Upon Further Reflection


In September equity and bond markets both fell.  Year to date bond returns are negative, enduring their third year of losses, their worst performance since 1928.  Meanwhile the S&P 500 Equal Weight Index is up a mere 0.27% versus the S&P 500 (Market Cap Weighted) Index up 13.07%, reflecting the impact of the significant returns of large cap tech stocks on this major market benchmark.  Even among the Magnificent Seven, META is still down 11.5% compared to its September 30, 2021, closing price.  In part, investors have realized that interest rates are unlikely to soon return to the prior decade’s low levels.  Such newfound conservatism may be due to 2023’s continued hiring and lack of recession.  To others, it may be a reaction to seeing the US President for the first time on a picket line, advocating for a 40% wage increase and a 32-hour work week for unionized automotive workers and no layoffs, despite promoting a technology, EVs, that requires 40% fewer workers. We continue in our view that in an environment of strong fiscal stimulus at a time of historically low unemployment and Federal and state energy policies that are constricting supply, the risk of rising rates remains.  CNBC commentators will tell you not to worry, that according to history September is just an awful month for equities.   While we are less sure of counting on the calendar when it comes to generating investment returns, we are confident that as winter 2023 approaches, conventional energy will still be needed for heating in the northern latitudes.

In September, we had the opportunity to read many presentations from the Pareto conference.  We want to share a new trading tell.  Buy the companies that present to the emptiest rooms and be careful about those that are the most crowded.  Sparsely attended presentations may mean no good news is priced into the stock, while when crowded, it shows that everybody, his brother, and sister know. If you bought SBLK after their Pareto presentation, you made 9.1% in approximately a week’s time.  However, if you had bought BWLPG, whose presentation was mobbed, you would have lost 3.6% over the same period. There are significantly other factors that drive stock performance, but it is a flag, nonetheless.

We would like to summarize our key energy insights going into the fourth quarter:

  • Primary energy consumption is up 52% since 2000. There is energy demand that did not exist before, as for example, Bitcoin miners and AI chips.  A single Nvidia GPU chip consumes approximately the same amount of energy as a typical US home. Economic growth is still linked to energy.  There has been no energy transition, it is only energy addition so far.
  • We are far from peak oil demand. In Norway, currently 80% of new auto sales are EVs.  After years of subsidies, more than a fifth of Norway’s automobile fleet is now battery powered. Yet Norwegian oil demand has remained resilient, and the residual value of EVs is falling. If one were to go on a road trip, it is still easier to use an internal combustion engine.  Filling a tank is also much quicker than charging, especially if there is congestion at the charging point.  We also observed similar phenomena in the UK. By the way, if you were to convert all the ICE vehicles to EVs, the world would require 50% more electricity.
  • The cost of energy infrastructure continues to rise. A new dual-fuel VLCC would cost $140 million at a first-class shipyard and would be available for delivery in 2027.  To achieve a 10% unlevered IRR would require the shipowner to earn $50,000 per day every day for 20 years.  The buyer would need to make a down payment of up to 40% upon order versus prior periods when it was much less.  Not surprisingly, we have the lowest fleet to order book in 30 years for VLCCs at 1.3%, and vessel supply and thus rates can tighten dramatically on small demand increases.

While we believe that addressing climate change is critical, much of our national policy is flawed, from forcing manufacturers to build EVs before the infrastructure is ready, to Biodiesel/Renewable Diesel/Sustainable Aviation Fuel, which generates substantially more harmful emissions than conventional fuels over their lifecycle, to Offshore Wind, which is substantially more expensive and less reliable than the energy sources it is replacing. We see a continued role for conventional energy and thoughtful policy, which is seriously lacking.  In the meantime, we remain cautious about the consequences of bad decisions, which in the case of Germany, is leading to rapid deindustrialization, or in the UK, where inflation is still running at 6.7% and the population is becoming significantly poorer.  The most likely outcome is pushing back artificial and unrealistic net zero deadlines.  A potential outcome is the collapse of the EU, as national populations rebel against declining lifestyles.  We would have said in September 2019 when we were last in London that was impossible, but then again, we didn’t foresee a global epidemic or the Russian invasion of the Ukraine at the time either