The COVID-19 pandemic has entered its second year, with the new variants pressuring global health care systems and governments responding with varying degrees of lockdowns. While it can be difficult to see the light at the end of the tunnel, the progressive rollout of vaccines will return us to a sense of normality. With this, the world will re-open and global economic growth will resume. While we do not know exactly when “shots in arms” will ultimately overtake the spread of COVID-19, we believe it is prudent to position your portfolio for the eventual economic recovery. We expect this recovery to be led by early cycle performers and therefore have ensured that your portfolio has significant exposure to the industrial and technology sectors, as well as energy, be it conventional and/or renewable.
The energy industry has been one of the most severely impacted industries during this COVID-19 pandemic. With the shutdown of large swaths of the global economy, demand for crude oil dropped swiftly from 101 million barrels per day to a low of 81 million per day a year ago. This rapid decline reflected the immediate effect of lower demand for transportation fuels and industrial uses. The carbon-based energy industry has faced its own “perfect storm” as it contended with that declining demand, elevated costs, and finding itself on the wrong side of popular opinion and the political debate.
In North America, the greatest use of energy is electricity generation, representing 37% of overall demand, followed by transportation (28%) and industrial (24%). Over the next 30 years, the United States Energy Information Administration forecasts that the demand for energy to support electricity production and industrial uses will grow steadily, while that for transportation will fall marginally.
Ideally, the renewable energy industry would rise quickly to provide clean energy to fuel the world. However, it is not that simple or easy. Renewable energy remains in its early days as it faces challenges to scale up and bring costs down in order to compete effectively with other more reliable sources of energy. As elsewhere, technology continues to evolve and improve, nonetheless it could take another 30 years to realistically replace the use of carbon-based energy.
Today’s world continues to run mostly on oil and gas, as well as coal. The modern economy features growing electrification, translating into rapidly increasing demand for electricity. Coal-powered electricity generation is quickly being replaced by both natural gas and renewable energy. Although renewables cannot yet compete with gas, the good news is that natural gas emits 50-60% less carbon than coal. As the world transitions to renewables to replace coal over time, natural gas will fill the gap.
The conventional oil and gas industry will remain in business for the foreseeable future. Importantly, the industry is making strides in reducing its emission intensity as technology around such areas as energy efficiency and carbon capture continue to advance. In the short term, a recovering economy will bring back strong demand for transportation fuels as the vast majority of vehicles continue to be gasoline powered. Meanwhile, the future for natural gas looks bright as it serves as a transition fuel until wind, solar and hydro can play a dominant role in this evolving energy landscape.