing out walls to replace them.

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Around 16% of US homes have heat pumps. They come with a lot of qualifications. Carrier, a leading US manufacturer of heat pumps, warns that, “… when outside temperatures drop below freezing, the efficiency of a heat pump is affected as the unit requires more energy to maintain warm temperatures inside the home.”

This is because the compressor is placed outside. Carrier suggests either installing an “auxiliary electric heater” for when the outside air is very cold but prefers adding a furnace (presumably natural gas) which would take over when needed.

This seems ruinously expensive. Figures on furnace augmented heat pumps aren’t available but it seems a common solution.

Natural gas power plants also provide reliable power when it’s not sunny and windy. The energy transition relies heavily on gas to compensate for shortcomings in equipment that’s supposed to enable us to do without it. This is supporting relentless growth in consumption globally.

There’s the added inconvenience that an accumulation of snow and ice on your compressor can impede its operation. So the homeowner might find she has to venture out in a blizzard to shovel snow off the unit.

Much of the information on heat pumps is from proponents, so is overwhelmingly positive. They seem to be best suited to mild climates where snow is rare – from North Carolina on south for example. They’re outselling gas furnaces in the US, although sales fell 17% last year. However, gas furnace sales were down 27%.

Heat pumps are more popular in Scandinavia than anywhere else, which suggests that operating in a very cold snowy climate isn’t insurmountable. Natural gas and electricity are both more expensive than in the US. In addition, there are financial incentives to reduce fossil fuel consumption, which also explains why Norwegians drive so many EVs.

Oslo sits on the 60^th latitude and the average low in January is 23 degrees F. Minneapolis is on the 45^th latitude, over 1,000 miles farther south and has an average January low of 7F. Norway’s weather is pretty mild compared to the midwest. I don’t think I’d buy a heat pump there, although Minnesota is providing subsidies to increase adoption.

Everything to do with the energy transition is more expensive and less convenient. EVs come with range anxiety. All my Tesla-owning friends love their car but have another conventional one. Solar and wind are costly, intermittent and require lots of room and extensive high voltage transmission lines. Heat pumps are expensive to install and may need a furnace in cold climates.

European heat pump sales fell because some subsidies were ended and natural gas prices fell following the jump that followed Russia’s 2022 invasion of Ukraine. Some households embrace low carbon solutions regardless of price, but many more are sensitive to cost. Luke Sussams, an analyst at Jefferies, wrote, “If the economics do not work, the consumer will not accept it.”

An enduring theme is that all these initiatives increase demand for natural gas. 43% of US electricity comes from natural gas, so EVs drive that higher. Heat pumps also need a natural gas furnace. Solar and wind couldn’t work without gas power for when it’s not sunny or windy.

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Natural gas is critical to the energy transition and unlike renewables doesn’t rely on subsidies. Its infrastructure will be in use for the foreseeable future. We think traditional energy offers the best investment prospects in the sector.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

Revisions this year for the ten year growth outlook for US power demand because of AI data centers have provided support for midstream energy stocks, as additional natural gas will be needed (see The Coming Fight Over Powering AI). A recent report from Morgan Stanley (Global Clean Power – At a tipping point) expands this outlook to the rest of the world and reaches a similar conclusion.

Since the report is focused on renewables the positive outlook for solar and wind is not surprising. Morgan Stanley is forecasting a 3.5% annual growth rate 2022-2030 for global electricity demand compared with 2.8% over the prior decade. AI data centers will be 20% of demand growth. Along with EVs, they also expect an impact from rural electrification in countries such as India, where they expect 7.6% annual growth through 2032. China was two thirds of global power demand growth 2012-22 but is expected to drop to a fifth over the next decade as the rest of developing Asia gains ground.

Overall, around half of global demand growth will originate in Asia.

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This is going to make electricity markets tight, causing higher prices and, the report argues, will create a positive environment for power companies. Global prices for long term power contracts are +15% over the past year.

Hybrid generators that combine renewables with natural gas will play an important role in meeting this new demand. The report notes that wind/solar hybrids with natural gas have seen a sharp increase in tenders in India.

Williams Companies CEO Alan Armstrong has often noted that renewables growth was driving demand for the natural gas that moves through his company’s pipeline network. Weather-dependent, intermittent electricity sorely needs a back-up capability that can come online when needed. Natural gas power plants provide that. Tenders for power generation in India regularly receive more than half their bids from hybrid solutions where the cost is around $50-60 per Megawatt Hour (MwH). This compares favorably with wholesale prices expected to average $70 per MwH by 2025.

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Once renewables reach 30-40% of a grid’s power supply their dependence on sunny and windy days tends to be a limiting factor. In the US this is reducing the safety margin across almost all of our grid systems. New England runs the biggest risk of power cuts in the future because of its poorly conceived energy policies (see Why Liberal States Pay Up For Energy).

Interestingly, one of the risks to the hybrid power outlook is a slowdown in US LNG export permits. This will favor coal consumption, something that’s clear to the careful observer but evidently not the Sierra Club, who opposes US LNG (see Sierra Club Shoots Itself In The Foot). Orders for 15 gigawatts of new natural gas power plants were placed in 1Q24, the strongest demand in almost a decade.

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Nuclear power is also enjoying a resurgence. Japan and Germany notably cut back following the 2011 Fukushima accident, although in Japan its importance is now growing again. China is the clear leader, with plans to add capacity of 168GW, followed by the US at 50GW. Morgan Stanley thinks power generation from nuclear could roughly double from its current 390GW and expects output to hit a record next year.

An example is Microsoft’s recent agreement with Constellation Energy to restart a unit at the Three Mile Island nuclear plant in Pennsylvania. Data center operators often have ambitious low-carbon objectives. Microsoft is building one roughly every three days somewhere on the planet. Because AI servers need stable power 24/7, solar and wind are a poor choice.

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Many will be surprised to learn that nuclear and natural gas are set to increase their share of global power generation from 32% to 38% by 2030. By displacing coal this will represent a success for those who want to see reduced emissions, albeit one that’s contrary to the goals of climate extremists.

The outlook for natural gas demand is strong, because it generates less CO2 per unit of energy than coal and can compensate for the shortcomings of solar and wind. Increasing US LNG exports will help electricity reach more people in developing countries.

Morgan Stanley believes global power demand is at a tipping point, and it’s why the outlook for natural gas remains strong. We believe it will continue to support attractive returns from midstream energy infrastructure.

In other news, Saudi Arabia’s apparent willingness to abandon its $100 price target for oil is offsetting any geopolitical concerns caused by Israel’s demolition of Hamas and Hezbollah. Iran’s inability or unwillingness to respond to the decimation of its two proxies is reducing the market’s assessment of the risk of oil supply disruption. Weaker oil did correspond with softness in midstream stocks last week, especially those with more crude exposure such as Oneok and Targa Resources. However, the sector’s link with crude has steadily weakened in recent years as leverage has dropped (see Oil And Pipelines Look Less Like Fred And Ginger).

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

The outlook for crude prices is a frequent conversation topic among energy investors. We’re often asked for our thoughts – over the next several years we’re bullish as growing demand from developing economies competes with insufficient investment in new supply. But we don’t trade oil or reflect that outlook in portfolio construction.

Crude oil and midstream are linked in the minds of many. Over the last decade they have often moved together. The price chart shows a very close visual relationship in years past. The original appeal of MLPs a decade or more ago was that they operated a “toll model”, indifferent to commodity prices and reliant on volumes. The quantity of oil and gas consumed in America fluctuates much less than its value.

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The volume of crude oil and petroleum products supplied in the US has stayed remarkably stable for decades. We use around 20 Million Barrels per Day (MMB/D) with little regard for the economy other than the brief dip during the pandemic. This is why pipeline owners don’t spend much time worrying about the price of crude. Prices respond rapidly to changes in supply and demand and bring them back into alignment without much change in volumes.

Oil is heavily used in transportation. Economic slowdowns have little impact on the movement of people and goods. Lockdowns during covid did hurt demand and caused prices to collapse, but this was rare, and we can all hope that such loss of freedom will never be revisited on us again.

Interestingly, investors rarely consider the relationship between natural gas prices and pipeline stocks. There is no relationship – natural gas consumption for power demand and other purposes has been growing for years with little impact from prices.

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Crude prices and midstream stocks were searingly correlated in March 2020 when demand collapsed, oil prices went briefly negative and people stopped moving. The correlation (defined using daily changes over the prior three months) reached 0.87 on March 25^th. It was unforgettable.

That day marked a peak in the relationship. Although both crude prices and midstream stocks recovered strongly from that low, the link has steadily weakened. The 80% rally in oil when inflation jumped in 2022 was not matched by the American Energy Independence Index (AEITR) although the inflation-linked contracts widely prevalent in the industry underpinned the sector’s 21% return that year.

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The relationship continued to weaken, driven by falling leverage and capex among pipeline companies. Debt:EBITDA moved from 4-5X to 3-3.5X among most investment grade companies, a substantial reduction that made the stocks less risky. Capex came down as it became clear we mostly had the pipeline network we needed. Greenfield projects also ran into opposition from climate extremists such as the Sierra Club, whose ill-conceived policy prescriptions (anti-nuclear; anti US LNG exports to displace foreign use of coal) are helping drive global CO2 emissions higher.

The past three years of strong sector returns have come with little participation from oil, and the correlation has come close to zero at times this year. The recent jump above 0.30 is more reflective of a negatively correlated period dropping out of the past three months than of a changed relationship, as a visual inspection of recent price performance shows.

The weak relationship of recent years is the new normal, because the underpinnings of reduced leverage aren’t going away. Investors are increasingly able to assess the outlook without much regard for the price of oil, because it doesn’t matter that much. Oil and gas consumption will continue to grow, driven by developing economies.

This was vividly illustrated by a recent story about Indonesia’s challenges in reducing its coal consumption. Like many countries in Asia, coal is Indonesia’s biggest source of primary energy at 43% according to the Energy Institute’s Statistical Review of World Energy. Plans to replace some of the power generation derived from coal with renewables are running into problems because the government is worried that they won’t get enough financial support from rich countries like America to offset the increased cost.

Yes, renewables cost more, as is clear wherever they’re used. This is less of a problem than its consistent denial by climate extremists and others. Renewables cost more and they may be worth it depending on the consequent reduction in CO2 emissions. But they cost more, not less than our existing energy systems. Otherwise, we’d all be using solar and wind already and there wouldn’t be any need for subsidies.

Fuzzy thinking by climate policymakers is colliding with the reality of developing countries, in that they don’t want to pay more for energy. US LNG could solve this problem for Indonesia and others if opponents would get out of the way. We think pragmatism, inspired by the failure of today’s solar/wind obsession to meaningfully reduce global emissions, will eventually prevail.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

When a sector has enjoyed a period of good performance, the investor typically has to moderate her feelings of satisfaction at a choice well made with concerns about a crowded trade. When a good idea becomes widely acknowledged as one, prices are likely to overshoot as valuations become stretched.

This does not seem to be the case for midstream energy infrastructure, which has returned 16% pa over the last five years. It has generated very satisfactory returns without creating a destabilizing inflow of capital. Pipeline investors have enjoyed a stealth rally – a relentless appreciation that has not caught the attention of social media or most market observers.

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We talk to potential investors all the time. Reasons for not investing include fears that lower oil prices could hurt the sector as happened during the pandemic. This overlooks that midstream has delivered several years of good performance while oil and gas prices have languished. The S&P Energy ETF offers that type of commodity price exposure, but reduced leverage throughout the pipeline sector has dampened the relationship with oil.

Some still fear that the energy transition will lead to stranded assets as the world moves away from fossil fuels. But the evidence of recent years is that we’re going to use more of every type of energy. Global primary energy derived from renewables is growing only half as much as the demand for electricity. Peak fossil fuel demand is a long way off.

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We also run across investors who just find energy too hard, with numerous policy issues that require analysis. The White House has pursued an ambiguous approach – variously encouraging domestic oil production when rising prices caused electoral concern and flip-flopping on fracking (like John Kerry, Biden/Harris were against it before they were for it), but then pausing new LNG permits when left wing Democrats needed some love.

Joe Biden’s embrace of a renewables-based economy is largely based on substantial tax subsidies such as the Inflation Reduction Act. To paraphrase St Augustine, “Lord, give me chastity (or get America off fossil fuels), just not yet.”

Improbably, this has worked out quite well for the US economy, which continues to attract foreign direct investment from manufacturing powerhouses such as Germany where the “energiewende” is strangling domestic businesses with high prices. The 15% reduction in CO2 emissions we’ve achieved over the past couple of decades is short of what the EU has delivered but hasn’t been that painful either.

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Midstream’s strong performance hasn’t relied on strong fund flows, and as a result valuations have remained attractive. It’s beaten the S&P energy sector and crushed clean energy. To make a small fortune in renewables start with a big one. Midstream has even stayed marginally ahead of the S&P500 without including any high-flying AI stocks. It just keeps moving steadily higher.

Years of outperformance have accrued to comparatively few cognoscenti willing to invest the time required to understand the underlying fundamentals.

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Metrics such as Enterprise Value/EBITDA continue to show the sector as historically cheap. Free Cash Flow (FCF) yields have dipped over the past year as stock prices have climbed, but the growth outlook is such that at current levels yields are set to move higher. Without further appreciation, within a couple of years FCF yields will be headed back towards the high levels of 2021-22.

For the past seven years midstream funds have seen net outflows, typically around $1-2BN. Most months are negative, although this summer there were a couple months with small inflows. There is no panic buying in this sector.

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When midstream companies were organized as MLPs buybacks were rare. More common was the regular trickle of secondary offerings to finance “drop-down” purchases from their controlling general partner.

The MLP structure has lost favor to the single entity c-corp with its simplified tax reporting (1099 vs K1). This has coincided with reduced capex and improved financial discipline as companies have concluded that we mostly have the pipeline network we need, and climate extremists have made new construction torturous.

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The consequent growth in cashflows has enabled the midstream sector to start repurchasing stock. In recent years these purchases have exceeded the net fund outflows. This year’s stock purchases are over $4BN ahead of fund redemptions. The most informed are buying from the less informed, and the imbalance is growing.

Wells Fargo is forecasting that increasing cash generation by midstream companies will fuel further buybacks. This has helped the American Energy Independence Index (AEITR) to a 27% YTD return.

Imagine what might happen if fund flows turn positive.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

I spent two weeks recently touring southern England with my wife. It’s 42 years since I moved to the US, and I appreciate my old country more now than as a teenager itching to escape to the new world. We did some sightseeing and saw old friends. As we traveled around, the British approach to the energy transition was never far from my mind.

Despite voting for Brexit, which was a populist, right wing decision, Britain is a politically liberal country like much of Europe. Reducing greenhouse gas emissions to limit global warming is not a contentious issue. The Conservatives, who were in power from 2010 until an ignominious electoral drubbing in July, passed a “Net Zero” law in 2019 mandating zero emissions by 2050.

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The UK has been surprisingly successful in heading towards this goal. Emissions are down 44% from their 2006 peak, meaningfully ahead of the EU whose equivalent reduction is 31%. Germany may be the self-styled leader of the “energiewende” but Britain has been quietly getting it done.

In 1900 coal provided 95% of Britain’s electricity. As recently as 2012 it was still 40%. The last coal-burning power plant will be decommissioned by the end of this year. They’re also planning to add more nuclear.

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Renewables provide 20% of the UK’s primary energy, substantially ahead of the US (9%) and the OECD (11%). Last year wind provided 29% of their electricity, just behind natural gas at 32%. What the National Grid calls “zero carbon energy” (mis-named since manufacturing wind turbines relies on traditional energy) regularly produces most of their electricity and was 51% last year.

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The North Sea is a reliably windy place, and offshore wind turbines are far less controversial than in the US. We saw them from numerous spots while traveling along the south coast. Windpower suffers from cost and intermittency, but the view of turbines miles out to sea doesn’t strike this blogger as particularly offensive.

US windpower is overwhelmingly onshore. Offshore has been plagued with cost over-runs and cancelations. Coastal residents complain about the view, and a 300-foot fiberglass blade recently shattered near Martha’s Vineyard, with jagged pieces washing up on the beach. Voters along the New Jersey shore, politically red in a very blue state, are outraged at plans for offshore wind (see Windpower Faces A Tempest).

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In the UK you’re never far from a wind turbine.

Energy costs more in Britain. Electricity is around $0.40 per kilowatt hour, more than 2X the US. People commonly shut the lights off when leaving a room. One hotel we stayed at required your room key inserted in a slot for the lights to stay on, preventing guests from going out and leaving the lights on.

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Gasoline (petrol to Brits) costs around twice as much as the US because of higher taxes. But the cars are smaller and the roads narrower. Even though I learned to drive there, it was over 40 years ago. Driving through the English countryside, it felt like small cars were zipping around impossibly narrow lanes. But our 800 miles of driving cost £100 ($133), just under $0.17 per mile and similar to the average for US drivers.

British drivers grumble about the cost of petrol (and the traffic) but unlike the US it’s not a political issue. Everyone knows the British government has no influence over oil prices.

Americans drive more miles per year than most countries, which is why gasoline prices get people so worked up. Moreover, Britain’s more extensive public transport system generally gets you around faster than in the US. Taking a painfully slow NJ Transit train into New York compares unfavorably with the faster commuter trains servicing London.

In Britain, it’s household heating bills that earn the public’s ire.

Natural gas is widely used, and Russia’s invasion of Ukraine boosted winter heating bills. For a couple of years households were protected from the full impact of higher gas prices, through government caps, but that costly program has ended. During our trip the new Labor government’s plan to cancel pensioners’ annual heating rebate was a leading news story.

Britain has a good energy transition story to tell. But how do people feel about making a considerable effort while developing economies led by China overwhelm their efforts? Most haven’t given it much thought, and those that have shrug and say it’s important to “do your bit.”

Young people care more. My nephew, who’s a data scientist, even considers the energy required of a data center in constructing the form of AI queries he submits.

Unquestioning fealty to green energy is common among liberals. If climate change is such an existential threat, why don’t their governments make it a priority in dealings with China? I think it’s because the politics of climate change aren’t driven by solving the problem, but rather by imposing costly and inconvenient local measures that appear effective but are globally irrelevant.

Britain is ahead of its peers in reducing emissions, but the worldwide effect is inconsequential. The 44% reduction they’ve achieved since 2006 is only 0.6% of the total. For reference, the UK is around 3% of global GDP.

Climate extremists are driving policy in the UK as elsewhere and are missing the big picture. At its worst it’s wokeness trying to impose guilt on everyone simply for being here, on Planet Earth, living.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

If a single chart can illustrate the challenges in reducing emissions, it’s the scatterplot below showing per capita energy use and GDP. Raising living standards requires more energy. The relationship between these two variables is hard to break. Richer countries consume more energy, and becoming richer requires more energy. Everyone wants to move up and to the right. They want to live more like Americans.

This is the fundamental challenge to moving the world off fossil fuels. Reducing emissions means paying more for energy as well as using less of it, which is completely at odds with the desire in developing countries to develop.

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Per capita energy use varies enormously. Americans consume over 3X the global average. It’s not a perfect measure – China’s per capita energy consumption is close to the EU average even though incomes are less than half, which reflects the larger share of energy-intensive manufacturing in their economy as well as relatively low energy efficiency.

Canadians will be surprised to see what energy hogs they are. It’s not just their mix of economic activities. As my family in Ontario knows well, winter is long and cold north of the border, which pushes up energy consumption.

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Getting richer means using more energy, and a substantial portion of the world’s population uses comparatively little. Moreover, concern about global warming tends to be greatest among rich countries, who are ironically better able to invest in mitigation against flooding or heatwaves.

An extended period of high temperatures in Pakistan was blamed on global warming, although for any specific weather event it’s impossible to know (see Energy By The Numbers). While scientists will point to the imperative to reduce emissions, Pakistanis will understandably favor more air conditioning, which means raising incomes and using more energy.

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The International Energy Agency (IEA) publishes forecasts that are more aspirational nowadays, having dropped their original mission to provide unbiased analysis of energy markets. In their 2023 World Energy Outlook their Stated Policies Scenario, which is the closest to reality, projects 30 GigaTonnes (GTs, billions of metric tonnes) of CO2 emissions in 2050, down modestly from today’s 36 GTs. Even that includes heroic assumptions about declining coal use and sharply higher renewables.

The IEA calculates that if all the announced pledges on energy were implemented (their Stated Pledges Scenario), 2050 emissions would drop by two thirds to 12 GTs.

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Their Net Zero Scenario shows just how implausible it is to eliminate emissions over the next twenty-six years. It includes an almost complete phaseout of coal by 2050, and an almost two thirds drop in natural gas consumption. It also assumes that total energy consumption is 15% lower by 2050 even though the world’s population is projected to be 9.7 billion by then (versus around 8 billion today).

Net Zero assumes nuclear power output would double. As fanciful as this scenario is, it wouldn’t be sufficient for the Sierra Club who wants the world to stop using nuclear as well.

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The only way to square the circle is for rich countries who care the most about climate change to make enormous transfer payments (think $TNs annually) to poorer countries, to compensate for high-cost renewable energy. Climate extremists will counter that solar and wind are cheaper, but the contrary evidence is overwhelming. Germany has among the most expensive electricity in the world thanks to their big push into renewables (see Germany’s Costly Climate Leadership).

US electricity prices for households rose 6.2% last year as renewables gained market share (see Long Term Energy Investors Are Happy). This lowered the system’s overall capacity utilization. Solar and wind operate around 20-35% of the time. Their increased reliance means more back-up for when it’s not sunny or windy – typically large-scale batteries or more natural gas. The cost of solar and wind isn’t just the cost of using them to provide power. You have to include the back-up too.

Rich countries are not going to make the necessary transfer payments, which would be on a different scale than the current subsidies and tax breaks directed towards clean energy. Energy prices are politically sensitive – the Biden administration has been acutely sensitive to the oil market, even though allowing higher prices would boost the appeal of the alternatives.

The inherent conflict between raising billions of people out of poverty and reducing CO2 emissions is going to favor the former. As developing countries get richer, they’ll begin to share the climate concerns of western countries. There’s not much evidence that they do today. So we’ll use more natural gas along with every other source of fuel. The upside case is that policymakers make a serious effort to persuade China, India and others to use more natural gas and less coal.

US natural gas infrastructure looks like a good long term bet to us.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

It’s hard to overstate the global success of US natural gas production. Over the past decade we’ve grown output by 37 Billion Cubic Feet per Day (BCF/D), accounting for half the global increase. We now produce over a quarter of the world’s gas. And it’s cheap.

The development of fracking happened in America not elsewhere for many reasons. The geology, water availability, access to capital, technology and a culture of entrepreneurship. Least appreciated is the concept of privately owned mineral rights, which has enabled thousands of landowners to partner with drillers, earning royalties subject to state regulation and taxation.

All over the world except in the US, governments own mineral rights.

Several years ago, a Spanish E&P company found out how hard it is to drill when you’re not welcome. In the north of England, the British government granted Cuadrilla rights to extract natural gas using fracking. The local population was strongly opposed. Britain surely needs natural gas, but the residents living above the reserves saw no financial benefit while enduring all the noise and disruption. It quickly became a political issue and the government backed down (see British Shale Revolution Crushed: America’s Unique Ownership of Oil and Gas).

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The Energy Institute’s 2024 Statistical Review of World Energy provides informative detail on natural gas, which provides 24% of the world’s primary energy, up from 22% at the start of the century. It’s 23% of the world’s electricity. In the US it provides 43% of our power. Even the International Energy Agency, which has transformed from an objective observer of energy markets to a renewables champion, concedes that last year “Coal-to-gas switching was the largest driver behind emissions reduction in the US electricity sector.”

The US Energy Information Administration (EIA), credits coal to gas switching for 61% of the power sector’s emissions reductions since 2005.

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Global consumption has grown broadly, with the notable exception of the EU. Their strategic blunder of reliance on Russian piped gas along with ruinous climate policies have constrained GDP growth (see Natural Gas Demand Keeps Growing). German emissions are falling because they’ve made energy too expensive. They are de-industrializing, to the benefit of the US (see Gains From Energy).

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Gas is much harder to transport than oil, so only moves via pipelines or LNG tanker. Transportation costs are a much bigger percentage of the value of the commodity than for oil. Shipping costs from the US to Europe via LNG tanker are $1.50-$2 per Million BTUs (MMBTUs), but liquefaction can add another $2-$3.50. With US spot gas prices at $2, that still leaves a profit margin vs Europe’s TTF benchmark at around $10, but this shows why large regional price differences persist.

Shipping crude oil over the same route is around $2-$4 per barrel, so a much smaller percentage of the value of the commodity.

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Nonetheless, global trade in LNG is growing, even while intra-regional pipeline trade has shrunk with the loss of Russian shipments to the EU. Almost 14% of natural gas was shipped as LNG last year, up from only 6% in 2000. Pipelines represented another 10%.

LNG provides both buyer and seller optionality in a world more prone to geopolitical trade disruption. Pipelines linking neighboring countries require extremely stable relationships (think US/Canada, or UK/Norway). Nordstream 2 had its gas supply cut before it flooded with seawater after a sabotage. Pipelines reduce flexibility for both parties. It’s why the China-Russia negotiations over Power of Siberia 2 continue to drag on.

By contrast, the global oil trade was 68 million barrels per day last year, around two thirds of consumption. Oil and gas reserves are unevenly distributed. Coal trade was only 21% of consumption. It’s easy to move, but reserves are widely distributed. It’s why developing countries use so much of it – because it’s easily accessible.

Natural gas consumption will continue to grow, to meet the developing world’s relentless demand for more energy. Policymakers may even acknowledge that renewables are hopelessly inadequate to replace fossil fuels and instead emulate the US success by prioritizing coal-to-gas switching.

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Gas generates around half the CO2 of coal when burned for power, and also generates far less local pollution. Critics argue that flaring and methane leaks offset this advantage. However, the US is far stricter on flaring than other big producing regions such as Russia or the Middle East. We produce 26% of the world’s supply but only 7% of the flaring.

This all highlights the huge opportunity of US natural gas. Our supplies can help poorer countries meet their growing energy needs, while displacing more damaging coal. And because our environmental standards are higher than in Russia or Iran, our natural gas is a more climate-friendly product.

The simpletons at the Sierra Club and the knuckle draggers at Extinction Rebellion who hurl paint in art galleries will never embrace this. But increased US exports of natural gas are the most effective way to reduce CO2 emissions. In our opinion it offers continued attractive returns, and by delivering what is expected rather than unmet promises, it is the most ethical investment in the energy sector.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

To be an energy investor is to consider the energy transition on a daily basis. You don’t even have to be certain that man-made global warming is happening. Simply accepting that it may be possible should still induce a prudent world into managing this risk. Climate is complicated, and certainty that increasing CO2 emissions will cause irreparable damage is as implausible as certainty that they won’t.

We won’t hit the UN Zero by 50 target, meaning eliminating CO2 emissions in 26 years, because it’s not taken seriously enough. That may sound odd. All you ever read is articles hailing the growth in solar and wind along with their plummeting cost. But even in the US, renewables provide just 3.5% of our primary energy output, up from 2.7% a decade ago.

Perusing data from The Energy Institute’s 2024 Statistical Review of World Energy reveals how far we are from tackling the problem.

The first thing to understand is that global CO2 emissions will be determined by China, not the US or the EU. China’s 12.6 Gigatons (GTs, billions of metric tonnes) of CO2 equivalent (i.e. including methane) have increased by a factor of 3.4X this century. They are 31% of the total, up from 14% in 2000. Over this time the US and EU have each lopped around 1 GT off their emissions.

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Non-OECD ex-China (ie the rest of the developing world) has gone from 9 GTs to almost 16 GTs. The data shows that concern about emissions rises with incomes. Everyone wants a western standard of living, which requires more energy. This is the inexorable force driving consumption of coal, oil and natural gas.

The success the US has enjoyed in reducing emissions has come from swapping coal for natural gas in power generation. It seems obvious to extend this benefit elsewhere through increased US exports of cheap Liquefied Natural Gas (LNG). But climate policy is driven by the marginal, most fringe views. Climate extremists have made it their misguided mission to impede US gas production at every step (see Sierra Club Shoots Itself In The Foot). These are the people most likely to prioritize climate change in casting their vote. Therefore, their policy recommendations hold outsized influence over public policy.

As a result, China’s coal consumption grows unchecked. Their substantial investments in solar and wind capacity are hailed as evidence that their policies are aligned with ours, but emissions keep growing. Climate extremists are so convinced that renewables can ultimately provide all our energy that they ignore the facts. They remain implacably opposed to nuclear power, even though it has the lowest fatality rate per unit of power generated of any source of energy. The Sierra Club believes that, “every dollar spent on nuclear is one less dollar spent on truly safe, affordable and renewable energy sources.”

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Nuclear power output has barely risen this century. China is the one exception. The rest of Asia responded to Japan’s Fukushima disaster by shutting down nuclear. Germany followed suit. France remains a notable exception, deriving 65% of its electricity from nuclear power. The rest of the world is at 8%.

The US Navy has 72 nuclear-powered submarines, 10 aircraft carriers and one research vessel. They have never had a safety incident. Maybe they should run our nuclear program. Every form of energy production includes risks. Climate extremists who thought hard about the issue would use their outsized political influence to improve the process by which US nuclear reactors are approved in the private sector.

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The futility of the solar/wind obsession can be seen in the chart comparing renewables generation with overall electricity. Global power consumption has grown at a 2.9% annual rate, and renewables at 5.1%. The analyst who tortures the data until it confesses what he wants interprets this as positive.

But another way to look at it is that global power demand has grown by 14,360 Terawatt Hours (TwH) and renewables by 6,124 (TwH). For all the media enthusiasm about weather-dependent energy, its growth has met less than half of the increase in global power demand so far this century.

This is why natural gas remains a great long-term bet. Policymakers may conclude that effecting a global coal-to-gas switch is a vital part of the solution. Or we may continue as we are. Both outcomes will see increased natural gas consumption.

I have this fanciful vision of the Sierra Club one day apologizing to the world for such narrow solutions while rising sea levels lap around their HQ (headline: Sierra Club Flooded). They are based in Oakland, CA, a mere 43’ above the Bay Area water, which seems imprudent given their prognostications. Or perhaps they don’t think it’s that serious, just like their policy solutions.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

Journalists love to write about fast growing renewables. It fits the narrative that solar and wind can eventually replace our traditional sources of energy. It allows the absence of any serious push towards nuclear power to go unanswered. It avoids the uncomfortable question of why China’s increasing emissions from coal are acceptable when in America California is a decade away from banning sales of gasoline-powered cars and NY forbids natural gas hook-ups to new buildings.

The Energy Institute’s 2024 Statistical Review of World Energy is a rich source of data on how the world obtains and uses energy. Careful analysis allows many energy shibboleths to be put to bed.

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Start with America. The biggest energy story of the past decade is the growth in oil and gas output, which has in turn enabled a drop in coal. The shale revolution delivered mixed results to investors because at times executives were overly enthusiastic about the returns they could earn. But there’s no doubt that it was good for the US economy.

Since 2013 our total output of primary energy has grown at 3.3% pa, by 27.7 Exajoules (EJs). 49% of that increase came from natural gas, and 44% from crude oil and condensates. Together they provided 93% of increased production.

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The typical liberal journalist hails the 6.3% pa growth in output from all renewables including hydro. It sounds impressive. But starting from a low base it’s an additional 1.6 EJs. Increased output of natural gas alone was 8X as much, supporting energy security, job growth and exports to our friends and allies. There should be 8X as much news coverage of this enormous success.

Few casual readers of energy news would be likely to guess anywhere near this 8X ratio if asked.

It’s fortunate that natural gas grew this much, because coal production fell at a 5.1% pa rate, or by 8.2EJs. This is 5X the increase in renewables. By reducing coal burned in power plants we have lowered our CO2 emissions along with other harmful pollution. Renewables were barely relevant to this success story. It was mainly achieved with natural gas.

Along the way we reached energy independence. In the popular imagination this refers narrowly to crude oil, when exports exceed imports. A broader measure compares energy production with consumption. America’s use of energy is flat over the past couple of decades.

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Our economy and population have grown, but we’ve become more energy efficient. Activity has also shifted to less energy-intense sectors – more services and less industrial output – although cheap natural gas has caused a resurgence in US manufacturing employment following decades of decline.

The bottom line is that renewables provide 3.5% of our primary energy output, up from 2.7% a decade ago.

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Turning to China, they recently reported hitting their renewables power target six years ahead of schedule. To the casual observer of energy news, it appears that the world is moving in lockstep to solar and wind. Some even worry that America is at risk of falling behind China’s ambitions on climate change.

Then there’s the facts.

China’s energy consumption has quadrupled this century, as the country began to make up for decades of socialist central planning. The biggest energy story in China is the yawning gap between energy production and consumption. China has a substantial energy deficit, at 48 EJs equal to approximately half of all US energy production.

It is a national security imperative for China to close this gap. It complicates any potential military steps against Taiwan. China’s growing EV market and renewables capacity must be seen in this light. They want to reduce their dependence on foreign oil.

China obtains 8.5% of its primary energy from renewables (10.4 EJs), substantially more than the US. It’s grown at 10.1% pa over the past decade. However, this is only 6.1% of China’s energy consumption since they have such a big deficit.

What the cheerleaders for China’s renewables ambitions overlook is that coal production has increased by 13.8 EJs over the past decade, over 2X the 6.5 EJs growth in renewables. Coal provides more than half of China’s primary energy. It’s down from 65% a decade ago, but only because their energy demand has risen faster than their ability to meet it domestically. Coal is13% of US primary energy production.

Energy reporting generally overstates the impact of renewables. It missed the enormous impact of increased US natural gas production. It gives China a free pass on their growing use of coal. It’s clearer when you look at the numbers. Many journalists overstate the impact of renewables and their ability to meet our energy needs. Natural gas is the world’s favorite energy.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

Germany’s energy transition, or “Energiewende” as they call it, is causing casualties. One is the Green Party, which did so badly in recent elections that it may not be represented in Thurungia’s regional legislature. More state elections are scheduled and there are concerns of further loss of support.

The Greens are the main proponents of climate change policies that are hollowing out Germany’s manufacturing base. The combination of an aggressive push into renewables, exiting of nuclear power and catastrophic dependence on Russian gas imports has resulted in the world’s highest energy prices. German retail electricity is US$0.40 per kilowatt hour, more than twice the US average of 16 cents.

German voters have been among the most supportive of policies intended to decarbonize power generation and reduce emissions. But their tolerance to pay more for energy while much of the developing continues to increase coal consumptions and CO2 output is wearing thin.

Germany has been more successful than most countries in hewing to the UN’s Zero by Fifty goal, which is to eliminate energy-based CO2 emissions by 2050. Their per capita emissions have dropped by 20% over the past decade, faster than the overall EU at 15%. The average German emits half of her US counterpart.

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This success has come at a significant cost, and has enabled developing countries led by China to keep increasing their emissions. Over the past decade since 2012, approximately when the shale revolution began to release cheap American gas and oil, US living standards have pulled farther ahead. German GDP growth has been flat for years, with living standards barely improving. Real GDP per capita in Germany has increased at 0.7% pa over the past decade, less than half the 1.5% pa US rate.

The outsized influence of Germany’s Greens has not been good for Germans. German voters didn’t sign up for climate change policies that would shift jobs elsewhere, to countries with cheaper and more reliable energy. There’s even a proposal in Germany to charge more for electricity on cloudy days.

Germany’s auto industry illustrates the challenges they’re facing. The shift to EVs has been pursued with greater enthusiasm by auto companies than their customers. The offerings aren’t cheap. Audi’s Q8 e-tron priced at €76K has been an expensive flop with software that didn’t work as advertised.

Volkswagen is considering layoffs at its plant in Wolfsburg, the first time in its 87-year history that they’ve had to contemplate closing a factory in their home country.

The problem is that the energy transition is neither cheap nor convenient. It requires paying more for power that is unreliable and planning long drives around EV charging stations. The cost and inconvenience may be worth it to lower emissions on our only planet, but Greens and other environmental extremists have disingenuously presented a different vision. Voters in Germany are waking up to this reality.

When considering the climate policies advocated by progressives it’s important to consider Germany, which has long supported a more rapid energy transition than we have in the US. Few of us would want to trade places with them.

VC investors have often drunk the same Kool-Aid, and the result is a wave of cleantech bankruptcies followed by a more difficult fundraising environment. Last month Moxion, a battery start-up funded by Amazon, failed along with SunPower, owned by France’s Total.

The correct policies include increased US exports of natural gas to displace coal, prioritizing an easier approval process for nuclear and expanding new technologies such as carbon capture. This blog is supportive of sensible ways to reduce emissions, rather than the failing policy prescriptions of the Sierra Club, wretched little Greta and other climate extremists. Natural gas infrastructure has certainly been a better investment than clean energy for years. It’s also been the biggest contributor to reduced CO2 levels in the US, by displacing coal.

To make a small fortune investing in renewables, start with a big one.

In other news, the Energy Information Administration expects North America’s LNG export capacity to more than double by 2028. This includes NextDecade’s (NEXT) Rio Grande facility which will provide 2.3 billion cubic feet per day when Phase One is completed. NEXT’s stock price has remained weak as investors assess what impact the election may have on the project’s completion.

Meanwhile, construction continues, and the company made FERC’s review of the previously issued environmental impact statement easier by withdrawing the carbon capture proposal (see Deciding When To Sell). It’s a measure of the politicization of energy approvals that NEXT concluded that the courts would prefer a simpler proposal that doesn’t capture CO2 emissions.

We have three have funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund