Energy is the master economic resource.
We take it for granted… but nothing happens without energy. Everything we see in our modern world today – and everything we use on a daily basis – is only possible because of energy.
It’s a simple thing. But if we truly ponder this, it changes our perspective.
Last week we talked about building a robust asset portfolio for financial security. The concept is called asset allocation. The idea is to spread our savings across a range of asset classes in a strategic way.
As we discussed, a tactical stock portfolio is a key piece of the puzzle here. And this is where we can leverage energy as the master economic resource…
My philosophy when it comes to portfolio construction is this: I want a portion of my portfolio to have exposure to energy. And I want to own that energy in the most advantageous way I can. If we start there, all we need to do is figure out what form that energy should take.
The Environmental, Social, and Governance (ESG) movement would have us believe that we should own energy in the form of solar and windmills.
They told us that we’re rapidly moving towards a “carbon-neutral”, “net-zero emission” world. And in that world, we would reduce our dependance on fossil fuels—namely oil, natural gas, and coal.
Countless “clean energy” exchange traded funds (ETFs) popped up in recent years to support this theme. ESG investing became a hot trend. And Larry Fink, CEO of investment management giant BlackRock, paraded around in media appearances proclaiming the gospel of ESG for a few years.
But reality has finally set in.
The world is quickly realizing that it is impossible to run our power grid on renewable energy sources like solar and wind power. And Fink no longer wants to use the term “ESG”. He’s now distancing himself from it.
We’re also waking up to the fact that these forms of energy are not nearly as “clean” as we were told they are. But that’s a topic for another day…
When it comes to energy production, energy density is everything. Energy density simply measures the amount of energy stored in a given fuel source per unit volume or mass.
Uranium (for nuclear power), oil, natural gas, and coal are incredibly dense fuel sources. I listed them in order of most dense to least dense.
When it comes to solar and wind power – we can’t measure their energy density. Because they aren’t fuels. Their power output depends on whether the sun is shining and the wind is blowing.
That means their power production is intermittent. It’s not constant.
As best I can tell, this is a problem that simply cannot be solved when it comes to solar and wind.
No matter how efficient solar panels become – and no matter how much battery technology improves – solar’s power production will always be intermittent. No sun, no power.
The same dynamic holds true for windmills. No matter how much the tech improves – wind power will always be intermittent. No wind, no power. And we just can’t run a modern civilization on intermittent power.
Yet, nearly $2.2 trillion worth of investment dollars have poured into the development of renewable energy since 2016. That’s according to financial media giant Bloomberg.
That’s what we call “malinvestment”.
Sure, renewable energy can be useful on a smaller scale. Especially in rural areas where the power grid infrastructure is limited.
But those use cases do not warrant trillions in investment. So we’re going to see a large portion of annual energy investment flow back into traditional energy sources in the years to come.
Indeed, we’re seeing signs that this is big shift is already underway. And that presents us with some great investment opportunities within our tactical stock portfolio.
More on that tomorrow…
-Joe Withrow