This special report provides (1) a deep dive into why I believe Energy stocks will be extremely profitable for years to come and (2) the first stock recommendations for our new Blend Portfolio.
In 2022, Energy was the only sector with a positive performance, returning 30.7% on the year. Utilities ranked a dismal second place by losing 8.6%. Every other sector incurred double-digit losses with Communication Services dropping nearly 40%.
It’s tempting to believe that Energy’s bull run is over.
- The sector is down almost 3% since the start of 2023.
- The market no longer appears that concerned about Russia’s invasion of Ukraine much less the possibility of other geopolitical conflicts.
- The Northern Hemisphere is coming out of winter, which means there won’t be as much need to heat homes.
- Tesla is rallying again, and auto companies continue to double down on electric vehicles.
Combine all this, and it seems like the best days of the Energy sector, especially companies focused on fossil fuels, are behind them.
Or are they?
A Two-Part Report on Energy and Energy Stocks
Fair warning…this is a very comprehensive report. I realize that “comprehensive” is just a snobby way of saying “ridiculously long,” but this was by design. If I’m going to make bold—and possibly unpopular—claims about energy, you deserve to know how I arrived at my conclusions.
Due to the length…err…comprehensiveness…of this report, I’ve broken it into two parts.
In Part 1, I explain why I believe the Energy sector represents an incredible investment opportunity.
In Part 2, you’ll learn about four stocks that have the potential for triple-digit gains if my Energy hypothesis is correct.
Table of Contents
- Why Energy Stocks Will Boom for Years to Come
- Life as we know it depends on fossil fuels…at least for now.
- Fossil fuels: just the facts, please.
- Even if we don’t like it, the world runs on oil.
- Energy powered the explosion of societal advancement.
- Energy gives you the time and opportunity to innovate.
- The Global Oil Supply is in a Dangerous State
- What happens when we factor in war-related effects?
- Not even OPEC can solve the problem.
- U.S. reserves are also in trouble.
- Next Up: Four Energy Stocks that Could Soar When Oil Prices Rise
Why Energy Stocks Will Boom for Years to Come
Before I explain why the Energy sector represents a massive investment opportunity, let me first say what this report is NOT about.
- I will not discuss climate change. My desire to invest in Energy stocks has nothing to do with that topic.
- This is NOT political. I’m not backing any politician or party, or their respective agendas.
- This report is not a value statement about Energy companies or fossil fuels. In other words, I’m not making a moral case for or against oil, coal, natural gas, or the companies that profit off those fossil fuels.
It’s not my place to tell you how to feel about climate change, politics, or whether a business is morally good or bad.
My sole purpose for writing this report is to share why my research has led me to believe that certain companies within a certain sector represent enormous profit potential. That sector happens to be Energy.
With that disclaimer out of the way, let’s dive in…
Life as we know it depends on fossil fuels…at least for now.
While some may argue against investing in companies focused on oil, gas, and other fossil fuels due to their negative impact on the environment, these businesses are necessary in the short term.
I recognize the need to phase out fossil fuels. In addition to their negative environmental impact, they are a limited resource. By definition, we can’t tap them forever.
The fact remains, however, that we do not have an alternative energy source that is capable of replacing fossil fuels right now or in the near future.
I’m not just talking about oil either.
Dan Ferris, editor of the Ferris Report, summarizes how much of our lives are utterly dependent on fossil fuels:
In his book, How the World Really Works, scientist and author Vaclav Smil ranks four materials as the essential pillars of modern civilization…
- Ammonia
- Plastics
- Steel
- Cement
All four substances are made using fossil fuels. Without fossil fuels, we wouldn’t have cement, steel, plastic, or ammonia… the critical elements that build our cities, transportation systems, products, food supplies—and really, our entire standard of living.
No substitutes are available in the necessary quantities and won’t be for a long time. Without these four materials, your life would be shorter and a lot harder.
Food grown with nitrogen fertilizer made from ammonia feeds 40% to 50% of our global population. That means half of the 8 billion people on this planet wouldn’t exist without the mass production of ammonia.
Durable, low-cost, lightweight plastics are ubiquitous in the modern world. It’s virtually guaranteed that you’re surrounded by them right now.
Steel is the most widely used metal in the world. Cement is the most widely used man-made material in the modern world and second only to water as the most consumed resource on Earth. Modern cities and mass transportation are impossible without them.
Even “green” products like electric cars, solar panels, and wind turbines require energy and materials that are derived from fossil fuels to manufacture them. Here are just a few examples:
- Electric cars: Electric car batteries require rare earth metals like lithium, cobalt, and nickel, which are mined using fossil fuels. The manufacturing process also requires energy and materials that are derived from fossil fuels.
- Solar panels: Materials used in solar panels, such as silicon, require a significant amount of energy to produce, which is often generated using fossil fuels.
- Wind turbines: The manufacturing of wind turbines requires significant energy, much of which is generated by—you guessed it—fossil fuels. Additionally, wind turbine blades are often made from composite materials, which are derived from… fossil fuels.
Fossil fuels are also used in the production of a wide range of chemicals (e.g. solvents, dyes, and synthetic fibers) and industrial products like lubricants, waxes, and greases.
Fossil fuels: just the facts, please.
Based on the information I listed above, it may seem like I’m arguing for the continued use of fossil fuels.
I’m not.
I’m simply describing the facts of our world today. Simply put, human beings need fossil fuels to survive, and that isn’t going to change in the near future.
You don’t have to take my word for it though.
The Energy Information Administration (EIA) predicts that global energy consumption will increase through 2050 as a result of population and economic growth.1
Unfortunately, politicians and others have created the perception that wind and solar renewable energy have already solved most of this problem.
That is patently false.
The reality is that we’re going to need oil and gas for at least another decade.
The chart below is from energy expert Erik Townsend, and it visualizes this reality.
At the end of 2021 (the latest year data is available), three fossil fuel sources combined to supply 85% of the total energy supply. Coal is in gray, oil is in blue, and natural gas is in purple.
The combined energy we receive from every wind turbine and solar farm ever built still provides less than 2% of human beings’ total energy consumption. Townsend summarizes the problem this way:
That’s such a tiny percentage that it’s hard to even make out wind and solar at the top of the chart. Wind is shown in green and solar is shown above it in orange, but these are such tiny slivers on the chart that they’re barely visible. And that’s after public policy has aggressively subsidized building out wind and solar energy capacity for more than two solid decades. Even if we add in hydropower and other renewables, total energy supplied by all renewables is still less than 5% of total energy demand. We’ve only just barely begun this energy transition, and unfortunately, we’re still a long way from phasing out fossil fuels.2
Even if we don’t like it, the world runs on oil.
We can’t just stop using fossil fuels without replacing them with a better alternative. And, as the chart above shows, we’re nowhere near ready to do that.3
In fact, if we quit using oil today, we would cause billions of people to die.
That’s not hyperbole either.
We simply cannot feed the 8 billion people alive today without modern farming equipment, which still runs on Diesel fuel. If we stopped using oil before replacing it with a clean alternative, billions of people—especially those living in poverty around the world—would starve.
That’s on top of the fact that nearly every product you use in your everyday life couldn’t have been made or delivered without consuming energy provided by crude oil.
Energy powered the explosion of societal advancement.
From an industrial and technological perspective, humanity has made much more progress in the last 200 years than it did in the previous 500.
Why is that?
While most people would credit technology, Townsend digs deeper. He notes that it was the increase in the availability of cheap and affordable energy that made the development of new technology possible.
The industrial revolution couldn’t have happened until it was enabled by the invention of the steam engine. The newfound ability to convert the potential energy contained in coal into physical motion that could be harnessed to accomplish work and automate previously manual processes was the turning point in history which everything else followed…That’s when the rapid-pace advancement of human society over the last two centuries all started.
The age of oil began in 1859, when Edwin Drake drilled the first oil well in Titusville, Pennsylvania. The discovery of “rock oil” was an even bigger deal than the steam engine. Petroleum and the abundant and relatively cheap products refined from it such as gasoline, diesel fuel, and now jet airplane fuel, quite literally changed everything. The availability of abundant energy enabled the inventions of everything from the automobile to the airplane to mechanized farming equipment. Advancements such as modern cities, public infrastructure, and high-rise buildings would never have been possible without modern heavy construction equipment, which is powered by diesel fuel refined from petroleum. Societal complexity is, quite literally, a function of the amount of abundant, affordable energy available to grow the economy.
Energy gives you the time and opportunity to innovate.
I’m guessing that you don’t work on a farm or have to produce all your own food. That’s only possible because energy derived from oil powers modern farming equipment. This lets just a few farmers produce as much food as hundreds of farm workers did two centuries ago.
It’s also the reason you’re free to pursue education and other careers without starving to death.
Cheap and abundant energy was the catalyst for the rapid pace of innovation over the last 200 years. Instead of producing their own food, people now had the time to pursue education and other careers.
Energy was the key. It’s what led to the advancements that we have all enjoyed across healthcare, technology, and countless other areas.
The Global Oil Supply is in a Dangerous State
There isn’t enough oil supply for the global economy to recover from recession and return to its pre-pandemic growth trajectory. That lack of supply could cause oil prices to skyrocket, which would crush economic growth.4
After oil prices went negative during the pandemic, they rose to their highest level in five years by the summer of 2021. That was long before Russia’s February 2022 invasion of Ukraine.
Those rising prices were a warning that we don’t have enough oil supply to meet demand. And that’s before considering war-related effects.
Oil demand in 2022 slightly exceeded 2019 demand, despite China still being locked down and international air travel not yet fully recovered. To resume the pre-pandemic economic growth trajectory, we need more oil than we consumed before the pandemic…and we just don’t have it.
What happens when we do factor in war-related effects?
As I wrote in the Feb. 11 edition of “Over the Weekend,” Russia has already shown a willingness to weaponize energy. In retaliation against Western sanctions, the country announced it will cut its oil production by 5% (500,000 barrels per day) beginning next month.
But what happens if Russia gets even more aggressive?
As tensions continue to grow between Russia and the U.S. (and NATO), Townsend paints this scenario of what that escalation could lead to:
If Russia wanted to weaponize oil prices as a tool of economic warfare, they might simply withhold half of the 8mm bbl/day [barrels per day] they normally export, taking 4mm bbl/day off the global market. OPEC clearly doesn’t have sufficient spare capacity to increase production by 4mm/day. At first, it’s tempting to think Russia could never afford to withhold half its oil exports because of the revenue loss that would cause. But if doing so resulted in a doubling of the global price of crude, they wouldn’t lose anything!
When Russia announced a 5% production cut a couple weeks ago, oil prices and energy stocks jumped in response. Imagine the chaos that would ensue if the country announced a reduction of 10 times that amount!
Not even OPEC can solve the problem.
In the quote above, Townsend mentions OPEC. That’s the abbreviation for the Organization of Petroleum Exporting Countries.
Since its inception in 1960, OPEC has played a key role in determining the cost of energy. For decades, OPEC members agreed to produce less oil than the maximum amount possible in order to avoid flooding the market with too much oil and collapsing prices.
The difference between the amount of oil actually produced and the maximum amount of oil that could theoretically be produced is called spare capacity.
OPEC members don’t reveal their exact amount of spare capacity because it gives them pricing power. The more spare capacity they have, the more power they have to control the global price of crude oil. From a negotiating standpoint, it never made sense for OPEC members to reveal the details of their spare capacity limits.
Warning signs from OPEC.
In recent years, however, most OPEC members have consistently failed to meet their production quotas. In other words, they’ve been producing less oil than they’re allowed to produce under the OPEC quota system! This means that they’ve completely run out of spare capacity and are already producing as much oil as they possibly can.
Interestingly, the language used in OPEC press briefings changed in 2022. Instead of talking about quotas, they now use the phrase “targets.” This change in terminology suggests that they’re struggling to produce as much as the target, rather than restraining themselves from producing beyond the quota.
Saudi Arabia and United Arab Emirates are the only exceptions to this trend.
Saudi Arabia currently produces about 11 million barrels per day (bbl/day). In 2022 they announced that their maximum production capacity is 12 million bbl/day. They also said that it would never be possible to increase their production beyond 13mm bbl/day, even with additional investment.
Remember, OPEC members derive negotiating power by overstating their spare capacity, so it’s unlikely that Saudi Arabia’s figures are low. In fact, it’s entirely possible that those numbers are higher than reality.
All of this means that Saudi Arabia has at most 1 million bbl/day of spare capacity beyond current production levels, and even that is likely a stretch. United Arab Emirates also has some spare capacity, but it’s less certain how much.
The bottom line is that OPEC no longer has the ability to limit oil prices by increasing production like they used to. Most member countries have been producing every barrel they possibly can for several years now, and the very few that have any spare capacity, don’t have much. This means the global oil supply is in a dangerously precarious position.
U.S. reserves are also in trouble.
In an effort to contain skyrocketing gasoline prices, U.S. President Joe Biden ordered the release of more than 200 million bbl of oil from the U.S. strategic petroleum reserve (SPR).
The SPR, however, was meant to be an emergency supply to be used in time of war or when foreign imports were otherwise cut off, NOT as a tool to suppress oil prices.
Those SPR releases created up to 1 million bbl/day of supply…but that’s not sustainable.
It hasn’t been run dry yet, but as of early Feb. 2023, the SPR was at its lowest level since 1983, and it was still being drawn down.
To put this in the context of OPEC, the amount of oil that was drawn down from the SPR during the fall of 2022 exceeded the entire 1 million bbl/day spare capacity of Saudi Arabia.
This implies that if the U.S. hadn’t drawn down the SPR, leaving Saudi Arabia to make up the difference, all of Saudi’s remaining spare capacity would have been consumed.
This erosion of oil reserves can have a dangerous, snowball effect on the global economy. Townsend describes it this way:
The consequence of this is that the global economy could get locked in a prolonged recession or even a global depression thanks to unaffordable energy prices. The way this would happen is that as the economy begins to recover from recession, demand picks up for petroleum products. But that small increase in demand causes a gigantic increase in fuel prices, because we don’t have any spare capacity or commercial inventory to buffer the bumps in the road.
Those skyrocketing energy prices could be exactly what crashes the economy right back down into recession again, effectively putting a cap on economic recovery due to lack of sufficient energy supply to allow the economy to recover. In other words, we’ll be suffocating ourselves and not breathing, because our obsession with pretending that wind and solar could solve everything for the last several years led to under-investment in desperately needed oil and gas production capacity.
Next Up: Four Energy Stocks that Could Soar When Oil Prices Rise
That’s it for Part 1 of this special report. My goal was to explain why current conditions and global oil supply levels have led me to believe that Energy stocks will soar for the next few years.
In Part 2, I’ll present four Energy stocks that stand to benefit from the pending oil boom. I’ll also explain how I intend to manage those stocks in The Antagonist Blend Portfolio.
Click here to read Part 2 now.
And to get content like this along with many other features delivered to your inbox, subscribe to The Antagonist now. It’s free!
Thanks for reading Part 1 of this report. I hope you enjoyed it.
Jason Milton
Footnotes:
- EIA International Energy Outlook 2021 Narrative: with projections to 2050
- Energy Doc *new revised version* Episode 1: Why Energy Transition is the greatest challenge humanity faces. Click here for the full narration script.
- The insights in this subsection and the following ones are summarized from Erik Townsend’s Energy Doc narration.
- This section and the following subsections are largely derived from Erik Townsend’s Energy Doc narration. Not all directly quoted material is in quotation marks.
Disclaimer: I’m not a stockbroker or financial advisor. I cannot and do not provide personal investment advice, and The Antagonist should never be interpreted in such a way. The Antagonist is an online financial literacy resource. All materials from The Antagonist are intended for informational and educational purposes only. They are not, nor are they intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested.
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