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The Green Energy Illusion

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Move over tech, energy is the new king … plenty of life left in the oil trade … the reality of going green too fast … Europe as a case study

On August 24,2020, the Dallas Morning News ran an article with the following headline:

“Dow boots Exxon Mobil from blue chip club in stunning ‘out with energy and in with cloud’ shake-up.”

You may recall that in summer 2020, Salesforce.com replaced Exxon in the Dow Jones Industrial Average Index.

At that time, here in the Digest, we called the move “symbolic.” It was testament to the growing influence of tech over the investment markets. And as you know, tech would go on to soar over the next 14 months.

How times have changed.

Last week, InvestorPlace’s Editor in Chief and fellow Digest writer, Luis Hernandez, sent me a chart that blew me away.

Before I opened the chart itself, I read Luis’ question to me in the body of the email:

What’s the over/under on when they pass each other?

I saw that he was about to compare QQQ and XLE.

If you’re less familiar, QQQ, tracks the Nasdaq 100 Index – in other words, it’s tech.

Meanwhile, XLE is the SPDR Energy Select Sector ETF. It contains energy heavyweights including Exxon, Chevron, Schlumberger, and ConocoPhillips.

Clearly, that’s energy – and largely fossil fuel energy at that.

My initial thought before opening the chart was:

Energy has had a monster run, but just a couple of years ago during the pandemic, crude oil sold for a negative price. Traders were literally paying people to take their contracts off their hands.

Meanwhile, tech has had a bad go of it for the last year or so, but it was crushing everything else for five-to-10 years prior to that.

How will this comparison even close?

If your initial reaction was similar, brace yourself

Here’s the relative performance comparison of energy vs. tech over the last five years with XLE in green, rapidly closing the gap with QQQ in black.

A 5-year chart of QQQ and XLE showing them diverging widely in past years, but nearly convening in their relative cumulative returns today

Source: StockCharts.com

And how about Exxon and Salesforce.com specifically?

Well, echoing ourselves from a moment ago, how times have changed.

Since joining the Dow, Salesforce.com has lost its investors 25%.

Meanwhile, Exxon has more than doubled money for its investors, up 215%.

Chart showing Exxon stock surging 215% while SalesForce.com stock loses 25% since they were switched on the Dow

Source: StockCharts.com

We’re watching a tectonic shift in the investment markets as energy’s strength continues snowballing

Investors should take notice.

Legendary investor Louis Navellier has certainly noticed. From a recent Accelerated Profits Market Update podcast:

…There is a shift away from tech companies as energy stocks are clearly set to post the best earnings in the third quarter.

Now, what’s interesting here is the big institutional investors are waking up to the energy companies’ growth; they went from accounting for just 2% of the S&P 500 to about 6% now.

Personally, I think energy stocks will account for 30% of the S&P 500 in the next two years, which bodes extremely well for our big energy bet as the institutional buying pressure should remain persistent and relentless…

The institutional buying pressure in energy stocks is going to be persistent and relentless…

That’s why I’m so bullish on energy.

To give us an idea of just how dominant energy has been from a performance perspective, let’s turn to FactSet. It’s the go-to earnings data analytics company used by the pros:

The Energy sector is also the largest contributor to earnings growth for the S&P 500 for Q3 2022.

The sector is reporting an aggregate year-over-year increase in earnings of $33.0 billion, while the S&P 500 overall is reporting an aggregate year-over-year increase in earnings of only $10.1 billion.

In fact, if the Energy sector is excluded, the S&P 500 would be reporting a year-over-year decline in earnings of 5.1% rather than a year-over-year increase in earnings of 2.2%.

Bottom line: Similar to tech’s performance years ago, energy is now crushing everything else in the market.

Taking a step back, what is going on here?

Aren’t fossil fuels on the way out? Isn’t green tech supposed to take over?

And even though Louis is bullish on energy today, is investing in “old school” oil companies still a wise bet after the monster year-long performance?

Well, to answer these questions, let’s begin by turning to InvestorPlace’s CEO, Brian Hunt.

Beyond helming InvestorPlace, Brian is an accomplished investor, trader, and teacher, having penned a series of classic investment essays which you can read here.

Last week, Brian sent an internal email to a few department heads here at InvestorPlace that detailed why gains in oil aren’t going away anytime soon.

From Brian:

To those of us that know economic history, the transition from horses to cars is a classic example of how major energy transitions work:

We find and develop an energy source with greater efficiency than the one currently being used… we become vastly more efficient, productive, and mobile… and then we totally reorder society around the new and more efficient energy source…

Throughout human history, we’ve used a variety of energy sources such as wood, animal power, wind, whale oil, coal, and crude oil.

As progress marched on, we transitioned to energy sources that generated greater “energy yields” … to sources that gave us greater and greater returns on the time, work, money effort we spent on generating the energy.

You see, for any type of energy – wood, coal, solar, anything – you must devote time, work, and energy into producing it.

Every form of energy has a cost of production…

Fossil fuels such as crude oil, natural gas, and coal provide very large returns on the time, work, and money required to extract, refine, and transport them.

In many applications, their energy yields are more than 500 times the fuels that came before them. That’s why we don’t cross the country in stagecoaches or heat our homes by burning logs.

Brian sums up his point as “the greater the yields on our energy sources, the greater the levels of prosperity.”

And the yield on fossil fuels has brought our world the greatest levels of prosperity humanity has ever enjoyed.

It has made everything cheaper and more prosperous, lifting billions of people out of abject poverty over the last hundred years.

But we’re now on the verge of taking a step backward

Back to Brian:

Most of us that know economic history also can’t help but come to a simple conclusion about the terrible energy crisis headed our way:

The coming energy crisis – where gasoline could soar to over $10 per gallon and inflation stays high for years – is the result of something we’ve never seen before in human history.

Crisis?

Wait – why? What about tech-based prosperity?

Brian writes that for the first time in history, we’re attempting to transition to a more expensive, less efficient energy source.

From fossil fuels…to various green tech fuels.

We’ve been told that green energy costs are plummeting, and this will result in a world powered by clean, renewable energy at even less expensive cost.

That’s not completely accurate. Such data is often cherry-picked. For example, it might price the cost of solar energy during the middle of a sunny afternoon rather than the all-in cost that includes night, cloudy days, and hazy days.

The reality is that the energy return on cost for green tech simply can’t compare to that of fossil fuels yet.

Now, this isn’t a slam on green tech or a suggestion that we abandon efforts to transition from fossils toward green tech. But it is a recognition of a critical reality…

The speed at which global leaders are pushing to make this transition – regardless of the cost – has dire ramifications for our global economy and global peace.

If you’re skeptical, just look at Europe

From Financial Post:

…As Europe is learning to its great cost, leaning on unreliable sources like wind leaves households vulnerable: wind speeds were unusually low for most of 2021, causing much of Europe’s current energy pain.

When the sun doesn’t shine or the wind doesn’t blow, prices rise quickly and we have to revert to fossil fuels for back-up.

And we’ll pick up with the Columbia Climate School:

Much of Europe’s current energy squeeze can be traced to its rapid transition to renewables.

In fact, economists at the University of Chicago recently found that higher renewable penetration drives up energy prices.

Environmentalists have been telling us that wind and solar mean cheaper, cleaner energy. They herald a future of electric vehicles quietly zipping around on electricity that created thousands of green jobs.

If all of this is true, why are we suffering from a global energy crisis just months after adding record amounts of new renewable capacity?…

Relying on more and more fossil fuels to shore up a growing share of intermittent renewables becomes increasingly costly and risky, as Europe is finding out…

…Continuing to push the false narrative of abundant and affordable clean energy is a huge political risk that will backfire when the public has to pony up for a bill they weren’t expecting.

And here’s RealClearEnergy.org with more about our domestic energy reality:

A historic energy crisis is the only possible result of spurning our most important and irreplaceable fuels – oil and gas – which supply over 70% of America’s energy and are not replaceable at scale (wind and solar offer a combined 5%)…

Oil meets 97% of American transportation needs, is a core component of over 6,000 everyday goods, and has no significant substitute.

Oil has to be used, regardless of price.

Look around you: oil is integral to everything that you see. Diesel and jet fuel derived from oil are literally the lifeblood of domestic and international commerce. 

There is no such thing as “transitioning” away from oil: oil is as invaluable and irreplaceable as water, which is why it’s the world’s most traded commodity. 

Increase the price of oil, and you increase the price of everything else – including renewable power systems themselves. 

I’m going to wrap up before this Digest gets too long, but here’s the takeaway:

“Green” aspirations are worthy and noble goals toward which we should strive, but they have to be balanced with economic reality

At present, our leaders are ignoring economic reality. That can’t last.

When the public realizes the size of the bill they’ll be footing if we continue on this trajectory, at this pace, there will be one of two outcomes:

  • A return to greater overt reliance on fossil fuel energy (while pursuing green energy at a more reasonable pace) …
  • Or massive social unrest.

Such social unrest is already happening in Europe.

Though most news outlets aren’t giving it much coverage, in recent months European citizens who are paying 10 times more for electricity today that they were a year ago have been taking to the streets to protest. And it’s likely to get worse

Here’s more from Reuters:

Europe’s wealthiest nations face rising risks of civil unrest over the winter, including street protests and demonstrations, due to high energy prices and mounting costs of living, according to a risk consultancy firm.

Both Germany and Norway are some of the developed economies experiencing disruptions to everyday life because of labour actions, a trend already seen in the United Kingdom, Verisk Maplecroft’s principal analyst Torbjorn Soltvedt told Reuters.

Verisk’s latest report on its civil unrest index found more than 50% of the almost 200 countries covered experienced an increase in mass mobilisations risk between the second and the third quarter of 2022, the largest quantity of nations since the firm released the index in 2016…

“Over the winter, it wouldn’t come as a surprise if some of the developed nations in Europe start to see more serious forms of civil unrest,” Soltvedt said.

Bottom line: Whether we like it or not, crude energy isn’t going anywhere, anytime soon.

That’s why Luis discovered this closing-of-the-gap between energy and tech… it’s why Louis is bullish on oil … it’s why Brian is bullish on oil … and it’s why you should remember this when constructing your portfolio.

Have a good evening,

Jeff Remsburg