The World of Bits Needs Electricity
The fall of oil and the rise of gas and uranium.
In the World of Things, oil was the most important monopoly
The history of oil has been about monopolies, from Standard Oil to the Saudi Crown, whoever controls the oil wields an enormous influence in the world of things. The history of oil has been an ongoing tournament.
At the end of the 1980s, the competition for oil production hegemony between the US and the Soviet Union was fierce. In 1998, with the Russian default and shrinking US oil production, Saudi Arabia emerged as the clear winner of the times. By 2008, the control was split between Saudi Arabia and Russia. By 2014, the game changed yet again, as the US shale oil boom launched them into pole position on the oil production front.
There are many strategies and methods that can be undertaken in the fight for dominance in the oil market. One is by triggering a dramatic change in price at the moment when a shock hits the demand. This helps create even more pressure on the competition. Russia knew the vulnerabilities of the shale oil industry, and stockpiled enough reserves to wage a 2-year price war. Game theory suggested that Saudi Arabia would trigger a price war, as a tit for tat retaliation against Russia. However, the major hit was felt by the US oil shale industry.
The winner of the competition is not only the one with cheaper supply but also the one who controls the transportation infrastructure. The US has a navy that could ensure the supply of oil in the Indian Ocean. Russia has the pipelines to flood the Asian markets with crude. The biggest weakness of Saudi Arabia is their transportation capabilities.
The World of Bits Requires an Enormous Amount of Electricity
The smart cities of the future, robots in factories, electric cars and even Bitcoin all need a lot of electricity. Our hypothesis is that the move from globalization to localism will create a massive shift from consumption of primary energy (oil and gas) to an increase of consumption in secondary energy (electricity). That means less oil dominance in our energy demand mix.
Source: Lawrence Livermore National Laboratory.
What we consider to be a huge game changer is the fact that electricity and natural gas (LNG or other) will now more than ever before, compete directly with oil in providing energy for transportation .
Source: BP Statistical Review Global Energy
The Shift From Oil to Gas = Geopolitical Instability in the Middle East
Source: Macrowise.
OPEC is no longer the cartel that matters most. There is a new, emerging cartel built on gas. Iran, Qatar and Russia together with Turkey could have a hegemonic position in gas production and transportation in Eurasia.
Source: Macrowise.
Likewise, during the 20th century, there was a transition from coal to oil created largely by WWI and WWII. In the 21st century, there is a transition from oil to gas. This transition could create even more turmoil in the Middle East, especially because Saudi Arabia is not one of the important gas producers.
Low prices in oil and the transition from oil to gas will create a bull market in geopolitical risk within the region.
Uranium: the game changer.
Electricity production currently comes from approximately 38% coal, 23% gas, 16% hydroelectric, 10% uranium, 4% wind and 2 % Solar. Gas appears to be one of the safest in terms of death rate and air pollution, but its greenhouse emissions are still quite high. Since 2008, nuclear energy has been in bear market, but we could be approaching a period where cost efficient nuclear energy production is more feasible.
Source: OurWorldinData.org
GE-Hitachi seems to be an answer to that:
What is very interesting is that uranium has been in a bear market since 2008 and is not accounting for any technological disruption that could increase demand for nuclear power.
Source: Tradingview.
Uranium production is far more oligopolistic than oil or gas.
Source: Katusa Research
Due to COVID-19, many mines are closed, meaning that just a little increase in demand will have a tremendous impact on the price of uranium.
We believe that one of the ways to remain long in the world of bits, is by being long uranium or uranium mining companies.
In our premium subscription some ideas of how to play that.
Guillermo Valencia A.
Co-founder Macrowise
April 25, 2020
Brazil