State Of The (Energy) Union

Energy Return On Energy Invested, Energy Density, And The Capital Cycle

Summary

• Energy Return On Energy Invested is a straightforward way to look at the efficiency of different types of energy production.

• Solar and wind are very inefficient, and are only feasible in most cases due to subsidies.

• Coal, oil and natural gas all have important roles to play, but nuclear is far and way the most efficient form of energy for baseload power.

• Capital cycles in many parts of the commodity sector point to strong returns for coal, offshore oil, and uranium.

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Over the last couple weeks, I have had several discussions on investments, energy, and broader financial markets with friends. I enjoy these discussions, but I also have a tendency to ramble from one topic to the next. Part of this is just simply due to how interconnected and complicated the energy world is, and part of it is me getting distracted bouncing from topic to topic. When I write about it, I’m able to be more concise and to the point. Today I want to talk in more detail about energy return on energy invested, energy density, and why I’m so bullish on offshore oil, coal, and other commodity sectors. Today’s post will have plenty of pictures, so the readers that are visual learners should enjoy it.

Goehring & Rozencwaig EROEI

It takes one look at the chart above to realize that we are never going have an electric grid that can support our energy demand if that grid relies on wind and solar. Our whole way of life is built on cheap and convenient access to abundant energy. Food in the grocery store and being able to drive to work are two examples of things that we take for granted in the modern world that are a result of cheap energy. For example, I wouldn’t be able to get organic bananas from Mexico for $1.00 per pound this afternoon without cheap energy. Each form of energy is suited to different things, and each has strengths and weaknesses, but without oil, gas, coal, and nuclear energy, the world would look a lot different. In human history, we have never gone from a more efficient source of energy to a less efficient energy source, which is why I don’t see a bright future for wind and solar.

Wind & Solar

Even if you want to ignore the unusual number of whales washing up on onshore on the East Coast, or the thousands of eagles and other birds that are killed every year by wind turbines, all it takes is a little bit of research into wind turbines and solar panels to realize just how big of a scam it is. Could the technology improve dramatically in the future? Maybe. I’m skeptical, but the current calculations could change. For now, solar and wind are not viable to produce reliable baseload power.

One of the other things people ignore is what it takes to create wind and solar panels. Now we get to take a short detour into the coal industry, which is responsible for more than two thirds of global steel production. Not only do solar and wind have much bang for the buck as far as energy produced, but it takes a lot of steel, and by extension, coal to produce.

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Each megawatt of solar power requires up to 45,000 kg (99,000 pounds, or 49.5 tons) of steel, which requires 31,500 kg (69,300 pounds, or nearly 35 tons) of steelmaking coal…. The average wind turbine requires up to 260,000 kg (572,000 pounds, or 286 tons) of steel, which requires 170,000 kg (374,000 pounds, or 187 tons) of steelmaking coal.

visualcapitalist.com

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Over the last couple years of obsessively following financial markets, I have learned a lot about the the energy sector. The whole energy sector is even more cyclical than your average business, but that means there is potential for outsized returns if you catch the wave right. I think that we have a bull market in front of us for most commodities due to the lack of investment over the last decade.