With much of the developed world now committed to net zero, the hunt is on for how investors should play the theme. After all, we’re talking about the most radical transformation of our economy ever.
By 2050, everything we do will be included in a carbon equation that must balance out at zero. Anything we want to do that emits carbon must be electrified, offset or stopped altogether. We will all have to live within our carbon means.
Which will, of course, be much easier for the wealthy who can afford to offset their carbon. Or fly on a private jet, which isn’t taxed by the EU’s green aviation fuel tax…
The investment implications of net zero, at first, seem obvious. Renewable energy is manifold more resource intensive than fossil fuels to build. It uses mindboggling amounts of copper and other metals, for example. Throw in lithium and cobalt demand for batteries and you get a serious commodity boom.
Thus, all investors need to do is invest in commodity stocks to profit from net zero. Simple.
And that’s a viable strategy.
I’m sure it sounds ridiculous, but I also suggest you do the precise opposite too.
Most things in economics initially do sound ridiculous, funnily enough. It’s a bit like the Japanese, in that sense. Until someone explains the whole story to you, their behaviour makes no sense. I mean, the Japanese board the bus at the back and get off at the front!
Economists call the counterintuitive nature of economics, “the seen and the unseen”. After 200 years, you might think the concept would’ve caught on by now, as many once-thought-absurd Japanese concepts have. But the economic idea still needs explaining every time.
Let’s use the original example from Frédéric Bastiat. If we break a window, this makes the glazier richer.
A politician would conclude that the source of wealth is therefore to go around breaking windows. But that is because they only see the seen and not the unseen.
The money that was spent on the glass would’ve been spent elsewhere. And that elsewhere loses out. But, because nobody knows who missed out, nobody seems to care.
The real purpose of an economist is to make people aware of the unseen. Which is an incredibly unpopular job, because it tends to instil a depressing state of paralysis. The idea that there are no solutions, only trade-offs, is not a good way to be invited to cocktail parties or parliament.
Nevertheless, minimum wage laws create unemployment, stimulus reduces GDP, selling oil from a strategic reserve raises the price (because the repurchase becomes priced in), raising tax rates can reduce tax revenue and lowering tax rates can increase total revenue, and so on and so forth.
In economics, it’s a good rule of thumb to presume that an economic policy will have the opposite effect to its intention. Look up the Cobra Effect for a deeply disconcerting example.
So, what’s the counterintuitive impact of net zero going to be? To increase emissions, of course!
That’s what Germany’s Energiewende has resulted in, after all. It made Germany reliant on Russian gas, which the Russians then exploited, resulting in a return to coal for Germany’s energy system. Not to mention wood heating by desperate Germans…
The result was a decrease in energy use of 4.7% in 2022, but an increase in emissions from the energy system! Quite an achievement.
But that’s nothing compared to the returns on coal stocks that year. They accounted for the top four performers on the Australian stock market, for example.
Why did Germany return to coal so rapidly? Because it was able to get coal power up and running extremely quickly to replace missing gas.
Now I’d like to apply that logic to net zero more broadly and over a longer time horizon.
If, over the next few years, renewables fall badly short, power storage fails to come online fast enough, the grid isn’t ready, there aren’t enough EVs and we face meeting emissions goals only by shutting down the economy, then I suspect there will be another change of heart, as in Germany in 2022.
The world will turn to the source of energy that it can most quickly get online. But what’ll that be?
Gas and oil.
Because it takes about half as long to get a well up and running as a mine.
You see, because of net zero, and other factors, we have badly underinvested in the future supply of all energy-related resources. Which includes mined metals, because those are in effect the “fuel” of creating renewable energy.
But not all sources of energy are generated from scratch equally quickly. Renewables require a very long and complex supply chain to get built and online.
The resources must be found, they must be mined, they must be refined and they must be manufactured into renewable energy-producing assets. Those must be connected to a grid that must be rebuilt to handle renewables and an energy storage system that must be built from scratch.
This prolonged process and the amount of resources it’d require are why I suspect we’ll fail to create a net zero energy system in the first place. What’ll happen instead?
We’ll drill for oil and gas and deliver it to existing power stations and an existing grid that is already designed to handle the load…
According to a speech given by my colleagues in Australia, it takes between five and seven years to find, develop and produce a new resource of oil and gas. It takes about twice that for mining renewable energy minerals alone.
Both fossil fuels and mining renewable energy metals have been hamstrung by net zero. If the world wants to have a reliable source of energy as fast as possible, we’re in for a transition right back to fossil fuels first and fastest.
Investors should anticipate this shift by investing in the opposite to renewable energy metals – fossil fuels like oil and gas.
Until next time,
Editor, Fortune & Freedom
PS The Japanese board the bus at the back and get off at the front because they pay the driver at the end of the trip, allowing the distance of their fare to be calculated in a detailed fashion. This works because nobody evades the fare by jumping off without paying.