We Study Billionaires - The Investor’s Podcast Network - TIP631: The Bullish Energy Cycle w/ Arvind Sanger

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by Arvin Sanger to discuss investment opportunities in the energy, metals, and mining space. Arvin Sanger is the founder and managing partner of Geosphere Capital Management, which focuses on natural resources and related industrial companies worldwide. Arvin has been in the space for multiple decades, and after his outlook for the energy cycle turned positive, he relaunched his fund in October of 2021. Since then, his fund is up 88.9% net of fees through Q1, 2024, while his benchmark is up 62.5%, and the S&P 500 is up just 26.9%. His benchmark is a 50-50 weighting

Starting point is 00:00:42 of the S&P Energy Index and the MSCI Metals and Mining Index. During this chat, Arvin and I cover how the energy space has developed over the past 20 or so years, why energy is inherently cyclical, Arvin's view on a sensible energy transition, China and India's role in today's energy markets, how Arvin views this current energy cycle playing out, how AI and cryptocurrency mining are impacting energy, the primary metals needed in the transition to sustainable energy, why Arvind is still bullish on uranium after the run-up in 2023, potential breakthrough technologies to come in the future, and so much more. Arvind is very sharp and well-versed in so many industries, so I really think you're going to enjoy this one. With that, let's dive right into today's discussion with

Starting point is 00:01:28 Arvin Sanger. Celebrating 10 years and more than 150 million downloads. You are listening to the Investors Podcast Network. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now, for your host, Clay Fink. Welcome to the Investors podcast. I'm your host, Clay Fink, and today I'm thrilled to be joined by Arvind. Sanger, Arvin, it's great to have you here. Great to be here, Clay. Well, I've been really excited to bring you onto the show because you've been discussing many of these interesting topics

Starting point is 00:02:18 and talking a lot about where things are heading with regards to the energy space. And you have extensive experience in the investment industry, especially in energy. And I really wanted to bring you on to get an update on where we stand today and your views on the market. So before we talk about today's market, Arvin, how about we start by looking at the big picture and explaining how we got to where we are today to help set the stage for the discussion? Well, I could go back a long time, but my career spans over 30 years of analyzing and then investing for the last 22 years or so investing in the energy space. So energy and I guess mining, but energy is the broader, longer time horizon. And I would say that energy has we have, when I

Starting point is 00:03:02 got into the business in the 86, 87 time period, oil had crashed to $10 a barrel. There was too much supply. And for most of my career, the energy companies responded, have money will spend. So it was like money in, money out, how fast can we grow? And it was always trying to fight an uphill battle in many parts of, certainly in America, but in many parts of the world going out for exploration risk and everything else. And then when I got to the investment side in, you know, so there were mini cycles from when I got into the business, I missed the entire 70s. I wasn't in the business. I was too young, but in the late 80s and 90s, there were mini cycles, things got good for a while, and then they rolled over. And then what really, I was lucky in my timing, what really happened in the 2000s is the

Starting point is 00:03:46 emergence of China. And at the emergence of China happened at the same time as we started worrying about peacoil. So what you had is a confluence of very strong demand growth from emerging markets, led by China, which was kind of the first major cycle that we had since the 70s where you had a sustained cycle for several years. At the same time, we were worrying about running out of energy. And I got into metals investing kind of a couple of years after starting an energy investment portfolio. And there were similar drivers. China emerging markets were the drivers of this boom. So that was a great cycle that unfortunately ended more or less with the global financial crisis in 2008. Then the decade of the 2010s hit. And in the decade of the 2020,

Starting point is 00:04:28 10s, what you had is a cycle that, you know, after the global financial crisis, demand recovered. Demand wasn't quite as go as the China bull market era, but it was still very solid. But what changed is certainly on the energy side is shale oil. And shale oil created too much supply with no capital discipline. And China itself also, because it was a much more debt-fueled rally, wasn't quite as materials heavy and the mining companies over-invested. During the 2010s, you had negative returns. If you invest in mining stocks or if you invest in energy stocks. Unlike the 2000s, 2000s, 2000s, you had no returns in NASDAQ from 2000, 2008, and you had greater returns in energy and metals and mining. And then you had the second cycle where it was the exact opposite. You had great

Starting point is 00:05:12 returns in NASDAQ and S&P was reasonably good. And you had negative returns in energy and metals and mining. So those were two major cycles that I saw as an investor. Every cycle is different, but there are echoes of previous cycles in every cycle. And this cycle that we see emerging is clearly the dominant theme is energy transition and how quickly that's going to happen and what that, what effect that has on supply and demand. In studying investing, one of the really interesting things you sort of highlighted is these pendulum swings, these big swings that, you know, people can find themselves in and sort of get caught up in. And it's quite well known that energy is cyclical. But, you know, markets overall are cyclical as well.

Starting point is 00:05:52 I think a lot of people sort of forget that, you know, an S&P 500 or a NASDA can have a great decade, followed by a subpar decade. And those riding the wave on these cycles look like geniuses in a bull market before it inevitably turns the other way. I was curious if you could talk more about why energy markets in particular are so cyclical. And maybe touch more on why you believe this cycle. What are some of the most important things that make it different than previous cycles? Well, I would say that what makes cyclical industry cyclical is that, you know, you know, both supply and demand tend to have some cyclical aspects, but I think demand cyclicality is

Starting point is 00:06:34 more economically, not very different than the rest of the economy. Supply is what really makes the cyclicality long-lasting or deep, and it is a question of how long it takes for supply to respond. And typically what happens in most cyclical industries is that, you know, demand is going up, everybody gets excited, supply comes on, and supply comes on and supply kind of peaks just at the time when Demands is starting to come off because everybody carrying out the demand story growing to the sky. And then you get a double whammy of falling demand or not much rising demand and all this oversupply, which takes a long time to work off. So the cyclicality on the demand is more modest.

Starting point is 00:07:12 The cyclicality on the supply takes a longer time to come on and takes a lot longer time to come off. So that's what makes the cycles pretty extended in terms of, you know, in terms of the energy business. And our mining is not that different. And what made energy cycles shorter and we had very many cycles in the 2010s is shale oil came on very quickly. And shale oil, you know, on and off in 2014, 15, 16, when oil price corrected, supply came off. We had one good year and then shale came rushing back and it ended again. So what caused me to, you know, give up on this cycle is the dominance of shale and it's quick on and off.

Starting point is 00:07:47 And that as an investor, we make money when we can play a cycle for a long period of time. And what makes this cycle different is this fear about energy transition, which in my opinion is keeping supply. It's not my opinion, but everybody knows. It's keeping a lid on supply in a way that I haven't seen before. So, you know, I'll give you an example. When you look at the offshore drilling rigs needed for offshore oil production, new exploration, a new rig costs $7,800, $900, $900 million. It'll take to build a new rig.

Starting point is 00:08:17 It'll take three years to build a new rig. and then it's going to need a 20-year life cycle to pay back. So if you're ordering a new rig in 24, it's going to come on in 27, and you're going to have to look at the demand for it through 2047. And if everybody is not debating whether oil demand is going to peak in 2028 or 2030, I happen to think it's going to be longer, but even I'm not willing to bet on 2047, right? So the reality is that there's no investment there. Now, if you look at the oil side, shale is still there.

Starting point is 00:08:45 What caused oil prices to come off last year was shale surprise on the upside. But what we are seeing now as the rig count has come off on that is that we may be in the eighth inning of the shale boom. And the rest of the world, there are pockets of growth. And yes, OPEC has surplus capacity, but structurally, nobody's investing in a meaningful way in long-dated oil. There are a few exceptions, but overall long-dated new oil expiration, not just rigs, but long-dated new oil exploration, oil companies are reluctant to make long-term bet. So even when you had Exxon and Chevron announced recent acquisitions, in the case of Chevron, it's a shale play where they're hoping for quick payback.

Starting point is 00:09:24 I'm sorry, in the case of Exxon, when they're buying Pioneer. In the case of Chevron, they are buying into Guyana, which is a slightly longer dated pay, but the success of full discoveries have already been made, and it's more about hooking up existing wells as well as doing development drilling to get the other wells on over the next three, four, five years. And the production will last for a while, but it's not making. a long-term exploration bet with a long payoff. And that's what we're missing is new greenfield, elephant hunting, as we used to call it. And so that's what keeps a lid on supply, and that's what makes the cycle long. And let me not forget to mention that one of the energy sources,

Starting point is 00:10:02 there are two other energy sources that people don't include in energy, one of which is coal. It's a four-letter word. It's terrible according to every CO2 output person. But the reality is the emerging market, 65% of the power generation of more of India and China comes from coal and other poorer countries in Africa, South Asia, Southeast Asia. And that coal demand is still remains the cheapest form of energy and nobody's investing in new coal capacity except maybe the national oil company in India and maybe the Chinese. And so therefore, that's going to be a tight supply market, even if we want it to go away, but the reality is cheap energy for the poorest people in the world is still something that they aspire to, and therefore that's going to

Starting point is 00:10:45 remain. And then there's uranium, and we want green energy, and uranium and nuclear is a new green source. And again, there's a long cycle for investing in that. So energy is very often narrowly looked at as oil and gas, but there are other sources of energy, one of which is terrible from a CO2 standpoint, and one of which is very green from a CO2 standpoint, nuclear and coal, and both are going to have challenges. One on the supply side, while the demand remains stable, supply is shrinking, the other, it's going to take a long time to turn supply on. Yeah, I also find it really interesting how there's all these moving forces where these dynamics and interplays within all these different energy markets.

Starting point is 00:11:22 And, you know, I'm sure being an investor in this space is just an ever-ending journey of dive and end into all this data and seeing how coal is going to affect natural gas, is going to affect oil and all that. And I wanted to talk more about that. You have talked a lot about how we need a sensible approach to the energy. transition where we recognize the limitations of some of the cleaner energy sources that governments around the world are wanting to invest in, and then also recognize that fossil fuels aren't going away tomorrow. So talk more about, you know, what a sensible transition looks like to you.

Starting point is 00:11:58 To me, a sensible energy transition looks at all energy sources and tries to figure out what is realistic. How can we plan for that? And let me talk about the dumb energy transition to contrast with a sensible energy transition. The dumb energy transition is that if we stop investing in fossil fuels, we will save the environment. The reality is by stopping investing in fossil fuels, you're not impacting demand, you're impacting supply. And frankly, that is the surest way to guarantee higher prices

Starting point is 00:12:31 and the people who can least afford that high price. The poorest are the ones that are going to gravitate towards policies and politicians who will, then remove these restrictions and get that the cheap energy that they want. And so therefore, I think that the sensible energy transition is recognizing that there are billions of people around the world who have very limited energy usage, a fraction of what we use in the developed world. And right now, the biggest driver of demand in the Western world, we're not reducing our

Starting point is 00:13:01 energy consumption. We want them to use green energy, but the biggest driver of demand right now in the world for energy demand incrementally is going to be data centers. for AI and data centers for all digital, but digital centers for AI, generative AI, that's going to double, triple, quadruple demand between now and the end of the decade from these data centers and plus we have crypto mining.

Starting point is 00:13:25 These are all ritual indulgences, if I may call it that. And so a sensible energy transition has to recognize that if we are not able to curtail our energy usage, and there is no way that data centers are only working when the wind blows or the sun shines, right? So they're going to require 24 by 7 energy, which I jokingly say is the surest way to make fossil fuels great again, is to do all this data centers and generative AI. So then the sensible energy transition is how do we think about minimizing the effect of all the energy usage? Do we need to think about carbon capture?

Starting point is 00:14:01 Do we need to think about other ways to manage? Because just banishing investment in fossil fuels is to me makes no sense because all the does is makes the poorest gravitate towards politicians who will remove this restriction on them getting cheap energy. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its

Starting point is 00:14:42 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These are an abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech, and financial sovereignty,

Starting point is 00:15:28 immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedomform.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately.

Starting point is 00:16:02 How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data.

Starting point is 00:16:44 This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide, demystifying AI at netsuite.com slash... The guide is free to you at netsweet.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats.

Starting point is 00:17:18 Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses. around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms.

Starting point is 00:17:47 You can build a beautiful online store with hundreds of ready-to-use templates and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB.

Starting point is 00:18:24 All right. Back to the show. So let's dive in more into fossil fuels. You had a chart in one of your investor letters. that showed sort of the demand for fossil fuels. So it showed liquid fuels, natural gas, and coal. And the demand for all these is growing. So talk about fossil fuels and how they sort of play into your investment approach.

Starting point is 00:18:49 Well, look, fossil fuels are the cheapest source of baseload power, which is power that you can turn on 24 by 7 without having to rely on any external weather-related factors. Nuclear is also part of base load. And so is hydro, but hydro rain doesn't fall the same every year. Nuclear takes a long time to build nuclear power plants. So coal and natural gas as energy sources and oil is more for transportation, although it is used in diesel gen sets as backups even for data centers. But those are the demand for even electric cars.

Starting point is 00:19:25 Today, China, 25% of the new cars sold in China electric cars. And yet China's oil consumption is still growing at 3% per year. In the U.S., we have 5, 6% cars, sold electric cars. Our oil demand is still growing. So the idea that oil demand is going to end anytime soon, oil demand growth, and it's mainly transportation and it's plastics and everything associated with that, that's going to grow for a long time. Natural gas is the natural transition fuel from coal.

Starting point is 00:19:56 And, you know, we are the Saudi Arabia of natural gas. Unfortunately, right now, the government, the Biden administration has banned approval of new projects for natural gas exports, LNG exports, but Qatar and others are developing it. And if I'm a poor country in Asia or in Africa, if I want to reduce my dependence on coal, I need cheap natural gas. And so one of the best ways we can help is do that, is to encourage more natural gas usage because it's much less CO2 producing than coal is. So I think that within the fossil fuels, there's a transition. And then the question is, Wind and solar, how do we get battery technology so that we can use them here on the clock,

Starting point is 00:20:36 and they are price competitive right now. They are not, and we're trying for new battery technology, solid state, and others. It's not going to be the same battery that you use in an electric car that would be used for, because electric cars need quick in and out. These ones need slower in and out from a power storage standpoint for power generation. But the other thing we don't talk about is that if we move to electrification from distributed energy, right? You fill up your car at the gas station. If you move to distribute to centralized energy coming from the grid, you need to upgrade the grid significantly because you're

Starting point is 00:21:12 going to have all these nodes of people who are plugging into the data centers are already causing problems. And now if I have a bunch of Teslas and other electric cars going to charge, the grid is going to not be able to handle the load. And so we're going to need to upgrade the electric grid. We're going to need to invest in more transmission. We're going to need to invest in more local substations. So it's a complicated. We're trying to change what has taken a century to develop and we're imagining we can do it in five years. And I say that's a pipe dream. So sensible, it's going to require a lot of things that have to be put in place. And I think the one thing I would say is we need to think about it patiently and recognize that it's a very complex energy system that has been

Starting point is 00:21:55 built over decades and we can't just put government incentives and suddenly everything will get replaced. I'm glad you mentioned China there because China, like in the 2000 cycle, I'm sure it still plays just a major role in the energy market today. There's one interesting stat I came across with regards to electric vehicles. China has over 20 million electric vehicles, and just for comparison sake, the U.S. has over 2 million. There's also debates on, you know, what's going to be happening with China's economy with maybe there's some uncertainty with regards to China and, you know, what they're. their impact will be on the energy markets going forward. How do you think about China's role in the energy markets today? Well, China was the biggest driver of energy incremental demand growth in the 2000s.

Starting point is 00:22:44 The entire decade from 2000 to 2020, if I looked at it, China was probably about 40% of world oil demand growth. I don't know if it was all sorts of energy. It may have been close to that for all sorts of energy. China is doing a very rapid buildout of nuclear capacity. they're doing a much faster build out of, as you mentioned, electrification of cars. Because if China has a weak point strategically, it's that they are deficient in oil and gas. And they get oil through the Middle East Strait of Hormuz, which, if there's ever a conflict for the U.S., it's very easy for us to choke off their supply. Natural gas comes from Australia, from Middle East, from U.S., and again, there are ways to control

Starting point is 00:23:23 that. So they're trying to, they are coal, they have surplus resources off. So there's a new element that's entered which we don't talk about, which is a strategic dynamic going on right now in the world, where Russia, China, Iran, maybe one block and the Western world, Japan, Australia, Europe, U.S., are arrayed on the other side. And so everybody's thinking about the strategic location of high energy resources. And China has taken an early lead such that today, 70% plus of the world solar modules come from China. Over 70% of the lithium processing that is required for electric cars. So China sells more than half the world's electric cars, but it also sells us a lot of the materials to make the batteries, the lithium and other items. And so it has a chokehold, if you will, on a lot of the green technologies.

Starting point is 00:24:10 So one of the big challenges today is do we want to go from where the U.S. and Europe, U.S. certainly is surplus conventional fossil fuel energy. U.S. is deficient in buying batteries from China. Europe is getting flooded with electric cars from China because they have the cheapest electric cars in the world because like you mentioned, they have the much larger installed base, so they're much early in that. So there's a strategic element that is coming into this whole energy transition discussion where China is the dominant play in wind, solar, and electric cars. They have 60 to 70 percent market share for some key technologies there, and we don't. And so I think the China diminution. story from an energy demand standpoint is clearly slowing down. China's economy is not growing as fast. China is probably growing demand for energy at two, three percent a year. So that's definitely turned the corner. It's not the engine anymore. India is more important going forward. Southeast Asia, Middle East Africa are more important. But from a supply standpoint, suddenly turned it on its head. In the 22,000s China was our demand source and everybody was looking where the supply was going to come from.

Starting point is 00:25:18 If you go to green energy, China is a supply source. Are we ready for that? Do we want that? And I think that's part of the energy transition part that is also becoming very important. When you're looking at oil companies, for example, to invest in, one interesting thing you mentioned on a previous appearance was that a, you know, a lot of these companies are going to be reinvesting in new supply. Their stock prices are going to be going down.

Starting point is 00:25:43 And when they announce, you know, a dividend increase or buyback, then their stock price goes up. And it leads me to think, is there these management teams that sort of take a stand and just say, hey, we're going to invest in new production. And, you know, maybe that leads to lower share prices and maybe makes buybacks even more opportunistic at some points in time. How do you think about this when you're investing in this space? Well, I don't believe that this cycle is going to see the same supply response that prior cycles saw. I gave you the example of offshore rigs.

Starting point is 00:26:18 We've seen it even in a much lower cost of barrier to entry offshore supply boats, which is a very niche market, but nobody wants to invest in a new 20-year asset. So on the oil supply side, the easiest place to invest with a quick payback was shale. And that would still be happening. Yes, they've been disciplined for a while, but if they were to break discipline right now, here's the problem they're running into. No tree ever grows to the sky and neither does any oil producing region, right? So we've had the West Texas where some of the earliest oil exploration in the U.S. happened. We've been through two major cycles.

Starting point is 00:26:51 This is a third major cycle. And the shale tree has grown much further than any of us foresaw, five, six, seven, eight, ten years ago. It has gone much further. But what we are now seeing is that companies are saying I have a 10 year or 12 year or 15 year inventory remaining at my current pace of my life of my current fields. and it's not like I have more to find. And if I keep drilling these acreage,

Starting point is 00:27:17 I'll run out of drilling in 12, 15 years. Once a company gets below 10 years of remaining inventory, its multiple goes down. So I can increase my cash flow, but I can drill more. I will drill my remaining acreage faster, but then I'll have less number of years of drilling inventory left, which means my multiple goes up for higher cash flow short term,

Starting point is 00:27:39 but my multiple comes down for shorter, kind of reserve life. So we're night ride running into this problem that shale is running out of new fields to find. I can keep drilling on my existing acres. I've got thousands of acres. I can keep drilling. But beyond that, there is no new

Starting point is 00:27:57 discoveries taking place that, oh, I found a new Permian, I found a new whatever. So that's why I believe that between the not wanting to invest in new long-term projects and shale running out of massive new finds, we are in a supply-constrained cycle. And unless something comes along that shocks us meaningfully,

Starting point is 00:28:18 I think this cycle is going to be one where demand continues to grow slowly, and supply remains constrained for both ESG and in the case of shale, kind of geological factors, if I may call it that. You also touched on AI and the data centers and their impacts on energy demands. Sam Alton recently commented that he believes that a lot of people are underestimating the energy demands of this technologies. How big of an impact is this on the energy thesis overall? And maybe talk about how significant this increasing demand is going to be. Well, I mean, today, data centers plus crypto mining, which is, you know, I guess you could call it kind of a data center. It's all computers in a location doing mining for cryptocurrencies.

Starting point is 00:29:03 If you take those combined, I think there are about 2% of world electricity demand today. There are IEA International Energy Agency and others have estimated that'll double to 4% of world's energy demand by 2026, and again doubled from there by 2030 to 8% of world's electricity demand. So it's quadrupling the rest of the electricity demand is not growing. On top of that, through electrification of cars, it really does put an unprecedented demand for electricity. Electricity demand historically around the world, you know, in 2019,

Starting point is 00:29:38 the International Agency estimated that energy demand with electrification was going to grow at 1.9%. If you look back the prior decade, global electricity demand was growing at 1.5 to 2%. And suddenly, we have these new sources which are driving 3.3.5%. That means seem like much, but at the margin, it's a lot. And so I think that data centers and, you know, are insatiable need for, you know, everything digital. You know, we want virtual headsets. We want AI. We want general of AI. a Google search versus going to generative AI,

Starting point is 00:30:10 chat GP to do the same search. Google search is one-nine to one-tenth as much data-intensive, compute-bar-intensive as using, and now today, you know, a few of us have discovered generative AI and we do it without thinking and more people are going to adopt it, and more users are going to come up, and it's just going to, you know,

Starting point is 00:30:30 so far the demand estimates that people have made have proved to be too low. Let's see if these demand estimates proved to be too high, I doubt it. I think, you know, there's a lot coming in AI. And if all the dreams come to be true, then energy demand is going to be, you know, one of the main constraints. I think more and more people are recognizing that energy demand could be one of the biggest constraints. So yes, let me add that Nvidia and others are trying to improve chip efficiency for power consumption. About 40% of a data center's demand goes for cooling air

Starting point is 00:31:01 conditioners. They're trying to come up with new ways to cool and whatever. So these estimates that I just told you of IEAs are assuming efficiencies take place. So it's a constant battle. The actual demand is much higher, but with efficiencies, the energy demand hopefully only grows by, you know, 25% a year and not more than that. I think it's also interesting how you mentioned China played a major role in the decade of the 2000s. And then now you look at India, one of the biggest countries the world, one of the fastest growing economies in the world. And you'd imagine that, you know, the energy demands over the next decade from India is just going to be massive as well. I was curious if you could speak more to that. Absolutely. What we've been looking at in India is that steel

Starting point is 00:31:46 demand is starting to grow at double digits. So the infrastructure build out is happening. If you look at what happened in China 20 years ago, beginning of the 2000s that, you know, you start to see steel demand is growing at double digits, cement demand is growing at high single digits. And along with that, energy demand is right now only growing at maybe five or five percent. But my sense is that, you know, if the other, as the infrastructure build out happens, you're going to see other parts of the cycle, you know, trucking, autos, everything that will start to also accelerate. And as you move up the, you know, per capita GDP curve, all of these things, as we saw in China, tend to have an accelerant effect as you build out infrastructure, more people, you know, already,

Starting point is 00:32:30 I think demand from air travel is growing also at double-jidates levels. So there's a lot of elements of demand where, you know, India will never be as energy kind of hungry as China. China overbuilt its real estate, overbuilt its infrastructure. India will always be two steps behind the curve, but it's still on a path where I think that for the rest of this decade, it's going to be the biggest factor in terms of incremental demand for a lot of energy and real resources. A lot of people, when I think about the energy space, a lot of people like to think about oil and gas due to the underinvestment issues that you've highlighted.

Starting point is 00:33:10 But you're also looking to capitalize on the underlying metals that are needed for the transition to sustainable energy. Maybe you could speak more to that, what the primary metals that are needed in this transition and what metals you think show a lot of promise from an investment perspective? Well, so, you know, I have a chart that I use, which is, you know, barred from a McKinsey report, which talks about which metals are needed across the entire, you know, energy transition. And if you start with, you know, wind towers and you look at solar and you look at hydrogen plants

Starting point is 00:33:43 and you look at, you know, biofuels and you look at all of these, the number one metals needed across all of them is steel. So, you know, steel is an intermediate material. For steel, we need metallurgical coal, which again is a four-letter word, but India, if it needs more energy, that's going to require more metallurgical coal. And there's not enough drilling happening, I mean, enough expiration happening for metallurgical coal. But the second most important metal, which is needed in everything electrification, if you need to carry electricity from point A to point B in your car, inside a wind, you know, from wind project or from a solar panels, requires a lot of copper or batteries of any sort, copper. And again, the amount of copper, that people have estimated for energy transition over the next 20 years we need is more copper than we found in human history. And yet if you look at copper grades, they are falling. And then if we want a green base load power source, the only green base load power source is nuclear. And people are talking about building small modular reactors, which will be quicker, cheaper.

Starting point is 00:34:45 Initial ones will take six, seven years. But once we get them building, then we can build them in factories, bring them on site and put them together much quicker. and SMRs is not a revolutionary new technology. There are hundreds of small modular reactors on nuclear submarines, on some aircraft carriers that already exist. Those are small modular reactors, and they've never had a nuclear meltdown in a submarine or an aircraft carrier. So, you know, using that technology.

Starting point is 00:35:08 So again, that'll take a while, but nuclear China is building out a big way. India is a slightly smaller way. But I think the West is starting to recognize that, in fact, that COP 28 last December, U.S., Europe and China, Japan announced that they're going to triple their nuclear capacity by 2040 to meet the green energy targets. Nobody talked about where is uranium going to come from. So it's going to require a lot of exploration for uranium.

Starting point is 00:35:35 So, you know, these are things that we look at and we look at all the energy sources, whether it's thermal coal or it's metallurgical coal for making steel, which is needed for energy transition or it's copper without which, you know, many of these transition technology don't happen. or it is going to be anything related to, you know, a nuclear. And I think that all of those great opportunities. And again, we think of energy as a continuum that doesn't stop just at oil and gas. And that's where I think a lot of people just limit themselves to that.

Starting point is 00:36:03 We think of this energy transition as having all these interconnectedness. And therefore, that creates opportunities. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up. And customers now expect proof of security. just to do business. That's why VANTA is a game changer.

Starting point is 00:36:23 VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with Vanta. That's not just faster compliance, it's more time for growth.

Starting point is 00:36:56 If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading but haven't dared try? The futures market is more active now than ever before, and Plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4X, crypto, and beyond.

Starting point is 00:37:35 With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity. You'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited, risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit plus500.com to learn more. Trading in futures involves risk of loss and is not soon. for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion

Starting point is 00:38:21 dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested in a 7.9,000,000,000,000 97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results,

Starting point is 00:39:11 current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show.

Starting point is 00:39:32 I find nuclear quite interesting because, you know, you only have a certain number of options when it comes to the base load power source because when it comes to solar and wind. The wind isn't always blowing and the sun isn't always out and, you know, demand fluctuates throughout the day. So maybe you could speak more to nuclear and why you believe it makes so much sense for these governments to invest in it due to these reasons related to the base load. The first thing I should say is if we are interested in green energy, the lowest generation of CO2 per unit of power produced lower than wind, lower than solar is nuclear. And yes, we have a nuclear waste that we have to deal with, but the nuclear waste is a small amount. I mean, it's not

Starting point is 00:40:13 that large, but there are two big concerns about nuclear. One is the waste, what will we do with it? And the second is the safety, if you have a meltdown. So these SMRs are actually, you know, there's technologies where it would make them safe in terms of much safer in terms of not having the meltdown, you know, kind of risk. And the nuclear waste is something that we'll have to come with a solution, you know, but bearing it deep underground or, you know, putting it into space or in the bottom of an ocean. There are many solutions, but there is no Pareto-efficient frontier where we can go to green technologies. And, you know, there's going to be all these batteries to dispose off after these electric cars have run their course. There's going to be all this old solar modules to dispose of,

Starting point is 00:40:55 all these wind, all wind turbines to dispose off. There is no, we just, you know, stand in the sun and the energy comes to us. There is no pure green. So each one has its own, you know, side effects, if you will. And nuclear has its own, but I think those are very manageable, and nuclear remains a green energy source. And I believe with these small modular reactors, we have a real room for it. You know, the holy grail, to be clear, people talk about it, and I've done some work looking at it, is nuclear fusion. Nuclear fusion, there is no waste and it's perennial energy. But people keep talking about nuclear fusion, as yet we haven't yet solved the technical problems. But if you ever got it, which could be by 2035, 2040, then all of our problems would go where we could have perennial

Starting point is 00:41:41 energy from nuclear fusion. But I'm not holding my breath on that in my investment time horizon. So keep an eye on it for the future of humanity. It could be the panacea, but it's a long time away. In uranium, the uranium prices had a pretty good run up in 2023. You had one of the bigger producers announced that it's looking like they were going to fall short on production. And then your letter also highlighted a bill that passed in the House that would effectively ban uranium imports from Russia beginning in 2028. How do you see the market developing from here in light of that recent run-up? Well, I think, you know, there's a lot of political challenges. 40% of the world's uranium comes from Kazakhstan. Much of that transits through

Starting point is 00:42:29 Russia. Russia processes about 25, after you produce the nuclear, the uranium, you take it to a processing facility where it's processed so that it can be then converted into a material that can be then used to build the rods that go into nuclear reactor. So there are multiple stages. About 25% of the West's processed uranium is in Russia. And so we're trying to reduce our reliance on Russian oil, Russian gas, Russian, you know, the metals we just came out with a rule a couple of weeks ago that they can't supply their metals into Comax or into LME. And so the one remaining area where Russia is still supplying the West is a significant portion of our uranium, you know, process supply. And I think that the big challenge for

Starting point is 00:43:20 everybody is how do we, how do we we wean ourselves off the Russian supply? And it's, It's a dirty little secret that Washington doesn't want to touch it with a barge pole, but there are moves afoot now to give some time till 28 for Western development of processing capability and more mine capability to reduce, you know, find routes from Kazakhstan, via a different route than through Russia. There are challenges, but we're trying to, I think the government is, or the politicians are trying to give time to adapt that, but that remains a risk. I mean, I'll give you one example. Five percent of world's uranium supply comes from a tiny little country in West Africa called Niger, NIGER, NIGER, as is pronounced. And they just kicked out the French.

Starting point is 00:44:06 They're telling the U.S. to remove its base, and the Russians are taking over, and the Russians are now in charge, and so mine is no longer supplying. It's probably going to be redirected to supply to China, whatever. It's going to create challenges for the West. So there are. challenges around the world in nuclear supply, in uranium supply. We want green energy, but we have to find, you know, more friendly sources. And that's a big challenge. I was also curious. I know some investors to get exposure to uranium, a lot of them, I think, just purchase a Sprott uranium trust that just holds the uranium itself. And I'm sure others invest in miners. How do you think about getting allocation to that sector?

Starting point is 00:44:52 I think that investors are getting exposure through either, like you said, Sprott, but Sprott, you know, used to trade parity or slightly above. Now it trades at, you know, 5 to 10, 11% premium. There's another one, yellow cake listed in London, which trades at a 10 to 15% premium. So those have kind of lost their luster a little bit. And what people are now finding is more interest in, you know, buying some of the miners, especially some of the development miners. So one of the ones in Paladin in Australia has a mine in Namibia that had been shut down for seven or eight years. The company had gone through bankruptcy. It was producing earlier seven, eight years ago.

Starting point is 00:45:31 And now it's restarting and it's just restarted. And they just put out a release that they've started to first production has just, you know, gone through the process through the mill. And that's been a great performer. But there are other companies, chemical is a big one in Canada that produces uranium. Because Adam Prom, which is the one that produces 40% of the world's, uranium that comes from Kazakhstan is kind of, you know, there's a lot of political risk involved with that. There are other smaller development companies in Canada and US. And so we look at a basket of all of these and these have all, you know, benefited from this in addition to Sprott. And so, you know,

Starting point is 00:46:08 I'm not recommending any one name because these are all small liquid names, but I'm just pointing out that, you know, in uranium, other than chemical, which is a large cap liquid company, you have to dig deep to understand what are the other options and none of those options are particularly large or liquid, but each one has some characteristics of mines that are under development or most of them are development stories not currently producing because a big two producers right now are Camaco and Kazanprom and there are not many other public options available. I mentioned earlier I found it so interesting how you have investments in all these different types of sectors. I was curious to get your take on if there's any sector or

Starting point is 00:46:50 area that really just kind of shines relative to the others in terms of conviction and the opportunities you're seeing. Is there one or two sectors where you think there's just really good opportunities there? Or you just think, you know, overall, a diversified approach and just sort of investing with these broader themes is the way you're thinking about it? Well, I'm not putting all my eggs in one basket. I love uranium, but I have, you know, a portion there. I love offshore related companies. So, you know, everything from a supply boat company to offshore drillers to one company that does kind of offshore construction support services, equipment and services. I like the idea that this is a sector where if there's majors that are

Starting point is 00:47:32 spending money, that's where most of the opportunities that they're seeing for, you know, meaningful difference. And there is no new supply coming on. I have high conviction that the supply side is structurally constrained because nobody's going to build new assets. So I love areas that where I can stop worrying about supply in cyclical industries, you almost never get that. Here, I can almost stop worrying about supply, and I just have to worry about the demand.

Starting point is 00:48:00 And the demand, as long as it's even moderately growing, things are going to be in great shape. And so that's an area that I love for the fact that there is no supply growth. In uranium, I like the fact that it's going to take four, five, six years to develop new uranium mines of the demand is there. So, you know, again, we talked about at the beginning

Starting point is 00:48:17 about cyclical industries. I want to understand what the demand is doing and how quickly can supply screw it up. And when I see sectors of supply can't screw it up. And, you know, metallurgical coal is an area where India is going to need more steel. Southeast Asia is going to need more steel. And we can't do our green stuff without steel. And most of these developing markets don't have a large amount of scrap steel to run electric arc furnaces like we can. So they have to use iron ore and met coal. And yet coal is a four-letter word. Nobody's investing. And so we think of metallurgical coal as another area that's interesting. So these are some of the areas where I see

Starting point is 00:48:49 supply either not happening or going to take a long time to happen, and demand has a good trajectory where I don't see how we suddenly stop using steel or we don't go down the nuclear path or, you know, the offshore drilling suddenly dries up. These are areas that I find great opportunities. But again, I'm not putting my all in one basket. Tomorrow, if another Fukushima happens, right? I mean, I hope not, but that's a risk. Right. So let's put the risks on the table. If Fukushima happens, something happens. I don't think there's a, you know, the steel bridge collapsing in Baltimore means more demand for steel. So I'm not word on the steel side. India's not going to suddenly say, well, you know, let's go back to living in huts.

Starting point is 00:49:28 We don't need that infrastructure. That's not going to happen. And nuclear, you do have a risk. In the rest of it, you know, you don't have that risk. So coal is typically thought of as a very dirty energy source. And you mentioned met coal there. I was curious if you could just describe what met coal is. and how it sort of plays into your thesis here.

Starting point is 00:49:51 So, you know, coal comes when you drink coal from the ground. You don't know before you dig what type of coal you'll get. So you have the colorific value and the ash content and the sulfur content of all different coals from different coal mines differ. And the lowest grade, you know, coal is used in power plants. And, you know, you have a very low grade coal. Then you have high ash content coal that comes. comes from Indonesia, India, other places that is also used for power generation.

Starting point is 00:50:20 And then you have the highest great coal, which is called metallurgical or coaking coal, and that is put in a coke furnace to produce coke, and that coke is then put in a blast furnace along with iron ore, and that coke provides the heat and the ceiling properties and to be able to take that iron ore and melt it and produce steel slag. So that metallurgical coal is the highest quality, if you might call it that colorific value coal. And that is found in rare places. It's found in parts of the U.S. Some of the coal mines, it's found in Australia.

Starting point is 00:50:57 It's found in Mongolia. And very few other places do you find smatterings of that high quality coal? And, you know, the largest producer of met coal in the world, Ph.P. Has been running down its production of Western metallurgical coal. the second highest, largest producer, tech out of Canada is selling its met coal mine to, it's getting out to get more green, it's selling its met coal mines to Glencore, and the third large Western producer Anglo-American is also running down its met coal mines. So yes, Mongolia has grown its met coal production, but the U.S. and Australia, rest of it is not growing.

Starting point is 00:51:33 So, you know, there is one new coal mine coming on in Alabama, which I visited a few weeks ago, and was very interested to see that because the world is not doing that luckily, but that one will be golden because it's the only new one coming on in the next few years and they're going to, I think, be very well positioned. But the reality is that this is a key commodity without which steel, you make steel two major ways. You make steel in an electric arc furnace where you use electric art with cheap electricity and use scrap steel. And we have a lot of scrap steel because, you know, we are developed economy for a long time. We have a lot of scrap. In a developing economy where you have small infrastructure built and you're building out much more, you don't

Starting point is 00:52:15 have enough scrap steel to be able to, you know, provide enough steel for your growth. So you go for the blast furnace route. And that's what we're seeing in India, Southeast Asia and, you know, probably in the future in Africa. So that's why I like Metco. So in light of all this talk on the energy transition, I'm curious to get, what are some of the most important or most interesting data points you're going to be watching over the next year that are really going to move the needle on what you're invested in? Well, I mean, I think the data points come at us, you know, every week, every month, every year and then with the greater, but you know, the one interesting data point that's been coming at us recently, in addition to the data centers,

Starting point is 00:52:57 is the move away from electric cars to hybrids. It's a very interesting point that even in China, which has been a very fast adopter of electric cars, you're now seeing more hybrid growth than you're seeing what we call BV battery electric vehicles, pure electric. And Elon Musk was complaining about it, but the reality is that consumers prefer the fuel efficiency of a hybrid, but the range anxiety removal of also of a hybrid, right? So that's why I think that, again, from a oil demands for those who were riding the epitaph of oil demand, that's a very interesting data point. that is coming to four.

Starting point is 00:53:36 The other interesting data point is China has been a major headwind on metals demand. And looking at China, we're trying to see the housing market. It was the mother of all bubbles. That mother of all bubbles has blown up where people own five, six houses, and that was a form of investment. And there's so many empty houses and there's so much oversupply that housing starts have fallen by 30 to 40 percent for three years in a row. our 2008, 2009 looked like a pip squeak compared to what it's going on in China right now.

Starting point is 00:54:07 That's a major headwin for all metals. China's built a lot of steel capacity for this. They're exporting that steel, but everybody is not putting up tariffs, so they're going to have to shut down that steel capacity because nobody wants to shut down their own steel industry. So, you know, watching China data to see when things stabilize, China is still the second largest economy in the world. It's the second largest consumer of oil.

Starting point is 00:54:29 it's a number one consumer of steel iron ore, seaborn iron ore. It's a number one consumer of coal, even though it's self-sufficient. It's the number one consumer of copper. It's a number one consumer of aluminum. So there's a lot of things in which we have to watch what's going on with China just to see it's not completely blowing up. And then, you know, the U.S. recession, U.S. demand, Europe has been in a doldrum for a couple of years. Is that coming back? So the macroeconomic factors.

Starting point is 00:54:56 And then, you know, on the supply side, we look at all the supply. supply data points on oil, on gas, on uranium, whether the Kazakhs are going to continue to disappoint. So, you know, each one has its own little subsector that we watch. So it's not one big data point, but there are some important ones. Absolutely. And when I think back to what sort of happened after the GFC, the rise in shale production, I think, sort of seemed like it took a lot of people by surprised and, you know, led to that down cycle being much longer. than many might have anticipated. With that in mind, is there any breakthrough technologies that might sort of blindside investors in this cycle? Or what sort of things might lead investors to

Starting point is 00:55:42 maybe be too optimistic on energy today with regards to like a breakthrough type technology? I mean, there's always a risk. I mean, I couldn't have answered this question with any intelligent answer back in 2007, eight in terms of shale. I had no idea that was coming. So when I think about it, there are always going to be surprises. And I think the reality is that, you know, battery technology is a chemistry problem. It is not a Moore's law problem, right? It's more akin to Murphy's law than Morse law in terms of fixing some of these challenges with the supply chains. But if there is any breakthrough in the new type of, you know, sodium battery or, you know, molten salt battery, there's been many discussions, sulfur batteries, something that allows for much cheaper,

Starting point is 00:56:28 of power from wind and solar, and that makes them much more competitive with natural gas, with coal, with other sources, and suddenly we can do a lot more. The realities we'll have to come back to the point that people are not putting tariffs on import of solar modules from China. So it's not just a one-directional thing, right? We also have the strategic element that, yes, we can get a lot of cheap solar, but if we want to increase our alliance on China, but a breakthrough in batteries would be a very important element off that surprise. And the other more pie in the sky, but much more fundamental, in my opinion,

Starting point is 00:57:04 long term, is something like nuclear fusion, which I talked about earlier, something like that would be. So I think those would be the two biggest. From a finding copper, you know, there are some technologies that might help us do a better job at finding and refining copper. But I don't see those as breakthrough. Maybe we'll find a lot more than we found recently and we'll be able to meet the challenges, but it's still going to take a while. On oil and gas, I don't see anything, but I didn't see shale. So take my word for what it's worth. I was clueless about shale in 2007, so I may be clueless about the next technology coming along. But when it does hopefully, you know, remember, shale didn't happen on day one. It took from 2010 when we started shale

Starting point is 00:57:43 oil drilling till 2014 when we had the old Chuck's moment where, you know, oil prices fell apart. So it's not like any new breakthrough produces energy like this. It'll take a couple of years. But being early on seeing that is going to be important. Wonderful. Well, thank you so much, Arvin. This was great. So many interesting things to think about and consider here and really appreciate you joining me on the show.

Starting point is 00:58:08 Before I let you go, how about you give a handoff to the audience to how they can learn more about you, Geosphere Capital, and anything else you'd like to share. Thank you, Clay. Thank you for the interview. I really enjoyed the conversation. and for investors who want to learn more, they can visit our website at Geospherecap.com. We are a hedge fund so we can only take qualified investors. But on Geospherecap.com, we do have links to some of the other kind of pieces we've been involved with in terms of podcasts and publications for people who want to look at that.

Starting point is 00:58:40 But if they need to and are interested in learning more about Geosphere and investing with Geosphere, they should reach out to IR at Geospherecap.com or Evan at Geospherecap.com. But we are not allowed to advertise and we don't advertise. We just, if somebody is interested, they'd still have to be qualified. Thank you. Great. Thank you, Arvin. I'll be sure to get that linked in the show notes.

Starting point is 00:59:01 Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. any decision consultant professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP631: The Bullish Energy Cycle w/ Arvind Sanger

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.