Energy 3.0 At the Cusp or on the Brink – Part 3 Will the Last one off the Planet Please Turn out the Lights?

“You have to go out – but you don’t have to come back!”former, unofficial motto of the US Coast Guard

In Parts 1 and 2 of my series, “Energy 3.0 At the Cusp or on the Brink” I began developing my 7 theses of investing in Energy 3.0. The 7 theses are displayed in Figure 1.

Figure 1. 7 Investment Theses for Energy Investing

Source: Christopher Montaño, CFA

In my posts 1 and 2 I covered the first 4 energy theses; Energy = Life, Energy = Commodity, Energy is Political and Energy is a Mature Market. The results have been fairly dismal. In my discussion we have seen that:

  • energy is critical
  • energy is a commodity -regardless of intellectual property
  • the industry requires political involvement
  • it has regulatory encumbrances
  • it has a low margin structure
  • there is low customer engagement -regardless of technology
  • and if these aren’t enough to discourage you there are “supercompetitors” in the form of regulated monopolies that devour everything in sight in excruciatingly slow fashion.

By now readers may well be asking, “Given your investment theses thus far… what’s the use investing in the energy sector?

Cheer up, it gets worse

This brings me to my 5th investment thesis:

5th Investment Thesis: Sustainability Mandates Investment Capital.

My 5th thesis is that in order to sustain our global economic growth, and sustain our population base, we have to allocate capital investment into energy supply and demand. We simply have no other choice.

Simply put, we do not have detailed understanding about our planetary natural resource limits and our population is getting very large. I also believe that there are major global economic and demographic shifts that will accelerate natural resource consumption during this century.

In 2010, we reached a global population of 7,000 million people. The United Nations projects that during the 21st century, the global population could reach as high as 16,000 million people. (See Figure 2.)

Figure 2. World Population Growth Scenarios

Source: United Nations World Population Prospects:  The 2010 Revision

The truth is that we don’t have a firm idea of how many people that the earth can support on a life sustenance basis, let alone on a growth and consumer based lifestyle basis. From where I sit in 2012, 10,000 million and certainly 16,000 million seem impossibly large numbers of people for the planet to support. I concede that at one time, 7,000 million probably seemed impossible, yet we are managing- for the moment.

Where’s my iPad & iPhone?

The big uncertainty comes in the form of global consumption patterns due to economic development. The good news is that the emerging and developing markets are moving along nicely in their economic development. The bad news is that there is a large population base that’s driving toward consumption patterns like us– the developed economies. There will be significant impacts upon natural resources due to shifts in global consumerism.

There are two waves of population bases that are migrating economically this century. First there are the population in the emerging markets and after that there are the “frontier markets”, the next wave of economically developing countries. Both of these markets represent a large population base that will be attaining a consumer based lifestyles of various levels during this century. This is a large increase in absolute numbers of people that will be consuming natural resources, durable goods, non-durable goods, food, etc…  — and this demographic wave will drive energy demand.

The emerging markets powerhouses “BRIC” (Brazil, Russia, India, China) are already a growth engine for global economic output. When their populations gain greater discretionary income they will begin consuming more along the lines of developed countries via automobiles, housing, clothes, appliances and food- and ultimately energy. How this will impact global stocks of natural resources is unknown. How long will the global stocks of petroleum, natural gas and coal last? This is uncertain and the data are not uniform or estimates closely clustered. Beyond this there is an issue of even if we have fossil fuels to support these new consumers, how do we impact the atmosphere?

Historically there has been about 43% of the world population in the BRIC countries since 1950. These four countries currently have 2,900 million people in them and are projected to peak out in population in 2045 at 3,349 million people (See figure 3.) On an absolute basis this is an increase of 445 million people in 35 years. (For reference, the previous 35 year period saw a growth of 1,160 million people amongst the BRIC countries.)

Figure 3. Population Growth Among the Big Four Emerging Markets, Brazil, Russia, India, and China

Source: United Nations World Population Prospects:  The 2010 Revision

One factor not included in the BRIC countries are their consumption patterns. The number of people moving economically upwards is very large. Common sense suggests if consumption patterns match the current developed world, then this will place a strain on all sorts of natural resources and derivative products. We wonder at what level of annual income does the consumption pattern of a population base enter exponential growth?

The situation becomes more complex as we consider the Frontier Markets. These are the large number of countries that have not been economically developed and are just beginning their economic growth – often based upon human capital arbitrage, global transportation and communications networks. The Frontier Markets include the following countries:

Table 1. Frontier Markets

Within this list are 88 countries that are staged to experience rapid economic growth in the middle and latter portion of this century. These countries are the next wave of consumption behind the traditional emerging markets and also have a large population base. Figure 4 details the middle scenario population growth through this century of the frontier markets. There are currently about 1,700 million people in these countries and the UN expects that number to increase by 1,300 million by 2050 and another 1,000 million by 2100.

Figure 4. Population Growth of Frontier Markets in 21st Century

Source: Source: Christopher Montañ0, CFA, United Nations World Population Prospects:  The 2010 Revision

If we combine the “BRIC” emerging markets with the frontier market populations, then in 2050 we will have a net population of 6,300 million consumers at lesser, but rapidly growing consumption levels than the developed nations. The population by 2100 of these same countries is estimated to be almost 7,000 billion people.

The consumption patterns of economically developing populations may vary from country to country. However it’s clear that fundamental human nature is to move toward ease of existence and actualization. The famous “S-Curve” (Bass diffusion curve) is the most basic of all market demand forecasting tools. New products that people like invariable have exponential demand until a natural level of saturation is achieved. There is no reason to expect that this will be different for the 7,000 million new consumers as they think about cars, televisions, clothes, housing, HVAC, etc… Without diving into excruciatingly deeper data, suffice it to say that sustainability and energy demand will be major, growing issues throughout this century.

How do we provide energy for this growing population group? The answer is likely to be any way possible. While the implications take effort to digest, one is clear. Without massive, global capital investment in all phases of the energy value chain, we will not meet demands during this century for continued economic growth and perhaps, even basic sustainability itself.  It is this fundamental driver of sustainability that I view as a primary thesis for investing in the energy value chain.

The first 4 investment theses dealt with the risk factors in investing in Energy 3.0. In this post, I turned toward a fundamental demand driver- population coupled with global demographics and economic growth. And it is this key factor that investors have responded to in the past 5 years.  However, there are now the challenges that are rearing up in the time period prior to the exponential knee of the growth curve. And it is exactly at this time that patient, wise  investors redouble their efforts in learning how operations and companies succeed in markets. It is also the time where less hardy investors may lose interest or be forced out of a market.


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