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peak oils treacherous currents

Within the energy sector, the idea was often known as ‘peak oil’. The basis of the peak oil argument was that prices would consistently rise because increases in production could not keep up with the growth in demand, which derived from emerging market economies.

But even during the time that this idea was prevalent, many economists expected rising prices to cause both demand destruction and investment in production.

Playing the power game

Power generation has a close link to industrialisation and so to global growth trends. Broadly speaking, the opportunities lie in both the generating companies and the construction of their capacity.The First State Global Listed Infrastructure Fund, which has €600m in assets under management and is lead managed by Peter Meany (left),alongside Andrew Greenup (right),offers exposure to both themes.

Rise and simultaneous fall

The BP ‘2012 Statistical Review’ shows that from 2001 to 2011, the price of Brent Crude rose from $22.81 (€16.66) to $111.26 a barrel. Total global oil production rose in the period from 3.6bn to 4bn tonnes, while total consumption rose from 3.6bn to 4.04bn tonnes. However, over the decade, consumption by OECD countries actually fell by 5.7%, while non-OECD demand rose by 43%. Thus we can see the evidence here of both intrinsic demand growth and demand destruction.

The BP ‘Energy Outlook 2030’ expects global GDP growth per year of 3.7% over the coming two decades, but growth of primary energy consumption of only 1.6%. This implies annual energy efficiency improvements of 2%. OECD energy consumption is expected to be flat, but with substantial changes in the fuel mix. Renewables should slowly replace oil in transportation and coal in power generation. Gas will also gain share. These shifts will be driven by a combination of prices, innovation and policy.

But while this might create the expectation of higher gas prices, gas markets provide a dramatic illustration of the effects of innovation. Fracking has enabled substantial increases in reserves and the production of gas in the US. Production grew by 17% over the past decade, but reserves have grown by 58%. Meanwhile prices have fallen sharply. Production and distribution are currently constrained by a lack of infrastructure, but the expectation is that the US will become a net exporter of gas in the medium term. The technology has now enabled production of oil from shale too.

Back in the black stuff

Some people speculate that the US will become a net exporter of hydrocarbons by 2020. This would have powerfully positive implications for the US economy and the dollar. However, the localised nature of gas markets means that while US gas prices have fallen sharply, prices elsewhere in the world remain elevated. Thus liquefied natural gas is expected to represent a growing share of the global gas supply, particularly in Asia. World electricity demand, driven by emerging market industrialisation, will cause electricity generation to be the fastest-growing sector.

Despite concerns about climate change, coal should be the largest contributor to the growth in power generation during the next decade. Renewables, including nuclear and hydro, will add as much but become dominant after 2020 despite the decisions of Japan and Germany to decommission their nuclear plants.

Political discord

In the shorter term, there is some underlying weakness in energy markets as investors worry about economic growth, but these should be temporary. The impact of political discord in the Middle East and North Africa will probably continue to affect prices, particularly oil, for years to come. This makes market timing nigh on impossible. These conflicting trends and issues present us with an array of attractive investment opportunities, not least among oil service companies. The complexity of the issues suggests that many people would do well to buy global energy funds, such as those run by Martin Currie, Guinness or Artemis.

Fracking has enabled substantial increases in reserves and the production of gas in the US. Production grew by 17% over the past decade, but reserves have grown by 58%

Simon James 
Investment Committee Chairman, Gore Brown

Those investors interested in a broad range of renewables should look at Impax or BlackRock New Energy, while the best way to access nuclear may be through an ETF such as the iShares S&P Global Nuclear Index Fund. Baillie Gifford is an excellent way to play the liquefied natural gas story.

Finally, two more speculative ideas. First, given that BP has mismanaged its operations in the US and in Russia, could it be a takeover target? Second, Salisbury-based Rockhopper, with interests in the Falklands, offers both political and exploration risk for those who are bored of austerity and the eurozone crisis.

tom@ybc.tv

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