Motley Fool Money - 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

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. 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 a 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 Duneberg's anonymous head writer. Duneberg 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 Seiple caught up with Duneberg 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 sort 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.

It driven predominantly by the Shale Patch Revolution. Post-COVID, 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 don't have models for what works in such environments. And so energy as life becomes really apparent when there's not enough of it. We like to say that, you know, in the battle between platitudes and physics, physics is undefeated. And the Bank of England this week is learning that it can't print energy. It can print the British pound, 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 you literally, in order to impose order on your local environment, which is a measure of 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-mull 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 the 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 involved in an energy crisis. And so it wasn't hard to detect. You could just look at the chart, you know, that natural gas priced at the Dutch CTF 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 commingle 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 cogeneration plants at major chemical facilities to produce industrial steam and electricity that drives the work processes that deliver life, that deliver our standard of living, the things we're used to having. And the natural gas crisis in Europe quickly spread to Asia because they found themselves competing for the incremental carrier of liquefied natural gas, which then, of course, by the law of substitution, spread to coal.

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 stagnationary 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.

in the U.S. are focused on return of capital and return on capital as opposed to growth for growth's sake. So the production of oil in the U.S. is not surpassed COVID highs. And the price, last 60s to see 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 do you, I guess, how did the 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 this

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 I, 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 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 like 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 we've been very loud from the beginning. People accuse us of being, quote, unpatriotic 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 if somebody blew up these pipelines, I'm sure we'll talk about, Nord Stream 1 and Nord Stream 2. 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, these are two decadillion dollar projects to create these pipelines.

they had the capacity to meet most of Europe's natural gas needs. It removes the incentive for Putin to come to the table and talk peace because you can't even supply Europe through these pipelines. If Putin disappeared tomorrow and the most Western-friendly leader of Russia possible was installed, Europe is now catastrophically in big trouble for energy. It 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,

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 was 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 less hopeful.

And the mechanism by which cuts to standard of living are distributed can get messy. 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. Price caps, stimulus, all of these things are only going to make the situation worse, as you know. And so the only answer is more production of energy. Even 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 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 US, sometimes we get into diplomatic rows with our perceived allies. 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 on 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 Europe has been slowing down or, 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.

I 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 so the opposition to nuclear power has always puzzled us. We have our beliefs as to their origins. But 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. Like you could start with water, use an electrolyzer, power that electric energy. 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 for all manner of potential solutions that probably won't work. But it requires no technical inventions.

nuclear waste is a solved problem. It just requires politics, political will. And credit to Gavin Newsom in California for extending the life of the Abilcanian. 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 ones they just shut down. Same thing in Belgium. They just shut down a perfectly good, totally 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 try. 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, we mentioned nuclear power is one potential solution. We've also talked,

or you've mentioned a couple 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? You know, it's a great question and we've long argued that if we drew a circle around Mexico, Canada, and the United States, so NAFTA, you have an energy superpower. You have all the oil and gas you need, you have all the nuclear technology you need, the Kand-do nuclear reactors and the workforce that supports them up in Canada. You have amazing resources and 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 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 Dumeberg 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 him sooner or later. We'll find our way to the right path because that's what people have done all throughout history. So 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, right? And you go forward. Ten years, you hop out and you walk around. So let's assume that the world follows the Duneberg path,

right, 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. We've said, like we, it's like a weird thing now to say, pray for peace. Like we had pray for peace. We were 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. We would like for democracy to be. be widespread and for people, for humans to flourish. And there is a way to do that. You know, if an alien came down and looked at the earth and saw how much potential we have, and then saw how inefficiently and unequally we're distributing it across the humans on this planet, you know, the wealthiest 1% versus the bottom 90%. It's really a scandal. And it's a broken system.

And so in an ideal world, in a utopia, we would have an abundance of energy. we would have peace. We would be at the top of Maslov's hierarchy of needs, all searching for our own source of personal fulfillment. I love that. Maybe one last last question for you. Sure. One of the kind of focuses of Duneberg, and you've kind of touched on this a bunch of places throughout this interview, is where narratives about energy diverge from reality, physics versus 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, you know, capitalism is this amazing machine, which is indistinguistic, 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 to save a few limbs. And so what needs to happen and in our own small way, we hope we're playing a part of this, is we need a re-education of the median voter in the Western world as to the criticality of these primary energy,

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 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 to have them at least ponder the trade-offs, an opening quote of one of our pieces was there are no solutions. They're just tradeoffs.

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 home to 60 degrees for the winter? That's fine. That's a tradeoff. 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 tradeoffs? 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, now probably more important than ever to start making some of those decisions and deciding where we want to allocate our time and capital and those sorts of things. Duneberg, thank you so much for joining me before we go.

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. Our primary work, it can be found at Duneberg. We are 100% subscriber-supported. We take no ads and we accept no sponsorships. Nothing wrong with those business models, but we believe that the complete editorial freedom

of the Duneberg team is one of our brand differentiators, and we are committed to being subscriber-supported for the length of Duneberg. We're also on Twitter, very active on Twitter, at Dumberg T, add the letter T to the end of Duneberg, as in Twitter. Somebody is squatting on the Duneberg name, which is unfortunate, but such as 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.