Mar 26, 2023·edited Mar 26, 2023Liked by Arjun Murti
Hi Arjun and group,
I was re-watching Super Spiked episode 21 King Coal
(https://youtu.be/OmsfT98PDmE) and at 12:25 minute mark you show a chart comparing the market cap of coal companies and O&G companies as a percentage of the S&P 500. What immediately jumps out is that the coal companies market cap is remarkably stable, whereas the O&G companies have big fluctuations.
Question: I wonder if coal share prices are more stable than O&G share prices as well as now having lower P/E ratios? If so, that is very interesting (higher earnings and lower volatility?).
That is definitely a function of the axis scaling. Coal equities are easily just as volatile if not more so than E&P/energy equities. That exhibit more makes the point of market cap size differences, which has the effect of making Coal look like it doesn't move.
Thank you! In this article, I'd call it more about making sure I was being hypocritical in not liking the demonization of the oil & gas industry but then kind of doing the same towards coal...
A couple of comments ask if there are any major commodities other than whale oil that have gone out of use. The most relevant example I can think of are the ~100 chemicals that fall under the category of ozone depleting substances. Relevant because these chemicals were a real risk to the human population globally and because nations around the world came together to phase them out.
Relatedly I don’t think there’s anything wrong with calling coal dirty. If ever there was a dirty mass source of energy it’s coal — the deadliest form of energy by far.
On the "coal being called dirty"...for me, I believe I am being inconsistent if I called coal dirty but then don't like win climate hawks call oil & gas dirty. that's all. Coal has lifted billions out of poverty already...about as clean a thing as any energy source can do.
Indeed. I am fully onboard with how compelling FFs are as energy sources and their effect on transforming human civilization. For coal specifically though I would like to see it replaced as fast as is economically possible. I like Roger Pielke’s idea for a global coal exit treaty
Jan 28, 2023·edited Jan 28, 2023Liked by Arjun Murti
It would be interesting to get a list of commodities that have actually peaked and look at the circumstances and causes of their peak. My guess is that the list is small. Another Super Spiked note! I'm going to research this now too.
The last 50 or 100 years has seen huge growth in both populations numbers and economic activity per capita. More people and, on average, each person earning and consuming more. If you want to see the underlying change in demand for a commodity it would be better to look at population and GDP deflated numbers.
Yes, the idea of an energy “transition” is not supported by historical experience. Almost every new source of energy is additive to the previous dominant energy form, and the absolute consumption of the legacy energy source does not decrease.
I'd even go a step further and say the same thing about the consumption of all commodities, once they enter large scale use and production they get repurposed and adapted and their global use doesn't go down. I'm trying to think of an exception to this other than whale oil/oil, if there are exceptions they would be rare.
It's an interesting point about tobacco and CFC's (from an investment point of view 1960's onwards for US tobacco I think is a workable analogy for fossil fuels circa 2023). I also agree that we may have to refine the question a bit, to define 'commodities' and 'peak' more precisely. Some quick thoughts about the list so far:
1. Whale oil being replaced by rock oil for lighting, and then electricity replacing oil lamps seems like a valid example. This wasn't through government policy, it was due to technical innovation.
2. CFC's from what I understand were quickly replaced by HCFC's, that wasn't a huge challenge for manufacturers, it was doable. Government policy created a quick change, but the change was also fairly straightforward from a technical point of view.
3. Tobacco use in the US from the 1960's I think is a workable analogy to what's happening with fossil fuels today: concerted policies to reduce demand beginning in the 1960's slowly reduced demand, but quite slowly, and it also had the effect of putting a moat around the incumbents (e.g. Altria) which made them more profitable.
I have a bit of experience in this area, something for everyone to consider. Pardon the length of the comment, I just had a huge coffee:
As Arjun says, the coal sector (in the US) is barely looked at, it's a niche area because of historically poor returns and social issues. This means that:
1. Hardly anyone thinks about metallurgical coal, we almost always talk about thermal coal. Met coal is more profitable and its production is tied to the production constraints for thermal, even though they are completely different (i.e. coal mines are unpopular in general, even though they may be producing met coal). Big supply constraints, but obviously steel production isn't going away anytime soon.
2. Given the sheer number and longevity of thermal coal plants globally, clean coal technologies (probably in combination with carbon offsets) will be critical to the energy transition because it is much quicker and more efficient to reduce emissions at the source+offset remaining for existing infrastructure than to build new infrastructure. Clean coal technologies are demonized and overlooked, which is a big blind spot for analysts and a key reason they will be around a lot longer than most people realize.
3. The big two US producers are committed to buybacks and dividends with their excess free cash flow, it's basically an even more extreme version of the US E&P situation - politically constrained supply, strong (global/seaborne) demand, management committed to returning cash to shareholders. Insanely low P/E ratios, virtually no mainstream interest or analyst coverage.
4. As Arjun said: the fact that globally we're still burning thermal coal, which is the one technology we actually do have ultra-low carbon replacements for, should be an object lesson in how long these transitions take.
5. Final point, consider whether ANY important commodity has actually ever been replaced and gone out of production. I can only think of 'rock oil' replacing whale oil. Can anyone think of another one? Point: once a commodity is being used and produced it virtually never goes out of use and production.
Arjun. followed you for years at GS . Really appreciate this substack, as given the decimation of the sector in the 2010's, there just aren't many intelligent voices left on Wall St. remaining. Given Energy's importance to the world and clear mismanagement of the transition to this point by the West, its great you are spending the time to educate. We can only hope some leasers hit the "subscribe" button.
The technology around natural gas usage has the potential to change. NETPower (Rice Acquisition Corp. II) is developing a technology to burn natural gas for power generation with significantly less pollution by separating nitrogen from oxygen prior to the combustion and capturing the CO2 output.
Hi Arjun and group,
I was re-watching Super Spiked episode 21 King Coal
(https://youtu.be/OmsfT98PDmE) and at 12:25 minute mark you show a chart comparing the market cap of coal companies and O&G companies as a percentage of the S&P 500. What immediately jumps out is that the coal companies market cap is remarkably stable, whereas the O&G companies have big fluctuations.
Question: I wonder if coal share prices are more stable than O&G share prices as well as now having lower P/E ratios? If so, that is very interesting (higher earnings and lower volatility?).
Hi Investor,
That is definitely a function of the axis scaling. Coal equities are easily just as volatile if not more so than E&P/energy equities. That exhibit more makes the point of market cap size differences, which has the effect of making Coal look like it doesn't move.
Got it. Thanks for the clarification.
Great article Arjun
Great article and thanks for your humility. Rare trait.
Thank you! In this article, I'd call it more about making sure I was being hypocritical in not liking the demonization of the oil & gas industry but then kind of doing the same towards coal...
A couple of comments ask if there are any major commodities other than whale oil that have gone out of use. The most relevant example I can think of are the ~100 chemicals that fall under the category of ozone depleting substances. Relevant because these chemicals were a real risk to the human population globally and because nations around the world came together to phase them out.
Relatedly I don’t think there’s anything wrong with calling coal dirty. If ever there was a dirty mass source of energy it’s coal — the deadliest form of energy by far.
https://ourworldindata.org/grapher/death-rates-from-energy-production-per-twh
On the "coal being called dirty"...for me, I believe I am being inconsistent if I called coal dirty but then don't like win climate hawks call oil & gas dirty. that's all. Coal has lifted billions out of poverty already...about as clean a thing as any energy source can do.
Indeed. I am fully onboard with how compelling FFs are as energy sources and their effect on transforming human civilization. For coal specifically though I would like to see it replaced as fast as is economically possible. I like Roger Pielke’s idea for a global coal exit treaty
https://rogerpielkejr.substack.com/p/a-coal-exit-treaty-can-radically
Thanks for that interesting link.
It would be interesting to get a list of commodities that have actually peaked and look at the circumstances and causes of their peak. My guess is that the list is small. Another Super Spiked note! I'm going to research this now too.
& @ Jason S
The last 50 or 100 years has seen huge growth in both populations numbers and economic activity per capita. More people and, on average, each person earning and consuming more. If you want to see the underlying change in demand for a commodity it would be better to look at population and GDP deflated numbers.
Yes, the idea of an energy “transition” is not supported by historical experience. Almost every new source of energy is additive to the previous dominant energy form, and the absolute consumption of the legacy energy source does not decrease.
I'd even go a step further and say the same thing about the consumption of all commodities, once they enter large scale use and production they get repurposed and adapted and their global use doesn't go down. I'm trying to think of an exception to this other than whale oil/oil, if there are exceptions they would be rare.
That may depend on your definition of the term commodities.
But with concerted government action, usage can fall substantially.
For example; CFCs and asbestos. Or what about tobacco?
It's an interesting point about tobacco and CFC's (from an investment point of view 1960's onwards for US tobacco I think is a workable analogy for fossil fuels circa 2023). I also agree that we may have to refine the question a bit, to define 'commodities' and 'peak' more precisely. Some quick thoughts about the list so far:
1. Whale oil being replaced by rock oil for lighting, and then electricity replacing oil lamps seems like a valid example. This wasn't through government policy, it was due to technical innovation.
2. CFC's from what I understand were quickly replaced by HCFC's, that wasn't a huge challenge for manufacturers, it was doable. Government policy created a quick change, but the change was also fairly straightforward from a technical point of view.
3. Tobacco use in the US from the 1960's I think is a workable analogy to what's happening with fossil fuels today: concerted policies to reduce demand beginning in the 1960's slowly reduced demand, but quite slowly, and it also had the effect of putting a moat around the incumbents (e.g. Altria) which made them more profitable.
Excellent as always.
I have a bit of experience in this area, something for everyone to consider. Pardon the length of the comment, I just had a huge coffee:
As Arjun says, the coal sector (in the US) is barely looked at, it's a niche area because of historically poor returns and social issues. This means that:
1. Hardly anyone thinks about metallurgical coal, we almost always talk about thermal coal. Met coal is more profitable and its production is tied to the production constraints for thermal, even though they are completely different (i.e. coal mines are unpopular in general, even though they may be producing met coal). Big supply constraints, but obviously steel production isn't going away anytime soon.
2. Given the sheer number and longevity of thermal coal plants globally, clean coal technologies (probably in combination with carbon offsets) will be critical to the energy transition because it is much quicker and more efficient to reduce emissions at the source+offset remaining for existing infrastructure than to build new infrastructure. Clean coal technologies are demonized and overlooked, which is a big blind spot for analysts and a key reason they will be around a lot longer than most people realize.
3. The big two US producers are committed to buybacks and dividends with their excess free cash flow, it's basically an even more extreme version of the US E&P situation - politically constrained supply, strong (global/seaborne) demand, management committed to returning cash to shareholders. Insanely low P/E ratios, virtually no mainstream interest or analyst coverage.
4. As Arjun said: the fact that globally we're still burning thermal coal, which is the one technology we actually do have ultra-low carbon replacements for, should be an object lesson in how long these transitions take.
5. Final point, consider whether ANY important commodity has actually ever been replaced and gone out of production. I can only think of 'rock oil' replacing whale oil. Can anyone think of another one? Point: once a commodity is being used and produced it virtually never goes out of use and production.
You are absolutely correct. It will be a long time, if ever, for an economic alternative to met coal to reach widespread adoption
Arjun. followed you for years at GS . Really appreciate this substack, as given the decimation of the sector in the 2010's, there just aren't many intelligent voices left on Wall St. remaining. Given Energy's importance to the world and clear mismanagement of the transition to this point by the West, its great you are spending the time to educate. We can only hope some leasers hit the "subscribe" button.
Thanks so much JM...subscription @#s have grown a lot!
The technology around natural gas usage has the potential to change. NETPower (Rice Acquisition Corp. II) is developing a technology to burn natural gas for power generation with significantly less pollution by separating nitrogen from oxygen prior to the combustion and capturing the CO2 output.
NPWR an interesting company I am just starting to get to know.