Brent oil is finally reaching $35. A sustainable – albeit low figure – up from a low in April of just $16 a barrel. A 21 year low. What is the future for the Energy industry? How’s that going to impact both the nation and, specifically, Houston, Texas?
Oil demand is picking up. In fact, when you look at the numbers it’s pretty remarkable. However, these numbers are up from a very low base. OPEC and Russia’s squabble finally has resulted in a truce, and from May 1st they agreed to reduce supply by about 9.7 million barrels per day. No small amount. However, at these prices, the ongoing decimation of America’s shale industry may at some point in the future result in us once again being somewhat – not completely – dependent on Middle Eastern oil. That dependency in itself is a little bit concerning because the Middle East is very much dependent on an $80 a barrel oil, and that may not be back for a long time, if ever. The Middle East is becoming increasingly unstable as it’s been hit by the double whammy of low oil prices and the Covid-19 health crisis that has hit those countries quite hard. But there’s a longer-term story here. Renewable Energy: it actually fared fairly well during the entire downturn and recovery. It’s not just resulting in a supply shock for the industry, but as costs come down the Renewable Energy world, we’re finding the mix is beginning to become significant. In fact, in 2020 the non-hydro renewable energy is 11% of total global energy consumption. That’s not a small number. We’re used to one, two or three percent. Also, red states like Texas that historically have been very pro carbon fossil fuel markets, you’re seeing an enormous growth in their Renewable Energy industry. This is changing the geopolitics and the local politics of carbon pricing.
Now we’ve got a more centrist position because there’s a mix of energy sources feeding the coffers of Austin, Texas. The long-term challenges facing the Energy market pre Covid-19 have really not gone anywhere. This recent experience has been a bit of a gut punch to a fighter that was already somewhat down on one knee. The best play for the Energy industry if you’re expecting continued improvement – and from such a deep, dark position, or low in the market, it’s not an unreasonable expectation – is the ETF by Vanguard: Vanguard Energy (Victor, Delta, Echo – VDE.) This isn’t an investment recommendation, but for those of you who want to bet on an improvement in fossil fuels – probably a fairly safe bet – that’s a great diversified way to address that. But the long-term rationalization of the fossil fuel industry is ongoing and is likely to continue to be painful.
This is going to hit Houston hard. In addition to damage done to United Airlines, to the Medical Center, and now also the Energy industry, we’re expecting a quite severe recession in the Houston market. For those of you who are familiar with Zillow, go look up Katy. Katy looks like it’s got a case of measles. Every single house for sale, there’s a little red dot. The housing market in parts of Houston is already collapsing, and yet in other parts of Houston, it’s still maintaining some strength. So it’s very spotty at this point, but it’s not looking great. Energy will be with us forever. The mix of Energy, however, that’s changing. The demand for fossil fuels may already have hit its peak sometime in the last few years, and if that’s the case the future for the likes of ExxonMobil, Chevron, BP is not that good. We wish you the best of investing success, and a very pleasant Memorial Day weekend. Thank you.