The World Is Running On "E"

Those close to me know that I’m always pushing myself (and those around me) to be better. The only way I know how to do that is to constantly push the limits, which sometimes leads to running low on energy. I’ve been told to “take it easy” but that’s just not how I’m wired. Oddly enough, I find myself more stressed and anxious when things are static. Perhaps growing up in the financial markets has made me adapt to a world where the only constant in life is change.

I will admit that sometimes I push too hard. This past year reminded me that even the fastest Formula 1 cars need to refill their tanks. Afterall, if we allow energy to run too low, it can lead to undesirable consequences and may become counterproductive. The same is true for general maintenance. Without finding the ever-elusive rhythm of “balance”, lack of maintenance can stifle one’s ability to exert energy in simple day-to-day activities.

These same principles are like those related to global energy production. In 2022, the world was reminded that global energy availability and stability remains a necessity for a properly functioning society. Data from the International Energy Agency (IEA) indicate that, globally, new energy investment that include fossil fuels and clean energy sources peaked in 2014, before falling rapidly during the pandemic in 2020. The lack of reinvestment in new energy production or maintenance of legacy systems has contributed to some of the world’s present energy scarcity issues.

Source: Goldman Sachs Global Investment Research, IEA WEI

We view today’s energy problem as a major long-term investment opportunity as global energy supply needs to catch back up to meet growing demand. For a myriad of reasons, annual investment in energy supply and production is projected to increase significantly in the coming years. At least an additional $1 trillion is estimated to be needed in the next five to ten years with the largest chunk dedicated to technology related to decarbonization.

There is no shortage of opinions on where these dollars should be spent, with opinions wildly varying. If only the solution to world's energy problems was simple and straightforward.

It’s not uncommon to hear the desire for more drilling, while others may advocate solely for green energy investment. Others plead that nuclear is the most obvious choice, despite the associated risks. Based on my knowledge and experience, the most probable reality is that the entire energy complex needs massive new investment to balance the needs of today and goals of tomorrow, but the majority of new dollars will likely not be dedicated to fossil fuels as they have been in the past.

For reference, IEA data indicates that 80% of the world’s energy supply was in some form of fossil fuels in 2019 – down from 87% in the early 1970’s. While the shift to clean energy sources over the 50-year period may appear slow, it is a mistake to extrapolate that the speed and magnitude of the shift will be the same over the next 50 years.

Source: IEA, Global share of total energy supply by source, 1973 & 2019

Even Exxon Mobil, one of the world’s largest fossil fuel producers, agrees with this assessment. In their 2022 Outlook for Energy, Exxon predicts fossil fuels will fall to 68% of the global energy supply in just 27 years. An interesting insight is that while total energy demand is estimated to increase by 15%, the proportion of oil and natural gas is expected to remain the same, with renewables increasing nearly 3x in favor of coal.

Source: ExxonMobil 2022 Outlook for Energy

There are a multitude of reasons why the future won’t follow the same path as the past but three key structural shifts are worth mentioning: 1. Rapid renewable technology advancement 2. Private sector investment 3. Global government decarbonization efforts.

Rapid Renewable Technology Advancement

It is important to understand that renewable energy production is less about the resource itself, and more about its relation to the technology used to capture, store, and distribute energy. The underlying resources themselves are abundant. Like many other technologies, clean energy technology advancement has been slow, and at times unnoticeable. Technology advancements stay that way until they hit a threshold of adoption and then exponential improvements come through efficiency and cost reduction. For example, in 2021 renewable costs continued the trend of falling, but at a faster pace than previously predicted.

Source: IRENA (Renewable Power Generation Costs in 2021 Report)

Private Sector Investment

Any new energy investment, traditional or clean, requires an extraordinary amount of capital and time to get online. This has always been a significant hurdle for any non-government investor seeking to make financial returns in the energy arena. Given the time lag from the initial capital outlay to cash generation, investors need to be confident they will be compensated for the risk they take on and that their investment   will eventually pay off. The challenging regulatory environment and uncertainty around future oil prices make fossil fuel investments a dicey proposition. Alternatively, regulatory support and certainty associated with improving economics of some clean energy technologies has entrepreneurs gravitating to the space.

The Renewable Energy Agency (“IRENA”) recently issued a report stating that 62% of new renewable power generation added last year had lower costs than the cheapest new fossil fuel option. If that wasn’t enough, McKinsey’s Global Energy Perspective 2022 states that renewable electricity generation is projected to reach 80 – 90% of the global energy mix by 2050. That same report estimates that peak oil demand is projected to occur between 2024 and 2027. To be fair, I have trouble believing this statistic myself, but the trend is clear. With so much at risk, the economics of new energy production will dictate where new dollars are spent.

Source: IRENA

Global Government Decarbonization Efforts

With rising fossil fuel costs, in part due to the war in Ukraine, the relative cost of renewables dropped significantly this past year. Non-oil producing countries were reintroduced to the problem of relying too heavily on foreign energy to power their economies. Whether it be from Russia, Saudi Arabia, Venezuela, or even the U.S., reliance on foreign energy is a national security risk. This is part of the reason why clean energy spending set a new record in 2022.

Source: U.S. Environmental Protection Agency (2022). Inventory of U.S. Greenhouse Has emissions and Sinks: 1990 - 2020

The other reason is a bit more altruistic. To fight climate change, decarbonization has become a major priority for the world’s developed nations. More than 70 countries, including the U.S., China, and the European Union, have made net-zero pledges to collectively work toward global emission targets initially established by the COP 21 Paris Agreement. The three largest sources of carbon emissions for government policy to target are Transportation, Electric Power, and Industry. Each one represents interesting investment opportunities that anyone looking beyond the next few years should have on their radar.

The goals of the agreement are ambitious to say the least as Goldman Sachs estimates that, this decade, an additional $1.8 trillion in annual spend is necessary to achieve the net-zero targets by 2050. The biggest financial response has come from the U.S. with the passage of the Inflation Reduction Act (“IRA”). The IRA does not cover the $3 trillion estimate, but meaningful dollars will be injected into areas like grid infrastructure, carbon capture, energy efficiency, battery storage, electric vehicles, and even green hydrogen. Each area has so much that could be addressed. Perhaps we’ll dive deeper in future writeups. While not all areas are “investable” from a profit maximizing perspective, many are or have become a   lot more interesting to consider.

Source: IEA, McKinsey, OECD, Company Data, Goldman Sachs Global Investment Research

At my prior firm, one of my primary research responsibilities was covering the energy sector. For all of the years I covered energy, investing in traditional energy was a bad bet. Simply excluding traditional energy investments from an investment strategy helped drive portfolio outperformance. From the industry and investors alike, the belief at the time was that oil was more valuable “today” than it would be “tomorrow,” so the only logical thing to do was to pump aggressively and sell it as quickly as possible. For over a decade, this sent oil prices to historic lows. In the 1960’s, the “Peak Oil” scenario was hypothesized due to the belief that the discovery of new oil fields would be finite. Oil was a limited resource and therefore more valuable as it became scarce. Like many investment themes, the pendulum has swung back and forth over time. With the energy sector leading the S&P 500 in 2022, it seems as if the pendulum has swung once again.

A Clean Future

As long-term investors we’re always tasked with looking ahead to the future. We love to find interesting long-term investment opportunities with secular tailwinds for support. The clean energy space is one of those areas where we see tremendous opportunity, but short-term conditions and sentiment play an important role in establishing the value of any investment. The current reality is that the world is still hungry for fossil fuels. While we expect to see higher oil prices and additional investment in fossil fuels in 2023, the better long-term play also happens to be better for the world. It may take some time for it to fully play out, but the trend is already in motion. Regardless, we see the entire space ripe with opportunities in both the short and long term. The entire energy complex is a very important investment theme we continue to like for 2023 and beyond.


The information in this report was prepared by Fire Capital Management. Any views, ideas or forecasts expressed in this report are solely the opinion of Fire Capital Management, unless specifically stated otherwise. The information, data, and statements of fact as of the date of this report are for general purposes only and are believed to be accurate from reliable sources, but no representation or guarantee is made as to their completeness or accuracy. Market conditions can change very quickly. Fire Capital Management reserves the right to alter opinions and/or forecasts as of the date of this report without notice.

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Michael J. Firestone, CFA

Michael is the founder of Fire Capital Management.