Investment Idea

Energy is the economy

Mikael Syding
16/03/2022 | 4 min read

In less than a month, the price of brent oil rose from $ 90 to $ 133 and down again to below $ 100 a barrel. Energy prices in southern Sweden have broken new records, as has the price of diesel. Russia's attack on Ukraine and the resulting sanctions have shaken the energy markets considerably.

In less than a month, the price of brent oil rose from $ 90 to $ 133 and down again to below $ 100 a barrel. Energy prices in southern Sweden have broken new records, as has the price of diesel. Russia's attack on Ukraine and the resulting sanctions have shaken the energy markets considerably.

Europe is making efforts to find alternatives to Russian oil and natural gas, but it is not easy when Germany has shut down several large nuclear power plants in a short time. In Sweden, it has even gone so far now that a small private player, Kärnfull Next, with roots in the electricity company Kärnfull (100% nuclear power) on Monday 14 March announced that it intends to order an SMR reactor from Hitachi with 300 MW power. And at the other end of the energy market, Russia is exploring the possibility of selling oil at a discount to India, to keep the economy afloat despite heavy sanctions from large parts of the Western world.

Energy is the economy.

Energy keeps our houses warm, cars, trains, planes and boats in motion, the conveyor belts in our workshops rolling, the mines digging and process industries such as paper and metals running. Without energy, there will be no manure for agriculture or something that drives combine harvesters and tractors. Without the help of external energy, humanity is just a tribe of hunters and gatherers in square huts. Today, at least 75% of the energy comes from the combustion of coal and oil and another part from the combustion of other biomass. We simply burn up to about 80% hydrocarbons to keep us warm, make our toys and move around them and ourselves. Thus, oil and oil companies are still the world's most important economic factor, even though they make up only a small fraction of the market capitalization.

It is good that environmental activists put the dangers of climate change on the agenda, but an undesirable effect is that investments in the oil industry have become too low too soon. And when external shocks such as a cold winter or a war reduce the supply of oil, it is the most desperate buyer who decides the price. If you can, you would rather pay as much as a thousand kronor per day if it is required to avoid freezing. And even SEK 100 per liter of petrol is rational if the car is the only way to get a few miles to work. Companies will find it more difficult to stay profitable if the energy price reaches above certain threshold levels, but consumers and workers have no alternative. The war in Ukraine may be protracted, but it is still not decisive for oil prices in the long run. It is more significant that investments in oil exploration do not have political support, which is why the shortage becomes permanent. Oil production risks falling faster than demand, because the investment cycles for solar, wind and nuclear power are so slow. At the same time, the situation is driving such investments. This means that there will probably be a continued very strong market for both oil and uranium. At the same time, the expansion of solar and wind turbines continues, but higher prices for all kinds of metals and for energy to build the parks can slow down growth somewhat.

We are now seeing oil prices and oil stocks dipping. It is probably a brilliant situation to buy exposure to the whole foundation of our modern economy, a foundation that once again seems to be in short supply due to ineffective policies. There is still no alternative to oil and if it is cold, dark or windless, you have to pay what it takes to be the one who gets the available oil. This creates a fantastic market for existing oil companies such as Conoco Phillips and Chevron.

At the same time, one should not forget how quickly public opinion is now turning in favor of nuclear power - the only really stable source of power that can replace the role of fossil fuels as a base for heat, transport and even electricity. As I said, the uranium sector is facing a perfect storm of rising prices and news about investments and production (see previous article: Despite the fact that uranium is the only source of energy that can replace oil dependence for at least a couple of decades, the entire uranium sector is only valued at a few tens of billions of dollars.

With high inflation, rising interest rates, increasing geopolitical turbulence, lack of access to oil and gas and a focus on the transition to more sustainable energy sources, a huge advantage is created for almost all parts of the low-value energy sector compared to high-flying technology companies, regardless of administrative software in the cloud or connected spinning bikes. As mentioned, the benefits apply to oil and uranium companies, but also to the pure raw materials.

This also applies to companies active in the electrification of the economy, such as copper mines, silver mines, rare earth metals for electric motors and wind turbines, and graphite for electric car batteries. 

There are thus many roads to Rome in terms of energy and electricity. As long as you focus on energy solutions, ahead of hyped program codes that are traded to fantasy multiples on sales without making a profit, I think you will do very well in the next 12 months. This is true regardless of whether the Fed comes riding in as a white knight to save a crashing corporate bond market this fall or not. This time, renewed stimuli combined with burning inflation and challenges for the global freight and supply chains are expected to benefit real assets and energy that are important in the near future over dreams of a futuristic tech Nirvana.

Karl-Mikael Syding


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