Electricity and oil are no longer apples and oranges

When we predicted a melt-up for 2020, World War III and Australia melting down wasn’t quite what we had in mind… It was supposed to be stocks soaring, not an Iranian general’s body parts and the ashes of Aussie holiday homes.

And yet, our favourite investment performed well in the turmoil. Gold hit all-time highs in a few currencies as a result of the Iraq attack. In US dollars it’s at a six-year high. Thanks to the Boris bounce, it’s still down in terms of pounds since September.

Which means there’s still time to get in. And this is the best way to do just that.

Oil has been even more fascinating than gold. Oil’s ability to turn geopolitical trouble into economic problems is unrivalled. For now. Perhaps renewable energy and this will change all that.

Still, the oil price jumped 3%. Headlines about inflation, recession, stagflation and shortages were rolled out. It’s a great example of why plenty of journalism can be automated. The articles are the same each time oil spikes.

Of course, the cure for higher prices is higher prices. Because they encourage more supply to come online, which brings prices back down again. It’s not just true for oil. It’s also why attempts to control rents and property prices fail so miserably. They discourage building more homes, which keeps the prices high. Allowing more homes to be built is what’ll bring prices back down. As well as supplying more homes to more people.

Real inflation is very different. It’s the devaluation of money itself, not supply shocks and their resulting price spikes. The failure to tell the difference is one of the few major risks left to the global economy.

If central bankers react to rising oil prices caused by a supply shock or a geopolitical crisis, they’ll be raising interest rates on an economy already struggling with higher energy costs… Precisely the wrong thing to do.

But back to what higher oil prices mean this time around. It’s not just more oil wells they make more viable. They make renewable energy more viable too. And perhaps that’s the key effect energy investors and tech investors need to keep in mind in 2020. Because the relationship between oil and power is changing forever.

If battery tech becomes viable enough to compete, then electricity will become a portable form of energy. This means power prices will compete with oil prices in the same markets. They’ll become substitutes. And that’s a radical change for energy markets and renewables.

Right now, oil and electricity are apples and oranges. They don’t really compete. Gas is the awkward in between that can compete with both, to some extent. Because it’s transportable like oil but can be used to generate power fairly cleanly.

If electricity becomes transportable and storable in ways that compete with combustion engines, the relationship between oil and power will change. They’ll be substitutes, competing for customers. And there’s nothing like competition to get innovation and investment going.

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But perhaps I’m getting ahead of myself. Perhaps batteries aren’t up to the task just yet. Not for all tasks, anyway.

Instead, there’s a much more promising solution in the meantime. One which allows renewable energy to transform itself into a clean power source that’s remarkably similar to oil. The crucial factor being that it’s portable. Without needing batteries.

The challenge is in the production, or should I say conversion, of this “new oil” to the form we want to use it in. But that’s precisely the challenge which this small British company claims to be in the process of solving.

And that company is part of what one of our editors, Eoin Treacy, calls “Silicon Island”. Which is not to be confused with the TV show Love Island.

The basic idea of Eoin’s version, which is in its rough draft format, is that Britain is an innovation powerhouse. At least, we were. And could be again.

Here’s the key bit of Eoin’s draft for this month’s issue of Frontier Tech Investor:

Most of the ecosystem that powers Silicon Valley would be quite simple to replicate in the UK; with a bit of joined-up thinking. We already have most of the ingredients, but the reason I am writing about this now is because the last vital pieces to the puzzle are now falling into place.

Frontier Tech Investors will find out exactly what’s fallen into place soon.

The idea behind Eoin’s issue reminds me of how the Japanese see their success of the 80s. And not just because I spent the weekend with four Japanese in-laws.

The Japanese fostered innovation and success very deliberately in government policy. Westerners believe the Japanese just miniaturised and copied our intellectual property. And there was plenty of that. But improving on tech is innovation too. And the Japanese did lead the world in plenty of areas classed as “innovation”.

What set the Japanese apart is their desire to trample over the existing order of things to foster innovation. They had to accept foreign tech to be better and worth copying before they got down to improving it.  

Eoin’s point, I think, is that the equation for success is known, just as the Japanese knew it. It’s just that’s it’s politically and socially difficult to implement that equation. A stomping majority in Parliament helps.

Our domination of fintech is an example of this going well. The financial sector gets the support it needs from the government. And more than it deserves. The result is we’re world leaders.

Why not roll out the effort in other areas? Why not indeed…

Until next time,

Nick Hubble
Editor, Southbank Investment Research

Category: Energy

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