The Energy Regression

September 22, 2022

In the beginning there was solar energy. We are made from the starts and from the stars we get the energy needed for life.  Plants harvest energy from sunlight using photosynthesis and animals eat plants and use metabolism to extract the energy.

In the ancient past humans used their own bodies as the primary source of energy. Humans consumed calories from eating plants & animals and converted those calories into muscle work for hunting and foraging, this was a “low efficiency” use of energy.

The first energy transition is believed to have happened when human ancestors first master the use of fire roughly 400,000 – 800,000 years ago. Fire allowed for cooked food which provided more calories to be extracted and for food to stay preserved.

Fire also gave us the first step towards climate mastery, allowing for humans to spend less calories each day surviving in the wild. The transition to fire was a massive leap forward that allowed humanity to have significant advantages over other animals.

Archaeological evidence shows that humans eventually transitioned from using only “human energy” to using animate prime movers (animal energy) for agriculture approximately 10,000 – 30,000 years ago. The use of animals and basic inanimate prime moves (plows, etc.) further decreased the amount of human energy needed to create the same amount of crop yields.

The ability to harness fire and domesticate animals kicked off the agricultural revolution and the lead to rise of civilizations.

The second energy transition started a few millennia ago when humans invented basic inanimate prime movers such as windmills and watermills for agriculture, and sails for ship transportation. This was the transition to “renewable energy.”

Ancient and medieval societies used inanimate prime movers for demanding tasks like water pumping, grain milling, oil pressing, wood sawing, & powering furnace bellows. Transportation was revolutionized during this time using square sails that unlocked world travel & exploration.

The third energy transition began centuries ago with the shift from biomass, animate and inanimate prime movers to using coal & and renewables to power mechanical prime movers like steam engines and water/wind turbines.

Steam engines were the quintessential energizers of the early industrial revolution. Coal was a main driver of steam, but hydro power played a large role in the textile industry, and wind energy was also critical for rural development during America’s Great West expansion.

The fourth energy transition was the electrification of society & the use of liquid hydrocarbons. Humans invented commercial systems of electricity generation, transmission & use. Steam engines gave way to electric motors which by 1929 accounted for 80% of all mechanical power.

The rise of crude oil started during the same decade as electricity. In 1858, Edwin Drake drilled the first commercial oil well in Pennsylvania, and the world was changed forever.

Oil and its derivative byproducts began to rapidly change the very fabric of humanity. The hydrocarbon revolution has had the biggest impact on humanity, including quality of life increases, human lifespan, modern medicine, and the massive increase in human population over the last century from 1.6 billion people growing to almost 8 billion.

Kerosene lit up the darkness and allowed for humans to have access to affordable, portable, and reliable light sources. The combustion engine allowed for another transportation revolution with modern automobiles and aviation.  By 2000 oil, gas & coal represented 90% of the world’s energy, with nuclear & hydro the remainder.

The fifth energy transition: Started in the 1940s with the development of the nuclear bomb and subsequent rise of commercial nuclear power generation in the 1960s. Unfortunately, this energy transition has slowed & reversed due to bad governmental regulation & public misconceptions.

The long term the future of energy will undoubtedly be done at the quantum level using nuclear power and eventually quantum computing technology to drive efficiency. Nuclear energy is cheap, emission free, and the safest form of power generation that we have available as humans.

Powering the Future

Throughout human history energy transitions happen when there are new energy technologies that offer substantial increases in the quality and quantity of energy. These transitions only happen when new forms of energy drive material gains in efficiency and have a strong deflationary effect to industry and consumers.

Anyone following the mainstream narratives of the 21st century would think we are currently undergoing another “Energy Transition.” We have been told that moving to decarbonize the current energy systems is the next transition, but as we’ve seen from history the word transition is more than just a marketing slogan, it is a societal transformation.

The recent push to “decarbonize” by using legacy energy sources (renewables) is making our grid more unreliable and causing energy prices to increase. Does this fit the characteristics of past transitions?

For a real transition to happen we have to focus on technologies that lift humanity up and provide more abundant energy sources. Anything else is not an energy transition, it's an energy regression.

Talk Energy Podcast

#144: “The Path We Take” with guest Michael Gayed, CFA.

Michael is the publisher of the Lead Lag Report and the founder of Toroso Investments where he has launched a mutual fund and multiple ETFs. 

Michael has been in the investment and media world for a while now and has never seen a time like this in his career. 

This episode we discuss the current state of the equity and bond markets, and how the risk on / risk off dynamic is completely disconnected from historical trends. 

We talk about how tribalism has taken over the markets and everyone seems to have picked their respective cult to support. 

We dive into the energy trends in the U.S. and Europe and how things may play out if demand starts to get shaky. 

Lastly, we discuss how betting on yourself is probably the safest way to play the current environment, but make sure to never believe your own BS, just because you have the end point right, doesn’t mean you know the path it’s going to take to get there. 

Market Update

Crude Oil

The prompt month contract traded down on Wednesday afternoon after the Fed increased rates and the EIA weekly reported a crude inventory build.  Today, WTI is trading at $83.33/ bbl with ongoing concerns of a recession and demand destruction.

President Biden originally announced plans to release 180mm bbls/d from the Strategic Petroleum Reserve over six months and was scheduled to end October 2022.   Recently it has been announced that an additional 10mm bbls will get released in November 2022.  The current level of the SPR is 434mm bbls, the lowest level since 1984.   There are concerns of the market reaction once the SPR release ends- the physical market is expected to tighten.   In May 2022, Biden said they would begin replenishing the SPR next year when prices are lower.  However, many critics argue that introducing the US government as a crude buyer at large quantities, will reinforce higher crude prices.

Russia sent a letter to all Energy and mining sectors stating that all men who work at the companies must report to recruitment offices between now and October 5th.  It is expected that the oil and gas companies would see a disruption of production.

Germany seized Russian owned Rosneft Refineries.  Rosneft provides 12% of total refining capacity of Germany.  After taking control of the refinery, the next question is where will the oil be sourced from to fill the plant?  Europe is expected to ban Russian crude oil imports starting in December.  However, Europe has continue to increase the amount of crude imports month over month.  The first half of September, Europe imported to 1.2 mm bbls per day from Russia, which is 200,000 per day higher than the August average.   The short term increase in imports is concerning and makes the December deadline seem unattainable.   

The EIA Petroleum Status Report for the week ending September 16th, 2022 was released on Wednesday, and showed a small crude build (+1.2mm bbls).  Cushing storage reversed the priors weeks decline and increased 0.4mm bbls.  Refinery run rates increased to 93.6%% utilization and are once again nearly at maximum refinery rates.  Crude production kept flat for a third week at 12.1mm bpd.  Crude imports had a large increase of 1.1 bpd compared to same period last week. 

Natural Gas

Natural Gas prices are feeling the volatility of yet another interest rate hike. Prices have stayed in the $7.70 range for much of the week as the US Federal Reserve attempts to curb inflation. With Russia announcing the mobilization of an additional 300,000 military reservists into Ukraine, the European energy crisis doesn’t look to be slowing any time soon. Fall is finally here, but much of Midwest is still hovering at above average temps so the draw on AC power should remain strong at least for the near term. With Hurricane season in full swing, look for the possibility of more storms and price impacts. Rising US Production continues to be a story along with the Freeport TX LNG facility’s November re-start date. A great deal to keep an eye on as the market moves into a bearish structure for Oct pricing.

Spot Prices in the Midcon region continued downward this week with some locations seeing the lowest prices since mid-July. With a further widening of the cash basis to Henry Hub, ANR-OK coming in $1.29 off at $6.70 while NGPL-Midcon is $1.38 back at $6.61. Production has remained steady for much of the week as inflows from Midcon production increased 500 MMcf/d while flows from the Rockies/Northeast decreased by 200 MMcf/d. Look for an increase in storage injections to continue the pressure on cash prices as average injections are up 520 MMcf from the 30 days prior according to S&P Global Commodity Insights.

The EIA released storage numbers this morning, coming in at 2,874 Bcf, representing a net +103 Bcf increase from the previous week. This increase was slightly above marketplace expectations of + 101 Stocks were 197 Bcf higher this time last year, however, this week’s levels are still within the 5 yr. historical range of 3,206 Bcf.

ANCOVA DISCLAIMER: The opinions expressed in this report are based on information which Ancova believes is reliable; however, Ancova does not represent or warrant its accuracy. These opinions represent the views of Ancova as of the date of this report. These opinions may be subject to change without notice and Ancova will not be responsible for any consequences associated with reliance on any statement or opinion contained in this report. This report should not be considered as an offer or solicitation to buy or sell any securities.