Natural gas and nuclear power will be the big winners in the energy sector over the next 20 years. They have a competitive advantage over solar, wind, hydro, geothermal, coal, and oil. That advantage, combined with market factors, sets up rare investment opportunities to hold high-quality energy companies and buy natural gas and uranium futures.
People in different parts of the world—from Sacramento to Frankfurt to Beijing—are currently experiencing higher energy prices and shortages. Three main factors are at work here:
- Increased demand,
- Policies aimed at reducing climate risk,
- Current market incentives.
Global demand for energy is increasing. Energy fuels all the benefits of modern life: healthcare, education, transportation, communication, and economic growth. Developed countries don’t want to give up those benefits, and developing countries want more of them. As a result, the demand for energy will continue to increase over the next 20 years.
But supply isn’t currently increasing to meet that demand. Concerns about climate risk have led to corporate and government incentives that channel money away from oil and gas production toward solar and wind power, and environmental activists in Europe and the U.S. have successfully slowed the development of nuclear power. Investors lost money betting on the energy sector over the last decade, so the stock market has been rewarding energy companies for strengthening their balance sheets and returning cash to shareholders instead of investing in new long-term projects.
But things are poised to change. Energy runs on a predictable cycle like other commodities. As demand for energy increases, the price of energy also increases because supply is limited. Higher prices attract producers to invest in new production. New production kicks into overdrive because companies start competing to produce more. This competition leads in turn to oversupply: prices crash, and producers stop investing. Supply then gets tight; prices start rising again, and the boom-bust cycle continues.
We are at the beginning of a new cycle. The supply shortage we’re currently experiencing will likely last the remainder of this decade. Investors will find rare opportunities to capitalize on growth.
Global demand for energy is increasing
Energy is the lifeblood of modern civilization, the driving factor behind human progress and human flourishing. Our food, water, housing, transportation, communication, healthcare, and economic development all depend on harnessing energy.
Energy isn’t limited to generating electricity. It is needed for transportation, heating, and producing most of the materials and products we rely on: plastics, fertilizer, computers, medical equipment, mobile phones, cars, and airplanes–all currently made from oil and natural gas.
The world is hungry for energy. Global energy consumption more than doubled between 1971 and 2020,[1] and it’s projected to increase nearly 50% by 2050.[2] It’s clear that we’re going to need a lot more energy than we’re generating now. Some people believe that when we learn to harness new sources of energy, we will stop using our current sources. But that has never been true. Historically, whenever we learned to harness a new energy source, we did not stop using the sources we previously relied on (Figure 1).
Figure 1: Harnessing new energy sources did not replace energy sources we used before.
Future demand for energy isn’t going to be evenly distributed around the globe. Over 3 billion people—40% of the Earth’s population—currently live in energy poverty.[3] Most of the increased future demand for energy is going to come from providing these people with the energy they need and deserve. This is especially true in Asia where standards of living are rapidly increasing.
Navigating climate risk
Climate risk is a real problem because warming temperatures likely increase the severity of floods, droughts, heatwaves, hurricanes, and fires. But it’s important to keep things in perspective.
There are better and worse ways of managing climate risk. Many investors falsely believe we are transitioning to a world that runs on solar energy, wind power, and batteries. But solar and wind power are unreliable: the sun doesn’t always shine, the wind doesn’t always blow, and batteries are too expensive to store enough energy to power the electrical grid.[4] Efforts to shift to solar and wind power inevitably lead to energy shortfalls and increased energy prices for consumers. Solar and wind are useful for certain niche applications, but they don’t scale well and end up distracting us from more effective ways of reducing climate risk. I wrote more about the problems with solar power in another article: “Solar’s Dirty Secrets.”
Pushing to phase out fossil fuels and nuclear energy without a realistic plan to replace them has resulted in rising energy prices, power blackouts, and fuel shortages in Europe, the United States, and parts of Asia. And it has made people more vulnerable to climate risk by curtailing their access to energy.[5]
Wealthier countries are in general more resilient and better able to adapt to climate risk. The global population grew from 2 billion people in 1900 to 7.7 billion today.[6] Yet deaths due to natural disasters have plummeted over 95% during the last 100 years as the world has gotten wealthier (Figure 2).[7] One way of mitigating the human impact of climate risk is to reduce energy poverty and invest in forms of energy that continue fueling economic growth.
Figure 2: Fewer people have died from natural disasters as the world has grown more wealthy.
Market incentives contribute to supply shortages
The energy sector is currently underinvested because many investors lost money betting on it over the past decade. In the early 2000s, a breakthrough in new horizontal drilling technology led to an oil and gas boom, and investors began pouring money into new exploration. Production started to rise in 2008, and the next seven years marked the fastest increase in oil and gas production in U.S. history. But this boom led to global oversupply, causing prices to crash and investors to lose money and stop investing (Figure 3).
Demand eventually ate up the surplus supply, and energy prices are once again increasing. But investors remain gun-shy: they’re reluctant to pour money back into new exploration and production, and the stock market continues to reward energy companies for paying dividends rather than investing in exploration or innovation. As a result, long-term projects are getting pushed into the future.
Figure 3: Underinvestment in supply contributes to current energy shortages.
The supply squeeze is going to last longer than many investors think. Solar and wind aren’t going to meet our energy needs, and the current lack of investment in the energy sector will contribute to energy shortages and higher prices.
The investment case for natural gas and nuclear energy
All energy sources have tradeoffs. Natural gas and nuclear power are no different. Nevertheless, they rise to the top of the best energy options when you consider the alternatives and their tradeoffs.
- Burning coal and oil generates pollution and greenhouse gases.
- Solar and wind power are unreliable; they increase energy prices for consumers and don’t scale well.
- Hydroelectric dams and geothermal plants can’t be built in all the places people need energy because not all places have suitable water and geothermal sources.
- Biofuels require an enormous amount of land, water, and chemicals and cause air pollution.
Nuclear and natural gas are reliable, affordable, and produce low emissions. They’re not perfect. But their shortcomings are more manageable than the alternatives, and their advantages can’t be beat.
The biggest advantage is that nuclear and natural gas are both extremely reliable sources of power (Figure 4). Nuclear is, in fact, the most reliable of all energy sources.
Figure 4: The capacity factor of a power plant tracks the time it produces maximum power throughout the year.
In addition, both nuclear and natural gas reduce greenhouse gas emissions. Nuclear power plants don’t emit any greenhouse gases or air pollution while operating. And natural gas produces about 50% of the carbon dioxide and just 10% the air pollutants that coal does.
Contrary to what many investors think, the biggest greenhouse gas reductions over the past 15 years haven’t come from increased solar and wind power, but from shifts away from coal and toward natural gas.[8]
Moreover, nuclear and natural gas have the highest power densities of all energy sources, so they require less land to operate than other energy sources. Consequently, both help preserve natural ecosystems.
Natural gas is flexible and helps grid operators ramp power plants up and down quickly to accommodate changes in demand, and it provides an essential backup for intermittent power sources like solar and wind.
In addition, natural gas continues to be essential for heating, cooking, and producing fertilizer, steel, fuel, motor oils, plastics, detergents, cosmetics, and many other products.
The biggest concern with natural gas is that it emits methane, a greenhouse gas. But it’s possible to capture the methane before it escapes and thus decrease the amount released into the atmosphere.
Nuclear is the safest, the most powerful, and the most reliable way to generate electricity. Once the reactors are built, they are relatively cheap to operate. Countries that rely heavily on nuclear power have below-average retail electricity prices.[9] And nuclear plants can operate for 80-100 years if they’re well maintained.[10]
The biggest problem facing nuclear power is lack of will. The public’s misperception about nuclear’s safety is based on irrational fear. People think nuclear power plants are dangerous for the same reason they think airplanes are more dangerous than cars: they’re swayed by emotion rather than the evidence.[11] Just as airplanes are far safer than cars, nuclear is far safer than other energy sources.[12] [13] This fear has nevertheless resulted in the E.U. and U.S. having very strict regulatory and financing hurdles that make the process of building nuclear plants slow and expensive.[14] But it doesn’t have to be.
Japan built a nuclear reactor in just over 3 years.[15] France built over 50 nuclear reactors in 15 years and currently gets 70% of its electricity from nuclear power.[16] And China plans to build 150 nuclear power reactors in the next 15 years at about one-third the cost of recent projects in the U.S. and France.[17]
The future of energy
Many investors feel confused by the myriad divergent messages they’re hearing about renewable energy and climate risk. Their uncertainty is why energy stocks are trading at historic lows. But one thing is certain: people are going to continue needing energy. When we weigh the costs and benefits of different energy sources, nuclear and natural gas are the inevitable winners in the energy sector. Their advantages are enormous, and their shortcomings can be managed. In fact, managing the shortcomings creates part of the investment opportunity: developing better, cheaper methods to produce energy.
It’s difficult to find investment opportunities with tremendous financial upside that also advance human flourishing and protect nature. And it’s rare to be positioned so well to capitalize on future growth. Don’t miss out!
[1] The International Energy Agency (IEA), World total final consumption by source, 1971-2019, IEA, Paris https://www.iea.org/data-and-statistics/charts/world-total-final-consumption-by-source-1971-2019
[2] U.S. Energy Information Administration (EIA), International Energy Outlook 2019, Reference case https://www.eia.gov/todayinenergy/detail.php?id=41433#
[3] The World Bank, “Energy Overview” https://www.worldbank.org/en/topic/energy/overview
[4] Mark P. Mills, “The New Energy Economy: An Exercise in Magical Thinking,” Manhattan Institute, March 2019, https://www.manhattan-institute.org/green-energy-revolution-near-impossible
[5] Robert Bryce, “Europe’s Energy Crisis Underscores The Dangers Of The Proposed Clean Electricity Performance Program,” Forbes, October 2021 https://www.forbes.com/sites/robertbryce/2021/10/13/europes-energy-crisis-underscores-the-dangers-of-the-proposed-clean-electricity-performance-program/?sh=20cbc7d7473a
[6] Max Roser, Hannah Ritchie, and Esteban Ortiz-Ospina (2013) – “World Population Growth,” published online at OurWorldInData.org. Retrieved from: https://ourworldindata.org/world-population-growth
[7] EMDAT: OFDA/CRED International Disaster Database, Université catholique de Louvain – Brussels – Belgium, 2020 https://ourworldindata.org/grapher/number-of-deaths-from-natural-disasters
[8] Glenn McGrath, “Electric power sector CO2 emissions drop as generation mix shifts from coal to natural gas,” U.S. Energy Information Administration (EIA), June 2021 https://www.eia.gov/todayinenergy/detail.php?id=48296
[9]International Energy Agency (IEA) and Nuclear Energy Agency (NEA) “Projected Costs of Generating Electricity,” page 43, 2020, https://www.oecd-nea.org/upload/docs/application/pdf/2020-12/egc-2020_2020-12-09_18-26-46_781.pdf
[10] U.S. Department of Energy, Office of Nuclear Energy, “What’s the Lifespan for a Nuclear Reactor? Much Longer Than You Might Think,” Energy.gov, April 2020 https://www.energy.gov/ne/articles/whats-lifespan-nuclear-reactor-much-longer-you-might-think
[11] Lesser Lesser Landy & Smith, “Is Flying Safer Than Driving?” June 2021, https://www.lesserlawfirm.com/is-flying-safer-than-driving/
[12] Markandya, A., & Wilkinson, P. (2007). “Electricity generation and health,” The Lancet, 370(9591), 979-990. https://www.sciencedirect.com/science/article/abs/pii/S0140673607612537
[13] Environmental Progress, “Nuclear energy accidents, although rare, have led to fatalities in operators, first responders, and civilians,” Environmentalprogress.com, https://environmentalprogress.org/nuclear-deaths
[14] Statista, “Median construction time required for nuclear reactors worldwide from 1981 to 2019,” Statista.com, 2021, https://www.statista.com/statistics/712841/median-construction-time-for-reactors-since-1981/
[15] World Nuclear Association, “Nuclear Power in Japan,” September 2021, https://world-nuclear.org/information-library/country-profiles/countries-g-n/japan-nuclear-power.aspx
[16] World Nuclear Association, “Nuclear Power in France,” January 2021, https://www.world-nuclear.org/information-library/country-profiles/countries-a-f/france.aspx
[17] Dan Murtaugh and Krystal Chia, “China’s Climate Goals Hinge on a $440 Billion Nuclear Buildout,” Bloomberg.com, November 2021 https://www.bloomberg.com/news/features/2021-11-02/china-climate-goals-hinge-on-440-billion-nuclear-power-plan-to-rival-u-s