Fossil Fuels, Renewables, and the Future of Energy
In this article I’ll be discussing energy from both a practical and financial perspective. There’s a lot of talk in Washington and the world writ large recently about transitioning away from fossil fuels and I want to dive a little deeper into the merits and drawbacks of all the different energy sources available to us, and then I’ll get into how society and investors can and should approach this transition going forward.
Whether people consciously realize it or not, energy is fundamental to how our society functions. It powers all our homes, our cars, helps produce all the products and food we consume, and really operates in the background of everything we do and need. And while we have a lot of different options for energy, we have built our society almost exclusively around fossil fuels. The reason for this is because, one, they’re widely available, two, they’re cheap, and three, they’re reliable. Those three things—availability, cost, and reliability—are the driving forces behind our consumption of fossil fuels over other energy sources. Many other sources of energy such as wind and solar may meet one or two of those criteria, but they struggle to meet all three and that has been, historically, the reason we have stuck with fossil fuels.
Take oil, natural gas, and coal as an example. All are very cheap compared to alternatives, all are widely available and capable of being stored and transported relatively cheaply, and all allow constant 24/7 power throughout the entire year. They obviously have a pollutive element that is driving us to cleaner energy sources, but there’s a reason we have used fossil fuels for so long. They perfectly meet our energy needs and have allowed us to expand our society at a rapid pace due to their low cost and scalability. These characteristics are crucial for meeting the massive energy demand we have today that simply cannot be met by most other energy sources. This is not to diminish the negative aspects of fossil fuels, but the markets have chosen fossil fuels because it was the most practical option—the path of least resistance if you will. The issue is practicality has come at the expense of the environment, which is something the markets have a hard time selecting for and why we have been forced to take corrective measures contrary to cost and convenience. But it’s the low cost, availability, and reliability of fossil fuels that has driven the world to structure society around them.
With that said, let’s now transition into some of the other forms of energy one by one, namely: solar, wind, hydroelectric, geothermal, and nuclear and see how they measure up to those three pillars we look for in energy.
So solar is technically widely available so long as the sun keeps shining, but our ability to capture and store it is limited. The technology is improving every year in terms of energy capture, but we still need advancements in storage if it is to be a reliable source of power at scale. The sun isn’t always out, but society is always consuming energy, so we would need an impractical, uneconomical, or even impossible amount of batteries with today’s tech to store enough energy to keep society functioning smoothly on just solar. Now advancements in battery tech are likely to come in the future, but this is currently a major headwind for solar. Another concern is cost. Part of the improvements in technology are driving down costs of panels and materials therein, which is a trend that will hopefully continue and eventually push solar costs lower than fossil fuels, but that is currently not the reality. People don’t like to frame the energy debate in terms of cost because they just want to transition to something cleaner, but when the cost of energy goes up, the cost of everything goes up so it matters quite a bit. Many, maybe even most, may not be able to afford a world powered exclusively by solar quite yet.
And wind is in a similar situation. While wind is seemingly ubiquitous, it is even more unreliable than solar and poses the same concerns with regard to energy storage. Even though you might feel a little wind wherever you are, wind mills are not location agnostic—they are only practical in certain areas of very high wind activity and even in those areas it isn’t always windy so wind energy isn’t going to be an option for everyone or for base load power because it can’t scale or offer reliability. This is not to say both wind and solar can’t or won’t play an important role in our energy consumption, but neither can meet the needs of society without considerable sacrifice and reduction of our energy consumption.
The next source of energy is hydroelectric, which has been widely used longer than wind and solar energy. Although it can be costly to create dams to support hydroelectric, the costs associated with it are very cheap after that. There are concerns over how dams affect local ecosystems, but they are extremely reliable and well-suited for offering 24/7 base load power unlike wind and solar. However, certain dams may be subject to wet and dry seasons with regard to their power reliability. The main issue with hydroelectric is its availability. You can’t build a dam everywhere because there aren’t suitable water sources everywhere so it’s unfortunately not capable of meeting all our energy needs. It can offer great regional energy, but it can’t scale the way we would need it to. It’s fairly reliable and relatively cheap, but its availability is limited to areas of significant water flow.
This brings us to geothermal, which suffers from many of the same problems as hydroelectric but also has many of the same advantages. While geothermal is reliable and sustainable like hydroelectric, it is very costly upfront and locationally limited. If you live somewhere where it’s available, it remains a great option for base load power because of its consistency, but it’s not going to meet large-scale energy demand around the world. As further research and development continue, it’s possible we are able to tap into more geothermal energy to meet greater demand, but, as it currently stands, geothermal would be lucky to meet even 10% of our energy needs. There are also some concerns about it expediting the release of natural greenhouse gases under the earth’s surface, although it’s not at all on par with fossil fuels and I wouldn’t let that lead you away from its potentially important role in supplementing our power needs because it’s a far better alternative than even many renewable resources if it’s available. Nevertheless, geothermal isn’t in a position to replace fossil fuels any time soon.
Now comes the final energy alternative I’ll be discussing and that is nuclear. Nuclear energy has been rather unfairly demonized because of events like Chernobyl and Fukushima, but those events are not representative of the technology. Chernobyl was a hastily made and poorly ran facility that was doomed to fail out of incompetence and Fukushima was the consequence of a natural disaster. That is not to say nuclear can’t be dangerous or it’s risk free, but these historical events paint an unfair picture of how safe and effective nuclear energy actually is. There have been considerable advancements in nuclear technology over the decades and its dangers are vastly overstated. More people have died from coal pollution than nuclear reactor mishaps and despite what opponents might say, nuclear remains one of the cleanest, cheapest, and most reliable sources of energy we have. Meeting base load power demand 24/7 is a huge concern in this transition away from fossil fuels and nuclear can do that at scale for relatively low cost. While the upfront costs to creating nuclear plants is quite high, after that the costs are actually pretty on par with that of fossil fuels. Nuclear energy is somewhat locationally restricted like some of the other energy sources in that it has to be near a body of water for cooling, but that body of water can be a lake, river, or anywhere along the coast. And although it might not be able to meet our total energy demand, there are estimations nuclear could meet at least 60%. So the costs, availability, and reliability of nuclear make it one of our best options for replacing fossil fuels, especially if we are able to supplement it with all the other energy sources. Nuclear energy could provide the bulk of our energy absent of fossil fuels and solar, wind, hydroelectric, and geothermal could, hopefully, fill in the gaps.
Alright, with all the energy sources laid out, let’s get into how society and investors should be looking at this. If it wasn’t already clear, I’m very bullish on nuclear. I like other sources of energy, but I don’t think any of them have the potential nuclear energy does, so from both a practical and financial perspective, I think we all need to be focusing more on building out nuclear infrastructure, expanding uranium mining, and doing whatever we can to promote nuclear as a viable alternative to fossil fuels. That said, I also think people are jumping the gun a little on this transition away from fossil fuels.
Although long term I think we absolutely should be taking steps to lessen our dependence on fossil fuels, our society is not ready for a transition as fast as we want one. We don’t have the infrastructure in place to meet our needs with alternative energy sources and yet countries all around the world are committing to being net zero without fully tackling the problem of meeting our energy demands in a net zero environment. Many people think wind and solar are already the solution when they just aren’t. They can’t adequately meet our needs and they’re actually not as green as people think. Old panels and mills get thrown away in landfills and never decompose, many materials used to create panels and batteries are finite and facilitate unsustainable and morally reprehensible mining practices, and even if those weren’t concerns, they aren’t reliable enough for base load power and we would have to build out an unbelievable amount of solar and wind in such a small amount of time to even come close to replacing fossil fuels within the time table politicians are outlining. Nuclear, in my mind, is the best option we have, but building out plants can still take 5-7 years and who knows how many we need to replace fossil fuels. The point is we should have been working on this a long time ago and we seem to be rushing this transition not realizing the potential costs or risks. Forcing people away from fossil fuels before we have adequate energy sources to replace them could leave millions without necessary power needs being met, which could lead to innumerable deaths and breakdowns in society. For these reasons I think we are going to come to accept fossil fuels for a little longer because we have to. But we will likely choose the least pollutive forms to meet our green expectations and reality somewhere in the middle. This is why I am also very bullish on natural gas and maybe even oil depending on how badly we are starved for energy. Natural gas is much cleaner than oil and coal and serves a very valuable role in our society, used for heating homes and water, cooking, lighting, and the list goes on. Natural gas is already supplying about 1/3 of the power we use and I think we are going to lean on it a lot more in the coming years when we realize cleaner, more renewable forms of energy aren’t yet ready for the main stage.
As an investor, I’ve taken note of the lack of money going into the fossil fuel industry, which has forced those industries to run off their free cash. So as demand stays constant or even ticks up and supply continues to be limited because of underinvestment in the fossil fuel industries, energy prices are going to soar and those energy companies are going to have to raise prices and likely bring in more money and investment if they want to meet demand.
So keeping all this in mind, I’m positioning myself to profit from what I believe is going to be a resurgence in natural gas and nuclear energy. Natural gas may eventually fade as we move away from fossil fuels, but the next decade is going to be hard without it and I think it has a lot of room to run. Same goes for nuclear although I think that will be a much longer trend given it’s more environmentally friendly. So just to summarize, our world is built around fossil fuels for a reason; they do what we need energy to do; they are able to meet our demand at a reasonable price and at scale. We may need to leave them behind in the green future being painted by politicians and society more generally, but we haven’t set ourselves up for that transition in the immediate future. If we hope to actually rid ourselves of fossil fuels, nuclear energy has to be part of that equation and we need to start taking steps to realize that reality. Supplementing our energy needs with a careful balance of all the aforementioned cleaner energy sources with nuclear as the leader seems to me to be the best approach, but the road to a future powered by renewables and clean energy isn’t perfectly paved—we still need to build it.