The Next (Energy) Revolution Starts Here
There are a few times in life when you stand at the beginning of a revolutionary change.
This is one of those moments.
On Friday, I introduced the next wave coming in energy. Profit centers are going to develop in the interconnections among the production, processing, storage, transmission, and distribution of distinct energy sources.
Indicators are emerging from some heavyweights that the move in this direction has begun in earnest. These include policy makers and analysts from the International Energy Agency (IEA) in Paris, the World Bank and White House in Washington, the Windsor Energy Group in London, as well as my industry contacts in several parts of the globe.
The new emphasis will be on energy balance. This means the building of an efficient network that allows for the substitution of sourcing and improves all stages of operation in the upstream, midstream and downstream sequences of energy delivery. For some regions of the world, this will translate into the availability of reliable energy for the first time ever.
While some of the ingredients will remain the same, the push towards balancing will put a premium on logistics, as well as introduce the need for parallel development.
This latter aspect will become significant for investors because it will require the reexamination of a basic market assumption. Currently, market participants believe that different energy types are in competition – investment in alternatives is viewed as coming at the expense of investment in crude oil production; shale gas instead of solar; offshore gas instead of onshore coal; and so on.
The “either or” nature is often the preferred approach for talking heads on TV, advancing the prospects of one energy segment at the expense of another.
The broader application of this is usually a kind of “discounting,” attempting to determine the relative advantage of employing capital to invest in one company rather than another, followed by a rough calculation of opportunity costs (investing in A precludes investing in B).
A zero-sum approach emerges – one wins, another loses.
But not from where the real shakeout and real profits are going to come.
Integration Drives This Mega-Shift
Different energy sources and delivery systems will find the most positive results will be coming from complementary development. Rather than choosing one energy over another, we will now have to identify the best (and most cost effective) ways of combining them into a seamless network.
This requires parallel development, in which energy sources can be exchanged or combined to maximize usage and reduce cost. Some aspects have been around for awhile, such as co-fueled electricity generators that use various fuels (coal, natural gas, renewables) or hybrid automobiles.
But these are “stand alone” applications. Each, while allowing more than one source to address a specific application, still comprises only a singular example of process or end use. .
And while the broadest of public and private sector policies seek an integration of energy for planning, analysis, and budgetary purposes, the energies contained within such an aggregate view remain organized as independent market streams.
In the future, the market expand this concept to entire segments of energy use and require that parallel, rather than competitive, energy sources and systems be pursued. Now this new world will exist alongside the more traditional current approach to energy. There will be tradeoffs and regional variations, as more abundant sources continue to control local markets.
But this will also introduce a very different way for traders to look at current volume and futures contracts. The increasing interconnection of the energy balance will allow prices to be set on a more expansive geographic basis. This will have significant impact on locations where energy is plentiful (such as the present U.S. shale gas largess) or in short supply (much of the developing world).
Where We Go from Here
As the parallel development requirements of the balance take hold, the pricing on both extremes obliged by the present energy trading market will be reduced, and the inefficiencies that come with them diminished as a result. The most desired outcome for the investor is a more level interregional base when it comes to the cost-price connection in generating and providing energy.
That is where we are headed.
The key to unlocking how an investor plays these departures will be an increasingly frequent component of OEI.
As the indications emerge in the months ahead, I will be providing you with first steps identifying three overarching targets to move on:
- Companies positioned to benefit; and,
- The next generation of energy breakthroughs.
Of course, I will continue to lay out profit-making strategies to use in the existing energy mix.
No reason we cannot make money in both the current and the new.