By Eric Peters, CIO of One River Asset Management
Utopia?
“We added solar and wind like it was going out of style,” said the CIO of the well-regarded US fund. “We have ample land, wind in the middle of the country.” Federal subsidies make electricity almost free. “But it’s a Catch-22 where we’re adding capacity, but reliability is declining.” In Feb 2021 Texas suffered a catastrophic electrical grid failure. Renewables went offline when they were most needed. Gas turbines froze too. 4mm homes went without power. Hundreds died. “Now policymakers across the spectrum seem to be acknowledging the need for both renewables and hydrocarbons.”
“Back in 2018 there was a utopian vision,” continued the same CIO.
“The economics were there, the physics allowed it, all we needed was political will.”
Net zero could be achieved painlessly, while boosting growth.
“But we’ve learned wind turbines frequently break, and don’t recycle well. They kill lots of large birds. Electric cars take a year to repair when you crash them.”
The residual values are lousy when you sell them.
“So now we’re asking better questions and considering the true costs and benefits. The tradeoffs. We’re growing up.”
“Asking good questions is always better for society,” said the CIO.
“There is pushback on the dogmatic view that the future of the world hangs in the balance, and those taking the most extreme positions on the matter have been undermined by an unwillingness to consider nuclear at any price,” he said.
“European banks will not fund hydrocarbons, it’s almost a religious belief at this point. But we will fund them because they’re a vital part of tomorrow’s energy mix and we can earn double-digit returns doing so.”
“If we want to build BMWs using windmills, it’s going to cost a lot to do it, and historically that’s the kind of thing the government must subsidize,” said the CIO. “It’s a societal good, like building parks in cities.” It is not a purely economic decision from the private sector’s standpoint. “A chip factory is being built in Taylor Texas with $6bln in Federal subsidies. Samsung is investing more than $30bln. That’s a societal good too. Because for security reasons, we may all sleep better at night buying some of our chips from Taylor instead of Taipei. But they may well cost more.”
“Ultimately, these decisions are about whether we’re willing to settle for something less good in exchange for something more reliable,” continued the CIO.
“If we want something as good and more reliable, it’ll cost more money. A way to think about these increased costs is a form of insurance.”
Insuring our children’s futures against the risk of cataclysmic climate change. Insuring our access to advanced chips against military conflict over Taiwan.
“Thinking through long-term risks is always a healthy exercise, and insuring against them sometimes requires government funding.”
“Europe made some naïve choices when they went through this exercise,” he said. “Germany shut all its nuclear power plants.” Which required it to increase its dependency on cheap Russian gas, strengthening Putin’s hand, which he then played in Ukraine. “They were going the opposite way; they were essentially selling insurance instead of buying it.”
This of course, is why it is vital that societies ask good questions and consider the true costs and benefits of big decisions.
“And the consequence is that Europe is deindustrializing. It’s stunning.”
