The world’s population is growing. Most of these people will be in third-world countries. They will aspire to have creature comforts Americans take for granted. Things like appliances and central air. In the United States, accelerated computing (AI), cloud and blockchain technologies and electric vehicles consume a lot of energy off the already stretched grid. In short, the demand for electricity, energy in general, is poised to accelerate over the next several decades. Is the global grid prepared? Will there be the necessary capacity? How will utilities around the world be able to provide the necessary power without using fossil fuels? Is there any way to prevent higher prices for U.S. consumers?
In this week’s Trading Perspectives, Sam Clement and John Norris discuss the inevitability of an energy crunch in the not so distant future. John is so confident, he has bet Sam a steak dinner utility prices will be significantly higher, greater than the official inflation gauges, over the next five years. Is he right?
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John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have our good friend, Sam Clement.
Sam Clement (00:36):
Hi John! How are you doing?
John Norris (00:37):
I’m doing fantastically here. We are getting ready for the long Memorial Day weekend, and everyone’s going to be out there having fun. There’s going to be brats on the grill, burgers, people are going to be drinking beer, sodas, all that stuff. It’s just one of those deals. Does the world have enough capacity for everyone around the world to celebrate the way Americans are going to celebrate on this upcoming three day weekend?
Sam Clement (01:00):
That could be a problem if the rest of the world was taking Memorial Day weekend off.
John Norris (01:06):
And we’re kind of laughing. But it is absolutely true when you sit down and think about the remainder of the world and how so many people would aspire to have the creature comfort zone, maybe the material comforts that we have here in the United States, if everyone lived and consumed like Americans did, I think it really would put some capacity constraints on the earth to be able to provide everything.
Sam Clement (01:28):
And we’ve talked about it in different lights, whether it’s crude oil, whether it’s electricity from natural gas, what have you. The trends that we’re seeing in the overall economy, whether it’s cloud infrastructure, whether it’s mining for Bitcoin, all these trends of the next 5, 10, 20 plus years, really even longer than that, the underlying focus is energy. And we’re at a point where other countries, emerging markets, are growing and there’s just this increasing trend of energy needs, plus an increasing trend of people who need energy, too.
John Norris (02:05):
And the point – just how much do we have and how much do we need and how willing are we in order to provide it? Now, if you read Thomas Sowell and a whole bunch of other sort of capitalist economists, you can make a very decent argument that if there’s the right financial incentive, the free markets will be able to provide this, eventually. There’s no doubt about it. And I do believe that. Unfortunately, there’s very few economies that are completely free. That aren’t encumbered with regulation of some type, and particularly in the energy industry, which is really, for all intents and purposes, a regulated industry, whether or not we’re going to be able to generate the necessary capacity to meet our needs here in the United States, let alone the remainder of the world. And Sam brought up a really good point talking about cloud computing, accelerated computing, also known as artificial intelligence.
(03:00):
All that stuff just soaks up so much energy and a lot of people just aren’t terribly aware of that. So even if we don’t do anything differently ourselves, we set the thermostat at 71 at the house, we’re still going to be gobbling up more and more energy here in the United States just because of our increased reliance on accelerated computing. And then also just things like mining for Bitcoin, cryptocurrencies, that’s incredibly labor intensive. At the same time when we’re having a significant environmental push to move to let’s less proven and maybe arguably less efficient, less consistent means of generating electrical capacity.
Sam Clement (03:53):
I don’t know what the solution is. Again, I’m kind of reiterating it, but this is not just a U.S. problem either. We have tons and tons of emerging market economies that are essentially, for lack of a better word, coming onto the grid. So it’s not just if we were to stay in the status quo, the people who need energy, the people who are using cloud computing, mining for cryptocurrencies, all these uses of energy. It’s not just them. It’s that more people are needing it as well. And that’s where the storm is headed, I think, is it’s more people are needing more energy, not just current people are needing more energy.
John Norris (04:32):
Well, but before we get to what you were just arguing, we didn’t even talk about electronic vehicles. We didn’t talk about the necessary electricity for that. This is going to seem like I’m delving off to the side and I’m really not.
But I’ve recently just finished a book writer by the name of Paul Thoreau. It’s called Dark Star Safari, and he started off in Cairo and eventually made it down to Cape Town, mostly in trains, buses, on foot, all that stuff. But it’s kind of his trek from the northern part of Africa all the way down to the end of it. And what you see and what he paints in his book is a continent that is just exploding with population. Population that currently doesn’t have, has not generated the capacity it needs in order to meet the needs of all the people that the continent itself is producing.
(05:28):
And then it gets to South Africa, which at the time when he wrote it, 2001, was still more efficiently operating than it is now. And here we are some 23 years later, after the book is published, Africa’s still growing in size and it’s less efficient, at least South Africa is. And yet we still have all these issues apart from just the United States.
See, we tend to think very locally here in the United States. When you think about Africa and how it has a fraction of what we have in terms of infrastructure and electrical capacity, its population is expected to double over the next 20 to 30 years. And that’s “officially.” I mean, who knows, they can’t count everyone. And the same thing in places like India. The population, just… things are still growing. There’s so many people coming on board in a lot of these emerging markets that would love to consume a fraction of the energy that the average American consumes.
What would happen to the needs of the electrical grid if places like the entire continent of Africa or India just gets to one third of the electrical consumption that we enjoy here in the United States.
Sam Clement (06:44):
It’s hard to fathom. I mean, California, if it was its own country, would be one of the, I think fifth largest economy in the world or something shocking like that. They already have trouble with energy output.
John Norris (07:00):
We’re experiencing more disruptions in power here in this state. And we use nuclear natural gas and hydropower and a bunch of other stuff.
Sam Clement (07:10):
I view the energy trend and problems over the next couple decades as the bigger problem. We’ve talked about the debt ceiling or the amount of debt there is and how it’s going to be a problem at some point. It’s going to be a huge problem.
John Norris (07:26):
I would say that’s a little bit more controllable in a lot of ways.
Sam Clement (07:28):
Yes. But I view this in terms of how fearful people are about that. And there is going to be a reckoning with the debt, I guess is what people feel. I think there’s going to be a much bigger version of that. I think the energy, the lack of energy is going to be the biggest focal point.
I mean, we are completely missing the target with where we need to be going.
John Norris (07:53):
Sam, You’re right. And that’s part of the reason why here we are at Oakworth Capital Bank, we are overweight the energy sector. And that’s not an offer to buy or sell investment securities or services or anything like that.
And while it’s not necessarily performing as well as maybe AI stocks are right now, this is a longer-term trend. We’re playing this long ball, we’re playing this as a marathon because the amount of investment that’s going back into the energy sector isn’t what it would, could or should be in order to meet future growth needs, not just in this country, but elsewhere.
A lot of these are multinational companies and the energy sector, and a huge chunk of it is just due to constraints that our government is putting on this sector.
And well-intentioned people in terms of the environment, are just really pushing back on the energy sector as the bad guys because they use dead dinosaurs in a lot of ways.
However, I would counter with that. If you don’t want to use electricity, you don’t want to heat your home, you don’t want to use lights, have at it. But it’s not fair for you to tell that to everyone else.
Sam Clement (09:03):
And the crude oil space is clearly the biggest focal point. But I view energy is even bigger than that. I mean, I am not against these alternative sources of energy.
John Norris (09:16):
No one is.
Sam Clement (09:16):
And I think nuclear is the best option that we have for tons of reasons. But it’s got to be a group effort from the energy space. It’s got to be nuclear. I’m fine with it being hydro in certain instances, what have you, but we are headed to a point where there will not be enough energy.
John Norris (09:38):
Well, I agree with you on that, and I hear you in terms of the electrical grid here in the United States, but how in the world are we going to generate enough electricity for the remainder of the world without using fossil fuels?
Sam Clement (09:52):
No, I agree.
John Norris (09:52):
I really don’t get it. Currently right now, India per capita usage of electricity is a fraction of what ours is. They generate three quarters of their electricity using coal.
Sam Clement (10:04):
Yeah, China’s building more coal plants.
John Norris (10:07):
And the reason for it is it’s easy to mine coal. I don’t mean that as a disparaging remark to anyone that’s been a coal miner, but it’s relatively easy to mine coal as a business.
It’s relatively cheap and abundant, and it’s cheaper to put up these power-generating facilities than it is putting up a solar panel farm or windmill farm or a nuclear facility.
And then truthfully, does the United States really want to put up or help put up a bunch of nuclear facilities throughout Sub-Saharan Africa? Would they be able to even handle it? Given the dearth of nuclear engineers in places like the DRC and central African Republican, elsewhere.
So we’re going to be using a lot of fossil fuels throughout the remainder of the world just to get to a fraction of what the United States currently consumes. So does it make a difference here in the United States if all of a sudden we put our economy in a bind by disallowing certain types of fossil fuels or just really putting the screws to it, in terms of environmental protection, that’s fine if we want to do that, but is it really going to impact the global environment if we do so?
Sam Clement (11:24):
I think part of that is begging the question of what is the U.S.’s role in emerging market economies’ energy needs?
John Norris (11:34):
Well, what do you think it is?
Sam Clement (11:34):
You asked a good question. Are we going to want to put nuclear facilities in some of these countries? And I don’t think that’s a confident Yes.
John Norris (11:43):
I’d say that’s a resounding no.
Sam Clement (11:47):
So, then what’s our role in supplying them with energy if they can’t get the supply that they need? Does that start becoming a burden on the U.S. economy?
John Norris (12:00):
Well, do we have the capacity to build out electrical infrastructure around the world when we’re experiencing hiccups here in the United States as it is?
Sam Clement (12:09):
Oh, yes, we need to build out our own electrical infrastructure.
John Norris (12:13):
It’s sort of like a physician – heal thyself first – and then after that, maybe we can worry with the remainder of the world. However, I hate to tell you this, Sam, but the Chinese have already beaten us to it. With the Belt and Road Initiative. While most of it is based on transportation, the Chinese are already pretty well ensconced in a lot of these countries.
Sam Clement (12:30):
And frankly, I’m kind of fine with that.
John Norris (12:32):
China is pretty well ensconced in a lot of these countries. And so it may be much easier for them, with their engineers already there, in order to put up the necessary capacity. But recently, I’ve been reading about Eskom, which is the South African electric utility, and how that economy, which was once the biggest and brightest in all of Africa, due to decades of neglect at Eskom and corruption and what have you, they’re now having rolling blackouts. They’re having shutdowns. They aren’t generating enough electrical capacity… just for basic usage, let alone for industrial growth.
What happens here in the United States, if we ever get to the point where Eskom is currently now? That we simply can’t grow because we don’t have enough electricity being produced because we are not wanting to put up natural gas plants. We’re not wanting to put up gasoline or, let alone coal, which is readily available here in Alabama.
Sam Clement (13:33):
Yeah. That’s how the global superpower that the U.S. is, I think, starts to crumble.
Again, not just to compare it to debt, but I don’t think us having too much debt is how the US becomes.. Well,
John Norris (13:47):
You and I have talked about that. We borrow our own money. We can print some if we want,
Sam Clement (13:52):
But we can’t “print” energy if we don’t build the capacity for it. We can “print” energy in the sense that there is plenty of energy for the U.S. here in the U.S., but it’s a matter of having the infrastructure for it and the desire to pull out that energy.
John Norris (14:10):
Basically, what we’re saying is, longer term, more than likely, understanding the political environment and everything that’s going on in the world today, more than likely we will be facing energy shortages as a global economy over the next decade at the latest.
I’m putting you on the spot. You need to say yes or no.
Sam Clement (14:38):
I mean, if I had to pick one or the other, I think the answer is yes. It’s just, we can see where the trends are going. We can see that there’s pushback on drilling.
John Norris (14:51):
Yes.
Sam Clement (14:52):
We can see there’s pushback on natural gas.
John Norris (14:51):
Yes.
Even the electrical grid, I mean putting more on the electrical grid without using crude oil. A long time ago we talked about when California passed a bill about no more gas-powered lawnmowers or something of that sort. And they’re having energy issues.
John Norris (14:51):
Yes.
John Norris (15:23):
(Laughing) Right now I wish you could see Sam. Sam. Sam’s face is just a picture of befuddlement.
Sam Clement (15:31):
We can see where this is going if we allow this to spread across the U.S.
John Norris (15:37):
And that’s where I share Sam’s frustration here with this. For me, it’s as clear as the nose on my face. And that’s one part of your body that continues to grow as you get older. So pretty soon I’ll be looking like Jimmy Durrani and Sam probably has no clue who Jimmy Durrani is.
But as clear as the nose on my face that THIS WILL HAPPEN. There’s no doubt in my mind we are going to have a significant troubles with our electrical grid, if not here in Alabama, then certainly in more rapidly growing states.
Sam Clement (16:09):
And that matters to Alabama.
John Norris (16:10):
That matters to Alabama because people will be paying up to get our electricity. So we’ll be stuck with less supply and prices will be going up. Texas has moved away, strangely enough, from fossil fuels, crazy because they generate so many of them. California, everyone knows what their situation is. They’re a net importer of electricity. And then Florida is just the number of people moving there. They’re going to have to find all the energy from somewhere. And frankly, no one really wants an electrical generating facility in their backyard.
Sam Clement (16:45):
Not in my backyard.
John Norris (16:46):
Not in my backyard.
And no one in Washington, no one at the EPA, no one that really a huge chunk of the country wants us to be using fossil fuels. So when we take a look at everything, can we build enough windmills? Can we build enough solar power plants? Can we do all this?
And I just don’t think we can. And that’s not to say it’s impossible, but it’s going to be pretty darn close to it. And the amount of time necessary in order to get these things up and running, and nevermind the fact we don’t produce all the parts in order to do this.
We have to import a lot of them from our friends at the PRC.
Whereas we do have the technology, readily available on the technology for natural gas, for crude oil, for coal.
Sam Clement (17:37):
We’ve kind of talked about the first derivative of it or the first iteration of it, not even getting into if we want these other methods, things like copper that we’ve talked about for a while, lithium, I mean, all these precious metals that we can’t really get on our own. Largely.
John Norris (17:59):
We could if we had the willingness to mine for them.
Sam Clement (18:02):
Some of them.
John Norris (18:03):
Yes.
Sam Clement (18:05):
Probably not all of them.
John Norris (18:06):
Not to the degree that we would need them, but we could at least make a dent on them. And this is kind of where the rubber meets the road. It is one thing to one, all these great things. It’s quite another face with economic reality.
What are you willing to give up in order to ensure we aren’t using fossil fuels?
What are we willing to do in the world to dictate that no one uses fossil fuels? Understanding that in third world, not using coal, not using natural gas will forever constrain these economies to backwardness because they won’t have the capacity to grow manufacturing or industry. And that, moving forward, as the world’s population is expecting to grow, the world’s just going to be consuming more energy. And it has to come from somewhere. Wind farms, solar panels, other types of renewables. That’s fantastic.
(18:59):
But first and foremost, people want to turn on the AC, they want to turn on the lights, they want to turn on the stove, and they want it now, not five years from now. And I just think we’re going to have a very difficult time as a global economy making sure that this happens. And as a result, I am very concerned about the electrical grid here in this country. And I’m very concerned about utility prices and just other energy prices for the American consumer over the next 10 years.
And Sam, I will buy you a steak dinner. I owe a former coworker about 30 steak dinners. I don’t think I owe you more than five.
Sam Clement (19:39):
Just get a whole cow and call it even.
John Norris (19:40):
I will buy you a steak dinner for you and Hannah. And if baby’s eating steak by that point in five years, we will go to wherever you want to go. We will drive over to The Palm, Morton’s, wherever you want to go. If pricees at the pump and your electrical utility bill… if those two things combined aren’t significantly higher in five years than where they are today, and by significantly I mean exceeding, whatever lie the government’s selling about the consumer price index, it will increase higher than the accepted CPI.
Sam Clement (20:22):
I agree. So I look forward to that steak dinner. An easy bet.
John Norris (20:28):
So I kind of hate to tell everyone this, but when we’re looking outside, and I’m looking outside on kind of a pretty day, it’s not a beautiful day, but it’s okay.
Sam Clement:
I’d say it’s pretty good day.
John Norris:
We are sitting around talking about such a bleak future in terms of the energy grid. You can take that as, oh gee whiz, Norris and Sam are just sitting there, just being all depressed. You can take a look at it like that, or you can take a look at it- just how do we make money on this?
And so do the homework and take a look at global population trends, global electrical construction trends. And I think that you will come to the same conclusion that we have.
The world’s going to have a problem. There’s going to be a shortage in supply and a great demand for it.
John Norris (21:14):
And whenever you have the demand curves shift out to the right, Sam… Whenever you have it shift out to the right?
- Supply doesn’t move.
- Prices go up.
- And when prices go up, generally profits do too.
So that being said, what’s going to be difficult for the consumer is going to be wonderful for investors moving forward.
Sam Clement:
I agree.
John Norris:
Alright. Well guys, thank you all so much for listening. We always hope to hear from you all. So if you have any comments or questions, please by all means, let us know. You can always reach us at or you can leave us a review on the podcast outlet of your choice. Of course, if you’re wanting to read more or listen more to what we have to say or what we think, you can always go to oakworth.com. Take a look underneath the Thought Leadership tab for all kinds of exciting information, including links to previous trade and prospectus podcast, links to our newsletter slash / blog common cents, as well as links to our quarterly analysis of Magazine Macro and Market. With that being said, Sam, anything else that I have to say on this exciting topic?
Sam Clement:
That’s all I got.
John Norris:
That’s all I’ve got today too. Y’all take care.