Low-cost, high-grade coal, oil and natural gas will be a distant memory by 2050. Much higher-cost remnants will still be available, but they will not be able to drive our growth, our population and, most critically, our food supply as before.
Our long-term investment themes
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The death of fossil fuels
Energy is a most critical component when generating economic growth – quite possibly the most critical of them all. A conventional approach to oil would suggest that oil prices are likely to trade higher – at least in the short term. The oil industry has done a poor job in recent years in terms of replacing depleted oil fields, which could lead to significantly higher oil prices in the foreseeable future.
The flipside of that argument is that the world is more and more indebted, and productivity continues to drop in a global economy, where the average GDP growth rate continues to fall. That again is likely to lead to a continued fall in capex going into the oil exploration industry and hence also falling energy production - a virtual vicious circle. Ultimately the world’s productivity problems will be resolved when scientists come up with a new and much cheaper energy form. Unlike many, who believe renewables offer a solution to these problems, we believe the ultimate solution is fusion energy, and that fossil fuels will be phased out once fusion energy can be commercialised.
These factors are likely to lead to an excessively high level of oil price volatility in the years to come. The emergence of shale reduced that volatility somewhat, but shale is likely to have only a modest impact on the overall supply/demand balance going forward.
When most people invest, volatility is frowned upon, and it is certainly correct that volatility in commodities has been on the rise in recent years. That said, volatility in commodities has a different impact on underlying commodity returns than volatility does in other asset classes. Whereas equities and bonds almost always do badly when volatility in those asset classes is high, commodities tend to perform quite well when volatility is relatively - but not extremely – high.
On that basis, it is hard to argue against investing in oil or, more broadly, in fossil energy. We expect volatility to remain high, which should create ample opportunities for investors in that asset class.