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Latest Development in the Energy Balance

by | published September 5th, 2017

On several occasions here in Oil & Energy Investor, I have discussed the emerging energy balance and how it is already providing you with some very nice investment plays.

That balance involves two related advances.

The first is an expansion in the number of reliable (and distinct) energy sources. The second addresses the extent to which these sources provide a genuine interchangeable network of availability from such sources.

The rise of renewable sources (solar, wind, biofuel, even geothermal) has been the most visible manifestation of the developing balance. But the crucial element to remember is the balance nature of it all.

As we have noted in Oil & Energy Investor on numerous occasions in the past, this is not an exercise in finding a silver bullet to wean the market from a dependence on any particular energy source – such as crude oil.

The rise of renewables may change the dynamics of the mix but the absolute replacement of an energy source is not the target.

Energy Growth Outside of the Mainstream

In fact, given the global nature of the energy market, dominant moves in one region are offset by contrary moves in others.

For example, much has been written about the death of King Coal in North America. Yet, coal will continue as the primary energy source throughout Asia for much of the next decade and beyond.

Asia also remains the focus of international energy. While demand is slowing down (although not contracting) in the traditional markets of Western Europe and North America, it is intensifying throughout Asia and the Pacific Basin.

Every analytical report points toward this region driving energy needs and prices until at least 2035.

Then, early indications are telling us the next boom happens on a continent usually ignored when it comes to energy (among other things) – Africa.

The overall energy demand worldwide continues to increase, and at rates faster than the primary reporting agencies – the International Energy Agency (IEA) in Paris, the U.S. Energy Information Administration (EIA) in D.C., and even the OPEC Secretariat in Vienna – have anticipated. Once again, this remains centered on an upward curve moving forward quicker than expected, driven by Asian numbers.

So what we are looking at is increasing overall global energy consumption moving forward, as larger populations traditionally outside the mainstream transit into higher energy users. The mix, on the other hand, continues to change.

The Biggest Impediment to a Fully Integrated Balance

As new sources elevate to levels of both usage and reliability of more conventional types of energy, the focus turns to how interchangeable the various energy sources are.

Power generation is well along in this respect. Over the past several years, natural gas has become the choice in the U.S., overtaking coal as the main source of electricity.

Meanwhile, solar and wind are the quickest growing components in the sector. For many regions in the country, both are now at grid parity with coal and natural gas. That means generation costs are the same without the application of government credits or subsidies.

The transition to advancing a fully integrated balance always confronts its greatest impediment when it comes to the transport sector. So long as vehicle traffic remains dependent upon oil products (gasoline and diesel), the move is stymied.

I used to joke (somewhat tongue in cheek) that, unless somebody figured out how to put a nuclear reactor or a wind turbine on the back of my car, it would remain dependent on crude oil as its energy source.

Matters are beginning to change here as well, testifying to the increasing interchangeability of the ongoing mix.

While the use of liquefied natural gas (LNG) and compressed natural gas (CNG) has transformed some of the vehicle components (primarily high-end trucking) in significant ways over the past several years, the transition into passenger vehicles is slower. Retrofitting existing internal combustion engines or making additional new natural gas-powered models available still face some heavy up-front investments.

However, matters are picking up with electric cars and hybrids. Batteries are improving as are the travel ranges. With over 75% of passenger vehicles traveling far less than the range already available from a single charge, and hybrids obviously extending that even further, the electric environment is rapidly improving.

What is required on this front is a major development pushing the electric option forward. That has just emerged.

India Triggers a Major Catalyst (and Opportunity)

Piyush Goyal, Indian Energy Minister, has announced that the country will sell only electric cars beginning in 2030. Auto producers like Audi have also announced that they are prepared for a major expansion of electric-only cars in the country as early as 2020.

Indian cities are experiencing a worsening air pollution problem.

But the catalyst here to the energy balance issue arises because of the Indian market size. Movement of what is shortly to become the largest single energy market in the world (surpassing even China or anything in the “developed” world) into electric vehicles only provides a major opportunity for investment and distribution.

Of course, that also translates into increasing flexibility moving upstream to multiple sourcing in the initial generation of the electricity moving on to the grid.

India has introduced what could become the primary enticement for a veritable revolution in how vehicle transport is approached.

And that is a major boon for a wide array of energy investment plays moving forward.

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