Motley Fool Hidden Gems Investing - Doomberg on EU's Energy Crisis, Coal’s Future, and Nuclear Power

Episode Date: April 23, 2023

If a country can’t get natural gas to power its needs, where does it turn next? Doomberg is an anonymous team of energy writers working on the number one financial publication on Substack. Motley Fool Senior Analyst Nick Sciple caught up with Doomberg to discuss:  - Tradeoffs made during Europe’s energy crisis - A durable shift for coal demand - Countries shutting down (and investing in) nuclear energy - An energy storyline that “many analysts are underestimating”   Company mentioned: PXD Host: Nick Sciple Guest: Doomberg Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

I do think, ultimately, most normal-thinking environmentalists would eventually come to the conclusion that it will be impossible to decarbonize without destroying people's standard of livings in the absence of a nuclear renaissance. And the quicker we all come to that conclusion, the better. If we truly care about carbon emissions, then this is a path that we must follow. I'm Chris Hill, and that's Doomberg, a writer on the number one financial publication on Substack. Doomberg is anonymous. If you look for a photo on Twitter or Substack, you're just going to find a cartoon chicken, but you're also going to find a deep understanding of energy policy.

You may recall that Motley Fool senior analyst Nick Seipel interviewed Doomberg last fall about Europe's energy crisis. Today, they talk about some key things that have changed since then, as well as the future of nuclear energy, and one storyline that could be bullish for the price of oil. One of the topics we talked about last time and something I've heard you talk about elsewhere is the idea when it comes to energy policy, there's really no solutions to energy problems, just trade-offs. Before we get into some of the energy topics of today, for our listeners, can you walk through that concept and why it's the case in energy? You bet. When it comes to energy, the first thing that you have to understand,

which we talked about last time, is that energy is, of course, life, and your standard of living depends on how much energy you get allocated to impose order on your local environment. These are the standard laws of physics that are just immutable and can't be circumvented through any form of magic and so given that all humans everywhere would like a higher standard of living the question becomes and and should be the emphasis of our discourse how do we generate as much clean energy as possible for as many people while minimizing our carbon emissions and there's this belief in the sort of renewable sector and the anti-fossil fuel sector that there's a magic one that we could waive where everybody has as much energy as they need and everybody has a great

standard of living and there are no consequences and there are no trade-offs. And that is really sort of the false bargain that has been sold to the general public in the name of climate alarmism. And so once you have that equation in mind where the numerator actually exists and it evolves, the integrated standard of living of all humans on earth divided by our carbon emissions, then and only then can you begin to make reasonable trade-offs about which energy forms we will exploit and which energy forms we will avoid and what the consequences to both the carbon emissions and the global standard of living what those consequences will be and that's what we mean by there are no solutions only trade-offs that's a phrase we've stolen

from somebody whose name escapes me right now but that's really the core to the energy argument the the key flaw in the ongoing debate is this concept that we're simply not implementing renewables because big evil oil and gas companies don't want us to, which couldn't be further from the truth. Sure. So, kind of with that in mind, let's revisit some of the topics that we talked about last time, some of the things that have happened over the past six months. So, last time around, we talked about Europe's coming energy crisis, a crunch, partially due to Russia's invasion of Ukraine, partially due, over the long term in particular, to the attacks on the Nord stream pipelines. You look at how Europe came through the winter. The crisis doesn't seem to

have played out at as extreme a level as maybe some had expected. With that thought process of there's no solutions, only trade-offs, how would you rate how Europe solved its energy crisis over the winter? I would object to the use of the word solved. Let's walk through the trade-offs that were made in order to circumvent the worst-case scenario tail risks that we had been discussing and were fearful of back six months ago. Let's focus on Germany, of course, because they're sort of the heart of Western Europe and the epicenter of the energy crisis for lots of reasons, many of which self-imposed. So how did Germany get through the winter? The first thing they did was they postponed the shutdown of their last three remaining nuclear reactors, which was a wise

decision and one that we applauded. Second, they scoured the world for every BTU of energy they could get their hands on, regardless of carbon footprint, cost, or impact on the emerging world. And there was serious impacts to the emerging economies, which we can discuss. And they also blew half a trillion dollars in this effort. And then third, and most fortunately, they were blessed with a incredibly warm winter, unseasonally warm winter, a three to four sigma event to the warm side, which was in many ways miraculous and in all ways quite welcome. And so because of that luck, we wrote a piece at the end of December called The Whims of Gaia, where we warned that, first of all, we were very grateful that the winter was so mild that they could muddle through

without, you know, sort of true catastrophe. But we warned that the leaders of Germany should not confuse good fortune with good strategy. And our fear, which has since materialized, is that the German leaders are taking all of the wrong lessons from this spell of good fortune. And let's just talk about one example of a trade-off that was made in order to make it through the winter. The Germans brought back coal at a historic pace, at a pace that nobody in the market modeled as being even possible. And so in the dead of winter, when it was slightly cold and the wind wasn't blowing and the sun wasn't shining, the Germans relied heavily on the dirtiest of fossil fuels to get through the winter. And of course, now that they were able to

get through winter, we learned last weekend that they have stubbornly decided to close those last three nuclear reactors and there's no talk of reopening any other ones. And so we shall see, they seem intent to go into the winter of 2023-24 with the least amount of reliable energy possible and continuing down the same path. And so, you know, what happens if there's a three to four sigma winter to the cold side this year? Nobody's cheering for that.

And I should say up front, we have many good friends in Europe and we're not sitting around hoping for catastrophe to be proven right. We are just pointing out the riskiness of this strategy and the potential pitfalls to it. And so they made a big trade-off last year. They burned a ton of coal.

They had amongst the brownest electricity grids in continental Europe. If this is succeeding, I don't want to see what failure is. Yeah. And to your point, coal use hit an all-time high in 2022, both because of increasing use of coal in Europe, but also because of increasing coal use on a global basis as Europe bid up liquefied natural gas prices. To what extent is the increase in coal use on a global basis connected with how Europe chose to muddle through the winter? I think it's entirely connected. We wrote a piece in February called the Streisand effect, where we basically, you know, the Streisand effect is where you try to draw attention away

from something and in so doing, you only bring more eyeballs to it. And in a way, the rush towards renewables in Germany caused the catastrophe, the crisis, which caused the response and the trade-offs that we just described, which caused the emerging world, billions of people, to look at what Germany did and ignore what they're saying and to act accordingly. And so, in that piece, we described how Indonesia, China, India, Pakistan, who were all damaged by the consequences of the bidding up of liquefied natural gas and the associated extreme price rises in coal and, to a lesser extent, oil, and they said, okay, we're not going to be fooled again, and they are returning to the coal mines.

Pakistan, in particular, had built much of its electricity grid around the assumption that there would be reasonable, clean, liquefied natural gas at reasonable prices for them to use. And when that was not the case, and they were literally shut out of the market, they said never again, and they're going back to coal. And so we suspect that the total global demand for coal will continue to grow and set records, and as a direct consequence of the energy crisis in Europe. And so there's no amount of self-imposed carbon reductions that the Western world can implement that will offset what the developing world is going to do. And who are we to tell four to five billion people that they should not develop their own standard of living

and that they should allow us to live on the top of the totem pole while they struggle and muddle through? This is not going to happen. It's simply not going to happen. And so, we just need to recognize that up front. So, just to double underline, do you think we've had a durable, permanent shift upward in coal demand because of what's happened in the past couple of years? Absolutely. There's just no question about it. And in that piece, we say, ignoring the path function of progress and eschewing nuclear technology coalesced in the very cause of coal's dramatic global renaissance. Ultimately, the opening quote to that piece was from a brilliant guy, an analyst named Mark Nelson. You can find him on Twitter at Energy Pants. He's a nuclear

expert. And he gave a great coal masterclass on Dr. Chris Kiefer's podcast, Decouple. And the quote that I love from that podcast is, quote, if you don't love coal, you'll never get rid of it. You have to understand the attributes that make coal desirable. What are those attributes? It's relatively inexpensive. You can store it outside as a mountain. You can just make a big pile of it, and then you'll know that you have all the supply you need to get through the winter. There are ways to burn it relatively cleanly, certainly not from a carbon perspective, but from all of the other sort of cats and dogs that come from the uncontrolled burning of coal.

That technology has developed pretty well. And so if you're staring into the abyss and your choice is between serving your population's needs today and risking some potential consequence decades from now, that is no choice at all. And so shame on us for putting them in that position. But they have made, in our view, the only rational choice before them. So, we've talked some about kind of what's happened over the past six months. Let's talk about some of the things that are going on now. You mentioned Germany's decision to shut down the last of its nuclear power plants over this weekend. I think in this environment, it seems like there's

a divergence in kind of views around nuclear energy as Germany is shutting down its nuclear plants. Finland just started up the first new nuclear plant in Europe, I think, in over a decade. You've also seen several multilateral agreements among large countries, Canada, the United States, UK, Japan, around nuclear fuel supply. What do you make of developments in nuclear policy over the past six months or so? And do you think there is a growing divergence between kind of the German wing and other global operators? I kind of feel like at this point, it's Germany versus the rest of the world. One major example that you omitted from your very extensive list, of course, is the United Arab Emirates, where they have brought their third of

four brand new 1.4 gigawatt nuclear reactors to critical. This project was done on time and on budget and will set up that small country for decades to come with clean, carbon-free, safe, limitless energy effectively um and so of the of the suite of energy choices presented to rational thinking political leaders it's just undeniable that nuclear power has the least of the trade-offs i.e we have to deal with a relatively small amount of nuclear waste which everyone in the world knows how to handle and compared against the other trade-offs like with all the mining needs to go into renewables or the carbon emissions that come with fossil fuels or the other pollutants that come with coal or the environmental damage of drilling and or

strip mining for all of these so-called green metals, nuclear's trade-offs are a pittance compared to the rest. And wherever you look, be it Canada, even the United States, Poland is looking to expand. And by the way, Poland burns more coal than even Germany did last winter. So if you're looking for a place where nuclear can have the biggest impact on the Western world's carbon emissions, getting Poland to go nuclear would be by far one of the biggest impact strategies that we could envision. And so outside of Germany and Belgium, you'd be hard pressed to find momentum to the negative side. And in fact, momentum is really, I do think ultimately most normal thinking environmentalists would eventually come to the conclusion that it

will be impossible to decarbonize without destroying people's standard of livings in the absence of a nuclear renaissance and the quicker we all come to that conclusion the better if we truly care about carbon emissions then this is a path that we must follow and we will and so one of our expressions is that which can't go on forever usually doesn't and the moment that the germans slip into a crisis because of their foolhardiness the existing leaders will be swept out of power either democratically or in a or by other means and then i think sanity will return. And one hopes and one suspects, although I don't know for sure, that the, quote, shutdown of these German nuclear reactors have been done in a way that at least preserve optionality for

future generations of leaders to reverse course. And let's hope they're not sort of irreversibly deconstructed in a way that makes it more challenging to build them anew. So, you mentioned Poland. Poland has signed several agreements around small modular reactors in partnership with some Canadian and U.S. companies. What do you make of the emerging trend toward small modular reactors? Do you think that is the technology that will be the primary driver of expansion of nuclear technology to the extent that happens? I would say that there is mixed views within the nuclear community around the need for and the hype around SMR technology. and what do i mean by that there's nothing wrong with large modular reactor technology that exists

today you know um as proven by the very successful project in the united arab emirates or you know what's going on in finland or with canada with the can do reactor designs like we this is a solved problem and so there's a fear in the nuclear energy community that the support for and hype around SMR technology is somehow going to be used as an excuse to postpone and or avoid much-needed new large modular nuclear reactor builds while never eventually manifesting their true potential. In other words, there's a fear that there would be sort of a rug pull on the part of environmentalists just when we would get ready to implement these things. Now, there's lots of things to be excited about with SMR technology, not the least of which is its potential use in energy-intense industries

where you could make designer SMRs for use in the chemical sector, for example. Just take one example. There's an enormous amount of energy that goes into cracking of hydrocarbons and all this stuff. And where that industrial heat comes from today is obviously it's burning of fossil fuels. If we could replace that with heat derived from nuclear technology, that would be a true meaningful breakthrough in reducing our carbon emissions. And there's been some headlines to that effect. And to the extent that companies do deploy small modular nuclear reactors at industrial sites, and this is sort of work that's being done under the DOE's Advanced Reactor Demonstration Program, there's some headlines people can search. I think Dow, the old chemical

company Dow announced something in the beginning of March in their plan to install such an SMR. So these are great and fantastic, so long as they are additive and not an alternative to the existing, safe, modern designs of large nuclear power plants that will serve us quite well for 60, 70, 80 years at a time. So it's in conjunction with extension of current plants. Do you think that there are prospects for new build, large modular reactors, or in an ideal policy scenario, that would be a logical route to take? Yeah, I mean, that's what we see in Dubai, sorry, in the United Arab Emirates, and that's what we're seeing in Finland, and bringing on old, large reactors back on stream in Japan

and so on. And are the prospects for getting that done in the United States today from scratch? I mean, it'd be difficult, especially given the nuisance lawsuits and the environmental radicalism that still persists around nuclear power. But theoretically, there are no technical or legitimately financial barriers to doing so. No, the financial barriers to doing so today are all artifacts of seen regulatory oversight and or nuisance lawsuits.

The two related, by the way, I mean, the credit to the environmentalists, they have managed infiltrate many, many, many government regulatory bodies around the world and have done their level best to delay, postpone, and increase the cost of nuclear power, only to turn around and claim we shouldn't do nuclear power because it's too expensive and it takes too long, as though they had no role in producing that outcome as an overt strategy of their organizations. And so unless and until we confront and defeat these radical Malthusian environmentalists, it will be very difficult to do in the Western world. But in the developing world, where they have a more visceral relationship with energy and what it means to their society to go without, especially after

this winter, I suspect that such organizations would have far less impact. And one should hope that they do have such a minimal impact. And so looking at China, for example, they're building dozens of nuclear reactors. And India, exploring their own set of reactor designs. All the countries you named earlier, it'll get done there. Whether it gets done here is a whole different question. That makes sense. We'll have to see how the policy environment develops as to whether we can see that investment take place here in the United States. Moving on to maybe some other energy topics. Two weeks ago, we saw Saudi Arabia, in conjunction with its OPEC partners, announce a surprise oil cut of over one million barrels per day that's going to run from May

until the end of the year. In your view, how has that action changed the state of play in energy markets today? You know, we wrote a piece just this morning on this exact topic called uniting states. And we viewed the OPEC cut in the context of a larger pattern of headlines and events that we found quite curious, most notably a strong push by the Chinese to create sort of unity and peace across the Middle East as much as they possibly could, driven in part by Saudi Arabia's desire to implement a quote, Saudi first policy. And as we said in that piece, if Saudi first is a relatively new phenomenon, it begs the question of who was first before. The answer to that rather uncomfortable question is the United States. And it looks as though

there is the possibility of a serious rupture between Saudi Arabia and the United States. And in the intervening period since when China shocked the world by establishing a detente between Saudi Arabia and Iran, there's been a series of other headlines that sort of fit a pattern of reconciliation and peace in the Middle East and unity aligned with sort of China and the BRICS nations. And what are those headlines? Well, we saw a relatively interesting breakthrough in the war between Saudi Arabia and Yemen, which is basically a proxy war between the U.S. and Iran, and a massive prisoner exchange over the weekend. And photographs of joyous prisoners being returned home were splashed all over the news media in the Middle East. Not so much here. This is not

being covered in the West. We saw Qatar and Iran get back together and end their dispute with Saudi mediation. We saw Saudi Arabia and Iran both apply formally for a membership in the BRICS organization. And our view in the peace, of course, is this is part of a broader strategy on the part of China to be seen as sort of the diplomatic peacemaker of the world, so that they can position the U.S. as the sort of provocateur and the rattler of sables in the Taiwan issue, and that they could get more international support in a coming conflict between the U.S. and China over Taiwan. And so it's a very complicated geopolitical mess, one might say, with lots of possibilities. But our view is the pattern of headlines that we've seen

in the past two months point to a lasting potential rupture between Saudi Arabia and the U.S., which has very meaningful consequences to both the energy markets, of course, and to geopolitics in general. And we think many analysts are underestimating this possibility. What do you think those long-term implications would be, assuming that occurs? More OPEC cuts, less leverage for the United States when it comes to getting the energy supply we need? What are the type of implications you're thinking about? Yeah, Zoltan Polzner had a really interesting piece called Commodity and Cumberage, I believe it was the title, where he talked about how you know, there's the oil market of 100 million barrels a day, and then there's the amount of

that oil that is actually freely traded and available for sale, as opposed to sort of consumed broadly where it is produced. And that would be sort of the free float of oil. And if China is soaking up incremental supply and that float shrinks, at the same time that the U.S. is sort of reaching the limits of its ability to grow its oil production, historically, whenever OPEC had market power, they've tended to use it. If the swing producer has truly shifted from the shale patch back to OPEC at a time where the OPEC nations are historically unified, then one wonders whether the floor price of oil might already be in for the next few years, and whether maybe $100 a barrel or $120 a barrel might be the new target range. We opened this piece with the story of

the Red Sea Project, which is basically an entire luxurious city being built in the desert by MBS as part of his grand plan to reduce Saudi Arabia's dependence on oil and diversify its economy. And this is all part of what's known as the Saudi Vision 2030. And they're expected to spend several trillion dollars on these projects. This was just one of many mega projects, you know, complete with a beautiful brand new international airport and championship golf course and space for all the mega yachts that the globetrotters will be bringing to this new luxury resort. All of that has to be paid for out of profits from their oil and gas sector. And so that means that Saudi Arabia is interested in a high price of oil for Saudi Arabia's sake.

China is more concerned about actual supply and also printing yuan to pay for that energy. And so there's a lot of sort of intrigue going on. There's a potential for a substantial shift that I think, you know, two decades from now, historians might be writing about this time period in a different way than it's currently being covered in the media. Yeah. So there's something you mentioned there that I think is worth maybe exploring further for our listeners. So you talked about the Saudi cut and the extent to which it could be connected to U.S. shale production topping out relative to where it had been over the last decade. You think about if this production cut had taken place in 2013 in the middle of the shale boom, likely to see U.S.

North American production jump up in order to gobble up the market share that the Saudis are seeding. But with this cut today, there is a belief among some, which you alluded to, that there is not meaningful capacity to increase U.S. shale production to match the supply reduction that the OPEC carried out. So, what is going on in the shale patch that would lead production to top out? Just to clarify that for folks. Yeah. So, this obviously is a topic of much debate. And so, let's just take an example. Most of the growth in the shale patch, some would argue all of the growth in the U.S. oil production industry is coming in the Permian Basin in Texas and Oklahoma. And in that area,

as we wrote about in a different piece, they are constrained by an inability to move natural gas out of the region because of a lack of pipeline. And so why does that matter? Well, in the Permian Basin, where all the growth is coming from, that oil comes with it, a significant amount of natural gas. It's called associated gas, as opposed to sort of drilling for gas on its own, which is done sort of in the Marseilles, up in the Appalachian region. That associated gas is flooding the U.S. market. There's a glut of it in the Permian Basin, as we wrote about in that piece. You can get natural gas for as little as $1 per million BTU, and sometimes it trades negative, i.e. oil producers would pay people to take it. This is the very same molecule that

Europeans were paying $100 per million BTU for the last time we were talking. And so it just shows you how difficult it is to transport natural gas, how that market is highly regionalized, and there's massive arbitrage plays. But in that piece, we describe how in California today, natural gas is $8 or $9 a million BTU because they have no pipelines to bring in natural gas from that bounty. And of course, Governor Gavin Newsom is talking about price gouging and market manipulation, when in reality, this is just the totally predictable consequence of their opposition to building new pipeline infrastructure. So if all the growth is coming from the Permian Basin, and one of the things that's constraining them is offtake of natural gas, then you can see how

challenging this becomes and how policy decisions in one area affect the potential to respond to OPEC cuts in another. Now, to be fair, within the next 18 to 24 months, there is some new capacity coming online that should solve this problem and allow them to continue to grow. But there are very few market analysts who predict that the U.S. will substantially exceed the rate at which it was producing oil pre-COVID in the next few years, if ever. If they do, it won't be by much and it should turn over. And why is that? Unlike traditional oil and gas drilling, decay rates of the new wells in the Permian Basin and the Shill Patch in general are much, much quicker than traditional oil wells. And most of the tier one assets have been relatively depleted.

There's a few companies like Pioneer, for example, that still have a very good inventory of tier one assets in the Permian. But those will be drilled out. And when they do, and everyone moves to tier three, tier two and tier three, the expense and the price they need to be profitable sort of rises and you get sort of less bang for your buck. And so there is a fear that the U.S. may have topped out or may soon be topping out. And if that sort of phenomenon coincides with an especially unified Middle East with Saudi Arabia taking the charge to resolve all of the family business internally and to be aligned with China and Russia, which by all indications, they certainly are so far. It's probably pretty bullish for the price of oil in the next two to

three years. That's all for today, but tune in on Monday for more from Nick Seipel in Doomburg. They'll be talking about electric cars, investing in energy, and more storylines to watch. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, but don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.