Secrets Of Success: Green energy drive causes dilemma
Saturday 10 February 2007
There were some interesting ideas about probable long-term investment returns in the presentations accompanying the annual Barclays Capital Equity Gilt Study published this week. The "short and dirty" conclusion is that historical relationships all point to the continued likely outperformance of equities against bonds in the medium to longer term.
This is in spite of two of the biggest players in the global financial markets, namely pension funds and dollar-flush governments, both for different reasons currently pouring huge amounts of money into bonds rather than equities. Neither group is made up of value investors, and their behaviour has driven down longer term bond yields to levels where, even after recent price movements, the probability of making positive real returns is very low.
The most topical aspect of the study this year however concerns an issue that is of huge importance to everyone, as well having implications for investors. This is the challenge that the world faces in seeking to meet two potentially conflicting imperatives: how to fill a serious impending shortage in world energy supplies while simultaneously reducing carbon emissions, of which energy supply is or course the primary component.
On current trends, according to the International Energy Agency, global energy demand is projected to rise by more than 50 per cent over the next 25 years. With no dramatic change in government energy policies, more than half of this increased demand will have to come from the traditional sources of oil, gas and coal. The investment required to meet this new demand, as well as replace ageing existing sources of supply, will be in the order of $20 trillion, equivalent to something like 15 per cent of total global capital investment over the period.
The complication, of course, is that coal, oil and gas are the principal sources of CO2 emissions. Around two-thirds of total greenhouse emissions come from energy use. To avoid global temperatures rising to the extreme danger levels highlighted in various recent official reports, policy changes in favour of alternative energy sources and nuclear power are inevitable if global growth is to be sustained.
While the political climate is clearly moving towards acceptance of new policies to counter climate change, even in the US, the dilemma is that the more action that is taken to reduce carbon emissions, the greater the share of the energy supply gap that will have to be filled from other sources. That in turn will almost certainly increase still further the massive capital that will be needed to finance the investment needed to secure the twin objectives of increased energy supplies and reduced carbon emissions.
At the moment, argues Tim Bond, the head of asset allocation at Barclays Capital, the world is still in a painful no-man's land. Despite the big rises in energy prices over the last three years, forward prices continue to point to further price rises in the dirty fuels such as coal and oil, but not in other types of energy. He says: "We can deduce that as yet the markets do not believe that policy changes will successfully reduce global demand for the dirtier fuels in favour of cleaner energy courses."
On the other hand, the continued uncertainty about what policies might be introduced is helping to restrain capital investment in new projects. The energy industry is starting to respond to the signals given by higher energy prices, and investing in new capacity, but has not so far done more than make a small dent in the problem.
The costs faced by energy producers are soaring, as BP's results this week made clear. There are not enough drilling rigs, ships to transport coal, and so on, to meet demand. While global spending on upstream oil investment in nominal terms doubled in the five years to 2005, Bond notes, because of the higher costs facing producers, the real inflation-adjusted increase in spending has been less than 20 per cent.
Left to their own devices, the markets will eventually solve the problem of the mismatch in future energy supply and demand through the pricing mechanism, but the lead times in energy supply are long, beset with environmental and strategic issues, and the process may be painfully disruptive. Other things being equal, the results will be high and volatile energy prices for many years, with the ever present danger of severe economic disruption, as there was in the 1970s.
The good news is that, in principle, financing the huge amount of capital expenditure that will be required to fix the energy and climate change problems should not be a problem. As every current market indicator suggests, the world is awash with capital that is looking for a home that offers high-yielding returns.
Yet the climate change imperatives are a complication. It is hard to see how governments can make new policy initiatives on carbon emissions without interference in the market. Some degree of Government controls over pricing seem sure to be part of the mix. What implication will that have for energy prices and investment in the freely traded market?
Investors have a keen interest in how these issues play out. During the 1970s, the last time energy prices were high and rising, notes Bond, oil and commodities were just about the only mainstream assets that produced positive real returns. In the stock market, apart from banks, oil and gas and energy suppliers were the only sectors that produced decent returns.
The same phenomenon has been evident in the world equity markets since the start of 2003.
Could a rerun of that scenario happen again? We don't know for certain. Bond's view appears to be that it might, although he also argues that the massive programme of capital investment required to fill the energy gap will be positive for world economic growth, even if it produces a speculative bubble in the process. A good chunk of the extra energy needed will be feeding the fast-growing economies of China, India and others.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Nigel Farage: Me vs Russell Brand on Question Time – he's got the chest hair but where are his ideas?
Shock poll shows voters believe Ukip is to the left of the Tories
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
New era of cheap oil 'will destroy green revolution'
Ukip founder Alan Sked and Nigel Farage 'begged Enoch Powell to stand as a candidate'
Ukip candidate jokes about 'shooting peasants' in racist and homophobic rant
iJobs Money & Business
£32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...
£Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...
£40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...
£45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens