Energy Outlook Around the Globe

Unlock the secrets behind the intricate web of global energy politics with Steve Davenport and Clem Miller from Skeptic's Guide to Investing. How has the Ukraine-Russia conflict reshaped energy markets? Why is diversifying energy sources crucial for geopolitical stability? We pull back the curtain on U.S. energy policies under Trump, exploring the potential future of offshore drilling and the strategic role of nuclear energy. Discover the power plays of major oil producers like Saudi Arabia and Iran, and the technological advancements in African nations that could redefine the global energy landscape.

Transitioning to electric vehicles and sustainable energy comes with its own set of challenges, and we’re here to decode them. From the dependency on subsidies to the true energy savings of EVs, we leave no stone unturned. Learn about advancements in material science that are reducing the demand for traditional fuels and the financial hurdles that ESG initiatives face. We also debate the viability of natural gas as a transitional energy source and outline savvy investment strategies within the energy sector. Plus, we shed light on broader investment opportunities in tech, healthcare, and infrastructure stocks, offering you a comprehensive guide to navigating market volatility.

Straight Talk for All - Nonsense for None


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Transcript

SteveDavenport: 0:26

Hello, this is Steve Davenport, and I'm here with Clem Miller from Skeptic's Guide to Investing, and today we want to talk about one of the hot topics in investing and one of the hot topics in terms of politics, which is energy, carbon, the use of natural resources for our systems and our infrastructure. How do we figure out where we're going? Is the ESG revolution happening? Is it stumbling? Has it been stopped? I believe that we're in a very interesting time, because what happened with the Ukraine and Russia is a bit of a microcosm, but also a bit of a message to people that you need to have diverse sources for your energy, and so we've been surprised by Russia being able to continue to operate because of India and China taking their oil and being happy about it because it's less than the full price they would pay elsewhere. So I think that cheap energy is going to be an issue, and it's not something that's going away quickly. We have different producers and different tankers and different risks around the world, and so I thought I would try to go around the world, and Clem, of course, can probably give me a better summary of some of these regions, but I just want to think in terms of the US when you look at the US as a consumer of energy and as a producer, and so when I look at the US and I think about the next six to 12 months, there's going to be a lot of talk about what Trump is going to do in energy policy and how that is going to mean more jobs to the US and what it's going to mean for our natural resources. I think that we've gone through a period where we've tried to clamp down on Alaska and other areas where there is drilling rights that haven't been put on sale or lease, but I think that those things will be a big discussion for our country. Are we in a better shape than we were when the Valdez caused all the damage to the coast of Alaska? How do we think of ourselves now as producers? Are we producers that are more efficient and more safe? Or is it just a constant move that when the price goes up, we drill in places? Maybe we shouldn't, because the payoff or the profit chart looks a lot better at higher prices. But when we look around and we see Aramco and we see what's going on in the producers of Iran and other parts of the world, especially in Africa, there's a lot of oil. And I think that when we look at this and we realize that this is a cyclical nature, are we opening ourselves up to a time of low energy prices, which will help solve a lot of ills in a lot of these economies around the world.

SteveDavenport: 3:32

We've seen how eliminating some of those channels for energy in Germany has been a mistake. They needed to think more about what happens if one of our suppliers goes down, aka Russia. How do we react and how do we create a better energy source for a country like Germany? I believe that we are in an age where we're going to have more discoveries at the battery level, the storage, at the transportation level and also at the production of new resources. And I think that you know down here in the South, the Vogel is now fully up and it's been the first new nuclear in 20 plus years. I look at that and I say I never thought that would happen. I thought that if you think about that area and all of the different resources we have. But now I look at it and I say thought that would happen. I thought that if you think about that area and all of the different resources we have. But now I look at it and I say that's probably an advantage for the US, because if we didn't pursue the nuclear, it's one more thing that we don't have as a tool to try to grasp all of these different production and political issues around the world production and political issues.

SteveDavenport: 4:54

So, Clem I ask you, where do you think the apex of energy is most important? Is it in the US, with what we're doing in the Permian and what we might do with opening up offshore with Trump? Is it in the Middle East and Hezbollah? And if that rages on, that will cause further disruption of Saudi Arabia and others because of the alliances that are starting to form in the Middle East. Is it these developing countries in Africa who are starting to become more stable and they will be able to be better producers and better providers to others like China? I don't know where this energy story is going. Do you have a sense of where the politics of energy is in these countries? Is Brazil offshore and Petrobras going to be ultimately one of the bigger providers? I'm not sure it's clear right now. Who's got the right combination of government resources and technology to be the cleanest producer in the world.

Clem Miller: 5:59

Well, Steve, you've covered a lot of territory there, so let me give. Let me try to touch on a whole bunch of that pretty quickly. First of all, the very fact that you went around the world suggests that this kind of focus that people have just on the US might be a little misplaced, and I agree with that. The US is obviously the largest producer, but at the same time it's not a majority producer. It doesn't control the market in the same way that Saudi Arabia might control the market by being the so-called swing producer, which they still are today. Saudi Arabia is the swing producer. If Saudi Arabia thinks oil prices are too high, they'll pump more, right. They think they're too low, they'll hold back more. So Saudi Arabia clearly is still the swing producer. I think Saudi Arabia has developed the ability to guard its oil fields. You know they had some experiences years ago with some attacks, probably sponsored by Iran, and I think they've done enough to try to deal with that. I don't know that. Then Hezbollah has the ability I mean they've got a lot of missiles right, but I don't know that that Hezbollah has the ability to to go in and destroy a lot of the Saudi facilities, saudi Arabia attacking Iran. So I don't see that scenario as playing out. I do think that the Gulf will continue to basically control oil markets. Saudi Arabia, uae, kuwait, qatar on the natural gas, oman, which has been picking up oil production in recent years. I think these are very, you know, these are the most important countries in terms of oil production, and especially from those countries in the direction of, you know, of Asia, because they're the main producers who sent to Asia.

Clem Miller: 8:28

You mentioned Africa. I don't think Africa is any more stable today than it's ever been. Uh, to be honest, yeah, and the reason I say that is because you know, you have all these governments in in Africa that are, you know, formerly democratic governments that are toppling and kicking out. You know U S um anti Al Qaeda, um troops and, uh, and welcoming in, uh, you know, russian proxy forces. So I just, I just don't see, and then you've got, you know, chinese, obviously, influence in Africa as well. So I don't see, so I don't see Africa as being any more stable than it's been in the past.

Clem Miller: 9:15

Turning to Brazil, they are a significant oil producer. Much of that is consumed locally in Brazil, um, and there's been a history of all sorts of corruption involving petrobras and so and so I don't know, I don't give that a lot of Credence either in terms of uh, in terms of uh being able to to generate a lot of production. So and and then you've got you know those countries that are subject to sanctions. You know Russia, obviously, venezuela, iran. You know these. These are countries that, yeah, if the sanctions are removed, they're going to, you know, going to produce a lot and they're going to, you know, drive oil prices down. But that's on the supply side. All I've been talking about there is the supply side. I think demand is just as important as supply and it's often ignored in these discussions.

SteveDavenport: 10:18

I guess I would say Africa has evolved more in terms of on both sides. I know you're saying that they're not a significant player, but I think that you know, when we talked about what's going to happen with Ukraine, nigeria kind of stepped to the front and said you know, we would be a bigger supplier to Europe, or you know. I feel like I agree with you that you would have expected it to have gone farther, but I do think that Africa is evolving as a bigger part of these. You know these issues. And I also don't know if I would agree with your statement about Saudi Arabia, because I think it's OPEC as a whole. I don't think Saudi Arabia can act alone anymore as the swing provider. I think that there are too many other people who are willing to violate OPEC's, you know that there are too many other people who are willing to violate OPEC's.

Clem Miller: 11:14

You know that's always the case. I mean, it's been the case for decades that there have been, on the margins, countries within OPEC who have managed to violate. But I think you know it's not like Saudi.

SteveDavenport: 11:25

Arabia had this lockdown on the the oil. Oh no, no, no. They release and they tighten and the world changes when in reality it's a much sloppier kind of process. It is sloppy.

Clem Miller: 11:36

I would agree. But let's talk about demand for a second right. You were talking about demand too, especially in terms of ESG or cutting back on climate. I would say that the most important thing that's out there on demand is the fact that China's economy is having difficulties. It used to be that China, in terms of the incremental oil demand, was basically driving oil markets. Now chinese incremental demand is uh is much lower. Granted, india is picking up, no question about that. But I think you know overall in asia you don't see the same prospects for oil demand that you used to have 10 years ago, 15 years ago, 20 years ago, when China was a very fast-growing market. Not just China but Japan is seeing diminished natural gas and oil use as well. Along the same lines, steve, you mentioned maybe ESG not being as well. You mentioned that some ESG actions might reduce oil demand. You mentioned the nuclear plant, for example, might reduce oil demand.

SteveDavenport: 13:11

You mentioned the nuclear plant, for example, and obviously wind has done better than I ever expected. I'm just saying I think there's this image of pretty soon we're going to be all wind water, right, right.

Clem Miller: 13:25

No, that's ridiculous. And the batteries are going to store it. Right, that's ridiculous. And the batteries are going to store it. But actually, if you look at the, when you look at the numbers on the on you know contributions to lower demand for oil, you see that a very big one is actually the use of newer materials to create. You know that will. You know contribute to keeping houses warm. And then efficiencies in air conditioning and in heating units and all this stuff.

SteveDavenport: 14:11

I agree the EVs are going to take over and it's going to be but-.

Clem Miller: 14:15

Well, the EV companies are doing terribly.

SteveDavenport: 14:19

Well, because if you don't give them subsidies, they don't survive.

Clem Miller: 14:24

I hate to say this, but it's about the money, right, and EVs, I mean. I think it's questionable how much they save in terms of energy, because they get their electricity from, you know, from power plants.

SteveDavenport: 14:35

Right, and so I mean, I think when you build a hill on sand you know the whole premise of where EVs are going to solve our energy problem was just a false you know a false argument?

Clem Miller: 14:53

No, no, that's.

SteveDavenport: 14:54

When we look at the world, we've got to say what are the false arguments that are permeated in these different regions? And then what are the real signs that there is change going on? And in the US, I think you are seeing real change with more chargers and more, and I agree it is slightly better.

Clem Miller: 15:12

I think material science has made an incredible amount of improvements, reducing demand of oil and gas for heating and air conditioning. It's made a tremendous difference and even though I'm speaking here on a day when temperatures might be well over 100, we have greater materials efficiency that helps out in terms of diminishing demand. We have greater materials efficiency that helps out in terms of diminishing demand. So and that's not just in the US, I mean China has, in all of their large building programs. You know, over the last decade or so they've been using newer materials. So I think that's actually contributed to the fact that they're using. You know that their demand, incremental demand, is less than maybe what was expected 10, 15 years ago.

SteveDavenport: 16:09

But my only premise is there's a lot of other things to spend money on, and when we look at the aging societies in China, when we look at the aging societies in Europe and the US, how do we reconcile that? You know, if energy is going to go a certain way, it's got to go that way, with support from government, because it can't do it on its own. But it also has to do it in relationship to all the other demands for money Right to do it in relationship to all the other demands for money, right. And if we have more demands for healthcare, if we have more demands for education, then those things are going to crowd out. There's only so much, and I think that we've overspent now and created deficits that are starting to frighten people, and those deficits are going to make it harder for this ESG concept to move forward. It's not that it's not going to move forward. I'm just talking about pace, not talking about whether it happens or doesn't happen, and I just think that the pace of ESG has been slowed and therefore we have to start to think about, you know, as investors, what do we want to own?

SteveDavenport: 17:28

I still think natural gas has a place. I don't believe in this no carbon future. I think that gas as a transition makes a lot more sense than coal or oil as a transition is what makes a lot more sense than coal or oil. I agree that oil is the most transportable, the most efficient storage unit for energy, but does it also come with certain weaknesses that we know are hard to ever fix? And that's why I asked the question. You didn't answer my question. Are we better off today when we drill off the coast of Alaska than we were when the Valdez was spilling oil In?

Clem Miller: 18:08

terms of safety, yeah, and I don't think that eliminates the risk of a spill, but it's more like the magnitude of what could happen. I think you've got many ships that have strengthened hulls and so on, but you're still going to have wrecks.

SteveDavenport: 18:41

You're never going to get wrecks, you're never going to get you guys in baltimore know that yeah yeah, the harbor coming yeah, yeah, uh.

Clem Miller: 18:49

Well, they've cleared it, uh, but they haven't rebuilt the bridge yet, so that will take some time.

SteveDavenport: 18:55

I mean I I kind of think what's happened with the ukraine is a lot of these tankers got kind of pulled out of mothballs and that they might be shipped. We might not have had an incident yet, but I'm not sure they're operating better with older equipment. I still think that the number of new tankers I think it's hard for banks don't want to finance oil industry items, right? Banks want to say I'm ESG, I only want to support things that are sustainable. So we really don't have and this is something.

SteveDavenport: 19:32

I will say, probably till the day I die a national energy policy?

Clem Miller: 19:34

If we did, we would make these decisions about how we're transitioning and what years and what's funding and how it all works together every, every, every administration has a national energy policy and they and they just that I'm not saying they implement them, but they spend a lot of time working on them if I talk about something and I never do anything about it are. Are you?

SteveDavenport: 20:01

saying that's a policy.

Clem Miller: 20:04

They put it down on paper. I did.

Clem Miller: 20:08

Yeah, they put it down on paper and I think that, ultimately, the US doesn't really control what's going on with global oil markets, and I think that I'm not saying we're entirely defensive. We do play our role in global energy markets, but I think it's important. Now we're talking about investing. If we're thinking about that, I think the most important. Now we're talking about investing. Okay, if we're thinking about that, I think the most important thing. I mean, from my perspective, if you're going to invest in the energy sector, I would not want to invest in smaller US drillers because those are very vulnerable to ups and downs in oil prices, so I would not do that. What I would do is, if I were that invested in energy is invest in global oil companies.

SteveDavenport: 21:15

So you like the oil diversified versus OG or Schlumberger in the equipment side.

Clem Miller: 21:25

Well, I mean, those are fine too, because they're going to do well in different environments. But the integrated oil companies are going to do well too, because they make money at every point in the value chain. No-transcript.

SteveDavenport: 22:14

Yeah, I mean. Distillers to me are an example of the problem with energy in the US, in that we don't. We haven't built any new facilities in 10 or 20 years and it's not going away for 35 years, so building a new facility will help us operate cleaner for the next period.

Clem Miller: 22:46

And in the meantime, we invest in the global energy companies because they're diversified across the world, correct?

SteveDavenport: 22:55

I think that you know I have this idea that we need to fight inflation, and one of those fights of inflation is going to be investments in real estate, investments in infrastructure and investments in energy. They tend to be not correlated to the overall market. You come up with the five or six best names in energy worldwide that you'd want to own, where you're getting a yield. That yield has a growth greater than inflation and therefore this item is going to perform differently than your overall portfolio, david Steinbergen and it's likely to be that the demand for energy is going to be consistent. So you've got to decide whether you want to be a Hess or an Exxon or a Ramco.

Clem Miller: 23:44

You're making a lot of assumptions, you're putting a lot of conditions on which ones you would pick. You can pick whatever you want, clem. Well, I'm not a big in my investment portfolio. I stay away from energy right Because of the volatility of energy prices, so I stay away from that. I stay away from most material stocks for the same reason. I just don't like the volatility. I'd rather have something that is a little bit more stable growth, quality growth. But that being said, that being said All of your semiconductors down today, I know.

SteveDavenport: 24:27

Stability of growth.

Clem Miller: 24:28

Argument is yeah, they're going to go back up, though it's ringing through my ears yeah, they're going to go back up though.

SteveDavenport: 24:35

Oh, I'm sure they are Clint.

Clem Miller: 24:36

I'm just saying that, if this is, serious.

SteveDavenport: 24:38

And if the us, you know, doesn't respond to uh, china implementing something in taiwan straight, um, I think your love of the stability and quality growth will probably be somewhat mitigated. Right well, see energy prices go up and you'll say they've got great growth. Look at this.

Clem Miller: 25:01

I mean. The energy companies in my mind are not quality growth companies, they're cyclical companies.

SteveDavenport: 25:06

I'm saying, though, is is the AI companies? Quality growth?

Clem Miller: 25:11

Well yeah, well not if they're not the, not the tiny ones that are unprofitable, but the you know, the larger ones that are unprofitable. But the larger ones that are larger companies Microsoft, amazon, I mean even Apple has done better recently because they're starting to integrate AI. But we've talked about AI in the past and I don't think AI is a fad. I do think it's a legitimate investment theme, but I think you have to be careful about what you invest in. You can't invest in anything that just sort of talks about AI all the time and has AI in their name or is unprofitable or whatnot. You have to avoid those, just like you'd have to avoid the dot coms back when you go with the big companies.

SteveDavenport: 26:10

All I'm saying is Clem, I think we've turned a corner where suddenly people are now starting to say, hey, maybe all this upside that we've had in the last six to nine months hasn't come at a sustainable rate. Right, I worry about things that you can live with 100% upside, but you can't live with that 50% downside.

Clem Miller: 26:31

So let's play that out. I mean, if you think that there's not much more upside to technology and you mentioned earlier about healthcare you were concerned about that, Steve where would you invest? If you're not going to invest in tech and healthcare, are you becoming a dividend investor?

SteveDavenport: 26:57

I do like my dividends In terms of small companies, like I like in Alba Marley, their control of lithium and as a supplier of battery materials. I love their independence in that they provide to all the different people, so they're not I depend on Tesla cars to do well or else Alba marley doesn't do well. Yeah, they do well when everybody does well and they do poorly now when all the evs are. So if I was to look at a space and say I think these evs have taken a beating, that probably is too much and so, just as we might have seen too much in the upside for some AI, I think we've seen too much downside in some of these EVs. So I believe that we will see some good values coming out of this and I think that we will see people start to get back to normal in terms of realizing this is a key part of their energy future normal in terms of realizing this is a key part of their energy future.

SteveDavenport: 28:05

I do believe that natural gas offers some great opportunities because I think people will start to realize that we've got to transition somehow. It isn't an all-carbon, no-carbon argument. It's an all-carbon going to less carbon, going to other sources, going to less carbon going to other sources and I think that when we look at those two opportunities, I think there are some integrators like a Chevron, like an Aramco, like an Exxon that will give you some exposure to a space that, as energy prices, I think, go up, I think that we're going to see the world start to come out of this funk that we've been in and I think, as we recover, we'll see energy prices go up and it will be good to have that in your portfolio.

Clem Miller: 28:51

I also think the metal. You're assuming that oil prices are going to go up though.

SteveDavenport: 28:56

Assuming oil prices are going to go up.

SteveDavenport: 28:58

Though, assuming oil prices are going to go up, I believe that the sources of energy I think will continue to be these volatile areas of the world that will cause us to have some more volatility in the price of oil than we'd like, but I don't think we can really live with a different solution.

SteveDavenport: 29:20

So I believe in, you know, nat gas and some of the EVs is where I would spend some of my money, and I would also say that you need some metals and mining infrastructure REITs. I think REITs have really just been pummeled by higher rates and I don't think it's all exactly what's you know. A lot of them are well financed and don't need to refinance, so I think that some of the punishment has been overdone. So I think REITs are another area of resources that needs to be thought about as part of your portfolio. Paying 4%, 4.5% I know that our current short rate is that, but in six months to nine months, when the short rate goes to three, I think some of these REITs will not only get a benefit from being able to finance better, but I think they'll come out of the doghouse, and right now, I think that's what's in EV and real estate are both in the doghouse and I think they're going to come out. What do you think?

Clem Miller: 30:27

When are they going to come out?

SteveDavenport: 30:29

When we've had our first 1% of cuts Right. You can buy now and take the risk that the Fed doesn't cut, which I think is probably more like a 20% scenario. Or you can buy now and when they do cut, which I think is more like a 60% scenario, I think you'll be well positioned.

Clem Miller: 30:54

We've had discussions in the past where I've talked about how I look at short interest ratios a lot. That's what I'm looking at in terms of if I'm going to invest in an EV company or a REIT. I'm going to want to see relatively low short interest ratios, so that's what I would like to see, I agree.

SteveDavenport: 31:27

You're taking what the market's actually doing and utilizing it.

Clem Miller: 31:30

Yeah, and energy does have attractive short interest ratios, attractive meaning lower short interest ratios. So you know there might be some opportunities there. But you know that's what I'm, that's my, that's how I would distinguish among these cyclical companies is I would look at cyclicals that you know have relatively low short interest ratios and not those that have higher ones.

SteveDavenport: 31:57

Just like I do everywhere else. Let's say you want something that was uncorrelated to tech.

Clem Miller: 32:06

And.

SteveDavenport: 32:06

I gave you these five choices Infrastructure, reits, energy metals and mining timber, timber. Which of those would you want to own as an alternative and as a risk reducer to help fight inflation.

Clem Miller: 32:29

Preston Pysh MD. You mean to take advantage of reduced inflation? William Raisch MD. Yeah, Preston Pysh MD, I would do.

SteveDavenport: 32:37

and if you assume lower rates as well, yeah, I mean, let's say the consensus is that we're going to have 1.5% drawdown in rates by next year.

Clem Miller: 32:51

I like the idea of infrastructure. Okay, okay, I do too. Yeah, the problem is that and actually it's more attractive now Some of these infrastructure stocks have gone down. But yeah, I mean so, but only infrastructure if I can get you know if I if they're highly profitable or growing and and and have low short interest ratio I understand.

Clem Miller: 33:20

I understand there are many of those, um, if at all, but I like new jewels in the. I like infrastructure as a theme though, yeah. So like metals and mining um, you know, is is okay too. Um, uhals and mining has, you know, a number of sub themes to it, like, for example, on the renewable energy, yeah, gold.

SteveDavenport: 33:45

I mean, I think there's a lot of things.

SteveDavenport: 33:47

Yeah, gold is yeah, I think we're going to wrap this up for today. Yep, it's been a great discussion. Thanks for your insights, clem, and I think that energy, just like any other topic, needs to be understood well in order to be invested, and we're trying to help you with the skeptics view on some of these different ideas and concepts that you hear in the news, and we hope we're helping you with your investments. This is all for educational purposes only and we appreciate you listening and we hope you'll show up and listen again as our next topics hit the wire. So thanks again for joining us, and Skeptic's Guide for Investing is turning off.

Clem Miller: 34:32

Thanks, Steve.