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Investing in global energy

The world's population is growing at a rate of 1% per year and is projected by the UN to rise by a further 20% (1.5 billion people) by 2030. Over 90% of this growth will come from developing countries. The implications for energy consumption are profound.

More motor vehicles will be sold over the next 20 years than have been sold throughout the entire history of the automobile industry. In emerging markets such as China and India, surging demand for electricity, cars and consumer goods will have a significant impact on the world's energy balance. China’s demand for oil per capita has not yet reached that of the OECD in 1950. There are 20 years of unrelenting oil demand growth to come while China’s vehicle fleet moves from 100 million now to 400 million by 2030, with numerous other countries following behind.


The rise in global energy demand is projected to continue long into the future, with forecasts of 56% growth by 2040. And it is likely that the majority of this demand will be met by mainstream energy sources like oil, natural gas and coal.


The world’s oil consumption currently stands at around 90 million barrels per day, and continues to reach new highs each year. Even in the global recession of 2008/09, demand for oil from emerging markets continued to grow. We think that, over the next 10 years, global oil demand growth of 10-15 million barrels per day is highly plausible.


Supply is struggling to keep pace

The risk that energy supplies fall short of what is required over the next few years is intensifying, in particular as the era of low cost, easily extractable oil comes to an end.


The non-OPEC world, despite the recent success of shale oil in North America, struggles to grow production meaningfully. Any spare production capacity that OPEC countries may have today is likely to decline as they respond to the expected rise in demand and one-off shortfalls caused by political upheaval in oil-producing regions. Put simply, the oil industry faces a huge challenge to build up new supplies of oil to compensate for the rapid decline in existing fields.


Favourable environment for investing in energy

The combination of growing demand and inadequate supply signals that oil and other energy prices will move up over time. This would create a very favourable environment for companies with energy resource reserves and for their service providers and distributors.


We keep coming back to one key proposition: easily extractable oil and gas assets remain scarce, and it seems reasonable to believe that, as they get scarcer, they will trade at higher prices than we have yet seen. In this scenario we believe shareholders in energy companies will be duly rewarded.


The rise in alternative energy supply

In contrast to the trend in prevailing energy supplies, the cost of alternative energy is falling. A number of alternative energy technologies are now at a price point where they are already competitive with fossil fuel energy, yet their current use is at very low levels. Against a backdrop of rising energy prices and with viable installation costs, the potential upswing in demand from very low historic levels is an exciting prospect for alternative energy companies and their investors.


Despite some political caution in the aftermath of the global financial crisis, governments continue to support alternative energy, favouring policies including direct subsidies, structural subsidies and mandated levels of alternative energy.


Meanwhile, concerns about long-term energy security are rising, and geopolitical factors are increasing anxiety. The environmental impact of conventional energy remains at the top of the global political agenda, intensified by the continuing growth in energy demand. In the long term, the world needs reliable, sustainable and cheap energy sources.


We believe the current alternative energy technologies – increasingly attractive in economic terms – offer a viable solution; demand is set for considerable growth for years to come.


Guinness Asset Management, August 2014

Important notes

Please note that these are the views of Guinness Asset Management and should not be interpreted as the views of RL360°.

Author

Guinness Asset Management

Please note that these are the views of Guinness Asset Management and should not be interpreted as the views of RL360°.

360° fund links

A range of Guinness funds can be accessed through our guided architecture products Oracle, Paragon and Quantum, and also through our PIMS portfolio bond.