Motley Fool Hidden Gems Investing - No Solutions, Just Trade Offs: Doomberg on Worldwide Energy Challenges Molecules, Physics, and Platitudes

Episode Date: October 1, 2022

The world’s energy crunch is a battle between platitudes and physics. Leaders may want to pay closer attention to the physics part. So for more insight on the world’s energy crunch we reached out to a cartoon chicken.  Wait, what?  Doomberg is an anonymous team of analysts covering energy and economic trends. Their newsletter is Substack’s #1 finance publication and the group is represented by a cartoon chicken.  Motley Fool Senior Analyst Nick Sciple caught up with Doomberg’s head writer for a chat about: - The state of Europe’s energy crisis.    - Nuclear’s place in a decarbonized future.  - And what the Nord Stream pipeline attack means for the world. Host: Nick Sciple Guest: Doomberg Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable mattress in the world. The Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today.

Because we have your number. If you have an adversary like Putin, who hates you, who is a net energy exporter, it is incumbent upon you to allow every molecule he's willing to sell to reach the market and then to flood the market with your own so that you drive price down. Oil sold for minus $37 a barrel at the peak of the COVID crisis. Nobody was making any money in the oil patch. If our objective is to starve Putin's war machine of cash, the only way to do it is to flood the world with molecules, driving the price way down and crushing his revenue. I'm Dylan Lewis, and that's Doonberg's anonymous head writer. Doonberg is a team of analysts and

writers covering energy and economic trends. The group is represented by a green cartoon chicken, and their newsletter is Substack's number one finance publication. Motley Fool senior analyst Nick Seipel caught up with Doomburg for a chat about the state of Europe's energy crisis, nuclear's place in a decarbonized future, and what the Nord Stream pipeline attack means for the world. One of the taglines that you use very regularly is the term energy is life. Can you explain to our listeners what you mean by that? So energy is literally life in the sense that the human endeavor is a constant, unrelenting struggle against the forces of entropy. and in order to beat back entropy and to impose order on your local environment you need to waste

heat you need to waste energy and your standard of living is quite literally measured by how much energy you get to waste and that sounds weird but it's sort of fundamental laws of physics second law of thermodynamics and it's not often thought of in that way because for most of today's of intelligentsia you know the cultural thinkers of the universities and think tanks they've existed in their professional careers during a time of energy surplus driven predominantly by the shale patch revolution um post covet for a variety of reasons that we've discussed we now find ourselves in a period of primary energy shortage and most analysts commentators and macroeconomic thinkers uh don't have models for what works in such environments and um so energy

as life becomes really apparent when there's not enough of it um we like to say that you know in the battle between platitudes and physics physics is undefeated um and the bank of england this week is learning that it can't print energy um it can print the british pound um but it can't print energy and it can't settle its energy transactions in its own domestic currency which is a key part of the crisis that is unfolding now that people are learning firsthand and so um you literally and or you're in order to impose order on your local environment which is a measure of your your standard of living, you must have access to primary energy. And right now, for a variety of reasons, the world is short energy. And we're seeing that if you push on one end of the balloon,

you're just sort of expanding it somewhere else. And all of these sort of whack-a-mole of crises are just unfolding at record speed. And a couple of them this week are only going to make the situation much, much worse. Yeah. So let's talk about the global energy crisis that we're in right now. That's something the IEA declared in July, but really something you've been writing about since 2021. So back in 2021, how did you foresee some of the issues that we're seeing in Europe today? The energy crisis actually started in the spring of 2021 when, by today's comparison, relatively cheap natural gas prices, but back then, expensive natural gas in Europe caused Europeans to pause and to not fill their storage tanks at the speed with which they needed to,

to confront the winter. And it's lost on people now, but the price of natural gas in Europe spiked to unthinkable levels long before Vladimir Putin overplayed his hand and moved across the border in Ukraine. He did so, we believe, in no small part because Europe had handed him all of their energy cards and he felt like he had leverage to play. We believe he miscalculated, but we also believe he would not have moved on Ukraine had Europe not already been embroiled in an energy crisis. And so it wasn't hard to detect. You could just look at the chart, the natural gas priced at the Dutch TTF on the Dutch TTF contract was 15 times the price of natural gas in the U.S. And you can't run your economy that way. And one of the big things that people get confused is they

co-mingle electricity with energy. This is an energy crisis, not just an electricity crisis. Natural gas is used to heat homes. It's used as a feedstock to make fertilizer. It's used in co-generation plants at major chemical facilities to produce industrial steam and electricity that drives the work processes that um that deliver um that deliver life that deliver our standard of living the the things we're used to um to having and and the natural gas crisis in europe um quickly spread to asia because they found themselves competing for the incremental carrier of liquefied natural gas which then of course um by the law of substitution spread to coal and um and now we are in this really bizarre situation we're corrected for

energy content, coal is more expensive than oil, which is really staggering and means something. We think it means we're headed to sort of a stagflationary environment where we have both inflation and economic contraction, and we shall see. But this is a really historic time, and you could see it coming. And again, because you can measure the molecules. Europe has stopped fossil fuel development. Many in the U.S. are focused on return of capital, return on capital, as opposed to growth for growth's sake. So the production of oil in the U.S. has not surpassed COVID highs. And the price elasticity demand for life is huge. And the clearing price that the wealthy in the world are willing to pay shuts out many of the developing countries. And so we're just at the

beginning of the crisis in our view, and it's going to be a big one. Yes. So you mentioned Russia's invasion of Ukraine certainly put something that was already going to be an energy crunch, even into a further energy crisis. How did Russia's invasion of Ukraine change conditions on the ground with regard to the energy shortage? So I'd say up front, we have limited our analysis of the situation to the energy side. We make no commentary on the military side. And why is that? We know nothing about it. And we can't cut through the propaganda war. But we understand the dimensions of physics and what the limitations physics will impose. And we have argued forcefully, and we think correctly, that the sanctions regime has been a total failure and was a predictable

failure from the beginning. And why is that? Anybody with any experience in the commodity sector knows that price is the key to battling somebody. So if you have an adversary like Putin, who hates you, who is a net energy exporter, it is incumbent upon you to allow every molecule he's willing to sell to reach the market and then to flood the market with your own so that you drive price down. Oil sold for minus $37 a barrel at the peak of the COVID crisis. Nobody was making any money in the oil patch. If our objective is to starve Putin's war machine of cash, the only way to do it is to flood the world with molecules, driving the price way down and crushing his revenue. If we were successful in taking half of his exports off the market,

the price of these commodities would more than double, and he would make more money because of it. So trying to crush his volume is only going to end up empowering him to make more money, which is what we've seen. So who's being sanctioned here? Look at what's happening in the UK with the Bank of England having to do quantitative easing in the face of 10% inflation, while Russia is cutting their interest rates hand over fist to well below pre-war levels. Why? Their coffers are full. Their coffers are full because energy is expensive. Energy is expensive because of our sanctions policies. And the quicker we realize that and change course, the quicker we can win the energy part of this hybrid war.

Right. So at the end of the day, it's your belief that in order for the market to be adequately supplied, you kind of need some of that Russian natural gas. The world cannot live without Putin's energy, period. And we should not want them to. Because if all of Putin's energy, let's just get the exception that proves the rule out on the table here. If we bombed every oil well and embargoed every port and no LNG, no natural gas from pipelines and no oil from Russia found its way outside of Russia's borders, the world economy would collapse. Hundreds of millions, if not billions, would starve. And we would enter into a depressionary spiral that would make the 30s look gentle. It's just a fact. And so this is an axiom. And when you're designing

your sanctions policy, you should consider not only the first order, but the second and third and fourth order effects of what you're doing and and we've been very loud from the beginning people accuse us of being quote unpatriotic um for pointing this out in fact we argue it's as patriotic as you can be this is not going to work here's a plan that would follow our plan and we will achieve our geopolitical objectives unfortunately we've gone in the opposite direction talking about price caps and and uh if somebody blew up these pipelines uh i'm sure i'm sure we'll talk about nordstrom one and nordstrom two this is catastrophic for germany in particular. This is a real big escalation. And so, yeah, we think we've been wrongheaded

on this from the beginning, and we've been consistent in our view. You can only win a revenue war in the commodity world by swamping with production. Yes. So let's talk about what's happened this week. Some obvious sabotage of the Nord Stream 1 and 2 pipelines, which link Russia to Germany when it comes to natural gas. Those have now been sabotage. And there's some belief that those might not be able to come back online for years to come. So how does this attack change maybe where Europe's energy future goes? It's a catastrophic, monumental, historic event of epic proportions that has not yet been internalized in the commentary of the media of the day here. And this is a very, very big deal.

to set the stage um these are two deca billion dollar projects to create these pipelines um they had the capacity to meet most of europe's natural gas needs it removes the incentive for putin to uh to come to the table and talk peace because like you can't even supply europe through these pipelines if if you know if putin disappeared tomorrow and the most western friendly leader of russia possible was installed um europe is now catastrophically in big trouble for energy condemns Europe to several very tough winters. And it's a real shocking event. The most important element of what's transpired here is we've crossed the Rubicon into a world where attacking energy choke points is now normalized. So we don't know who did it. There's lots of speculation who did

it. We won't indulge in such speculation. Somebody did it. They know that they did it. And the people that didn't do it, they know that they didn't do it. But in the sort of game theory of what happens next. Let's just say, you know, the U.S. did it, just to pick an example that we don't necessarily believe to be true. What's Putin's response? We have choke points over here. We have cyber vulnerabilities at LNG export facilities. We saw an explosion at the Freeport LNG export facility. There were some whispers that that might have been a cyber attack. The company denies it and there's no evidence of it. But whoever did it, the other side now feels emboldened for retribution. And because energy is life, and because we have these choke points,

it doesn't take too many acts of sabotage to catalyze a catastrophic decrease in the global average standard of living. And this is a big, big, big deal. Yeah. Whatever entity is responsible for these attacks, in any event, we will not be able to return to the status quo we were in in, say, summer 2021 with respect to these pipelines. So as you look forward to Europe, the world, trying to solve its energy shortages today, what's the path that you think leaders should be following? Well, there's only two possibilities. You will either produce more energy or you will accept and distribute substantial decreases in your standard of living. One of those is hopeful and the other is uh less hopeful let's say and um the mechanism by which cuts to standard of

living are distributed can get messy um and and we believe europe is entering the winter with insufficient molecules and no amount of central bank printing or interference in the market can create those molecules so any strategy to get us out of this crisis that does not involve more energy produced domestically is doomed to fail um price caps stimulus um all of these things are only going to make the situation worse as you know um and so the only answer is more production of energy um even if they were able to outsource all of their natural gas needs for example from the lng market two problems they have just diversified away from one set of uh foreign potential geopolitical opponents into another one. Qatar has got a mixed relationship with the West.

They're a major exporter of LNG. Even the U.S., you know, sometimes we get into diplomatic rows with our perceived allies. Ultimately, if Europe can't produce its own energy or it can't acquire energy in its own currency, then they're going to have to accept a substantial and destabilizing cut in standards of living, which we fear is going to trigger a substantial tilt to the right in European politics. And we're seeing evidence of that today in Italy. But this blowing up of the pipelines is a really big event. And it changes the chessboard permanently. And it changes the chessboard in a way that elevates risk substantially. Look, we have the foreign minister of Russia and the president of Russia actively warning about

using nuclear weapons. This is a very, very big deal, and one that we should be taking very seriously. Yeah, so you mentioned nuclear weapons. I want to talk a little bit about nuclear power, actually. It's been a conversation you've had a fair bit around, you know, Europe has been slowing down or speeding up, excuse me, the shutdown of some of its nuclear plants. You actually had some German ministers yesterday talking about the need to extend nuclear plants in the aftermath of what happened with the pipelines. How do you see the role that nuclear could play in solving some of these energy issues? So there is simply no path to a decarbonized world that does not have nuclear power as an anchor. And many sort of progressive environmentalists

would disagree with that and think that we can get there with solar and wind alone. It's just provably untrue. It simply won't be enough. It requires an enormous amount of energy to produce solar panels and wind turbines. And the payback period is huge. It's a hyper-political number, so we don't need to engage in that. But the payback period on nuclear power, because it's so energy dense, is six weeks.

If the payback period on solar is four years and you want to, let's say, displace 10% of your energy needs, you need to take 40% of your energy this year to do it. Whereas if the payback period on nuclear power is six weeks, you can obviously have a much bigger impact much quicker. There's a lot of noise about nuclear waste, which we believe is just a propaganda trick. You cannot decarbonize without nuclear power.

If you truly believe that the climate crisis is a catastrophe and that decarbonizing is a must, you either do nuclear power or you crush everybody's standard of living. And politically, as we've tried to warn our friends on the progressive side of the environmental movement, the path function matters. and if you force a swift de-acceleration of standards of living you will lose the popular vote the median voter will turn against you and you will see this rightward tilt in politics that is dangerous this is an experiment now that's a bit uncontrolled and um and so um the the opposition to nuclear power has always puzzled us we have our beliefs as to their origins

but um we're starting to see at least in the u.s a reconnection with the power of high density fuels like uranium and the fact that these are basically carbon free and that we can decarbonize while ensuring a decent standard of living for people if we have nuclear power at the focal point of it. It is literally impossible any other way. And so we can argue about it and we could be political about it and we could create all manner of grifts and allocations and spending bills. But until and unless we get serious about increasing the energy density of our primary fuels, we're either going to see radically decreased standard of living or we're not going to decarbonize. Right. So the choices are either reduced demand, which is to your point,

you know, reduced standard of living or increased supply, whether it's through nuclear or some of these other forms. And to your point, nuclear, you can substitute for natural gas in a much more one-to-one way because of the baseload. Oh, and you could create a hydrogen economy around nuclear. And we could use hydrogen combustion engines to power our vehicles around hydrogen produced from nuclear. You could start with water, use an electrolyzer, power that electrolyzer with a nuclear power plant, and we could get rid of CO2 emissions. It is possible. It requires no technical inventions for us to radically decarbonize our economy while still maintaining a good standard of living. And the technology exists. The missing ingredients are some financing. This

is not cheap, of course. And we certainly are pouring money out of the Treasury's coffers uh for all manner of potential solutions that probably won't work um but it it requires no technical inventions uh nuclear waste is a solved problem it just requires politics um political will and credit to gavin newsom uh in california for extending the life of the abulcanian and and look if the germans actually do keep their remaining nuclear power plants on that's a great first step it would be nice if they restarted the the ones they just shut down same thing in in Belgium, they just shut down a perfectly good, fully operable, middle-of-life nuclear reactor for no good reason, in the middle of an energy crisis. It's insanity. You couldn't make it up

if you tried. And so the current slate of politicians will either open up a physics textbook soon, or they will be voted out of office. Yeah, we'll see how things play out. So we mentioned nuclear power as one potential solution. We've also talked, or you've mentioned a couple of times, liquefied natural gas. One of the big exporters on a global basis is the United States, and that's growing, continuing to grow. What role does North America, the United States have to play in solving the world's energy crisis today? Yeah, it's a great question. And we've long argued that if we drew a circle around Mexico, Canada, and the United States, sort of NAFTA, you have an energy superpower. You have all the oil and gas you need. You have all the

nuclear technology you need, the can-do nuclear reactors and the workforce that supports them up in Canada. You have amazing resources and an outstanding workforce across all three countries. We have all the fertilizer we need. We have all the farmland we need. We have all the fresh water. 80% of the fresh water is sitting between Canada and the U.S. today. All the forestry products that you could imagine. We have everything we need in North America to both radically improve the standard of living of all of the citizens that are here and project enormous geopolitical power outward by supplying via export the critical fertilizer, energy, minerals, food, and lumber needs that the world is so hungry for. So not only could we radically improve our own

world, but we could help the rest of the world lift themselves out of energy poverty and help humans flourish around the world. We could embolden our allies and punish our enemies. it's all right here. We just need to get serious about it. And, you know, one thing about a crisis is it does focus the mind. And so we're actually pretty optimistic people in real life, you know, the name Doomberg notwithstanding. When we're done trying all of the bad ideas, we have very, very good hope that we will settle on some of the good ones. I tend to be of the same mind as well. I think something's got to give and sooner or later we'll find our way to the right path because that's what people have done all throughout history.

Let's talk about the future and maybe an optimistic look. One of the things we talk about here at The Fool sometimes is, imagine you hop in a DeLorean, and you go forward 10 years, you hop out, and you walk around. Let's assume that the world follows the Bloomberg path, that we're going to invest meaningfully in new energy, technology, nuclear, things like that. If you jump forward 10 years, what does the world look like in that universe? So in an ideal world, we have small modular reactors distributed around the country so that there's no real big point sources of vulnerability. We have hydrogen production facilities that power vehicles that can store 500 miles of range. And we use internal combustion engines to basically

burn that hydrogen back to water so that we don't have to rip all of these precious metals out of the ground. We could basically just retrofit the existing automobile fleet. Our carbon emissions are down. Our food productivity is up. People are well fed. There's peace in the world.

You know, we've said like we, it's like a weird thing now to say, pray for peace. Like we had prayed for peace. We would not, we're anti-war. And that used to be a very liberal position. And now it's considered sort of right-wing conservative because you are somehow against war.

um we would like the for democracy to be you know widespread and for people for humans to flourish and and there is a way to do that you know if an alien came down and looked at the earth and saw how how much potential we have um and then saw how inefficiently and unequally we're distributing it across the humans on this planet you know the wealthiest one percent versus the bottom 90 it's really a scandal and uh it's a broken system um and so in an ideal world um in a utopia um we would have an abundance of energy we would have peace and we would we would be at the top of maslow's hierarchy of needs uh all searching for our own source of uh personal fulfillment i i love that maybe one last last uh uh question for you or uh sure one of the kind of focuses of

doomberg and you you've kind of touched on this a bunch of places throughout that this interview is is kind of where narratives about energy diverge from reality, physics versus, you know, idealism, things like that. Where do you think is the biggest gap today between kind of the general knowledge around energy today and the reality on the ground? So this is a crisis of distance for the median voter in the Western world. Light is derived from a switch. Food arrives from the pressing of a few buttons. And heat comes from a thermostat. And because we have grown distant

from the primary means of production, capitalism is this amazing machine which is indistinguishable from magic, in a sense, because it allows the illusion that stuff just appears. And one can become convinced that it doesn't need to be made. And so the analogy of our energy policy that led us into this crisis is sawing off the trunk

save a few limbs. And so what needs to happen, and in our own small way, we hope we're playing a part in this, is we need a re-education of the median voter in the Western world as to the criticality of these primary energy systems. The workers in the oil and gas field are not villains. They're not out to destroy the planet.

They're producing critical-to-life energy that the rest of us not only indulge in, not only take for granted, but begrudge. And so it's a fight worth fighting. And it's a matter of politics and education and polite debate and public discourse, which we're big believers of. We will debate anybody anywhere that has authentically held views expressed politely. We have our own authentically held beliefs, and we try to express those as politely as we can. And we do believe that ultimately the median voter can be convinced to look at things in a different way to understand where it is that the life-critical energy that they exploit every day comes from.

we're not here to change the mind of the loudest of the voices of the true partisans we are ideologues not partisans and our objective is to teach people how the world really works and and to have them at least ponder the trade-offs you know an opening quote of one of our pieces was there are no solutions there are just trade-offs so that's fine if you think nuclear waste is a problem then you have to trade something off are you willing to set your your home to 60 degrees for the winter that's fine that's a trade-off you can do that. Or you can handle the relatively small amount of nuclear waste in a safe way that

a modern nuclear power plant produces. So what are the trade-offs? Let's define them. Let's have an intelligent, polite, open discussion about the pros and cons, and then in a democratic fashion, decide what we're going to do collectively. Absolutely. And today, when we're in a global energy crisis, now probably more important than ever to start making some of those decisions and deciding where we want to, uh, where we want to allocate our time and capital and those sorts of things. Um, Duberg, thank you so much for joining me before we go. Uh, where can people find your work? If they'd like to read more, where can they stay in touch with you? Nick, this has been great. Um, uh, our primary work, it can be found at duberg.substack.com. We are 100% subscriber

supported. We take no ads and we accept no sponsorships, but nothing wrong with those business models. But we believe that the complete editorial freedom of the Duberg team is one of our brand differentiators, and we are committed to being subscriber-supported for the length of Doomberg. We're also on Twitter, very active on Twitter, at DoombergT, add the letter T to the end of Doomberg, as in Twitter. Somebody is squatting on the Doomberg name, which is unfortunate, but such is life on the internet. Really appreciated the opportunity. Love your work, and that was a great discussion, Nick. Looking forward to having it again. As always, people on the program may own stocks discussed on the show and The Motley Fool may

have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. Thanks for listening. We'll see you tomorrow. Thank you.