EATV - Goehring & Rozencwajg Q4 2023 Natural Resource Market Commentary

2024-02-24 11:45:00 ET

Summary

• Goehring & Rozencwajg Associates, LLC provides financial planning and investment advisory services. The Company offers natural market capitalization resources mutual fund investments for growth in business as well as provides consulting services.
• In our new letter, we discuss EVs in depth and explain why oil demand should remain strong for a long time to come.
• While everyone is worried about “peak demand,” we think that “peak supply” is much more likely. The implications could be tremendous.
• The commentary also delves deeply into Saudi Arabia’s recent announcement it will no longer pursue production growth, whether US oil supply is actually surging and groundbreaking new technologies that could revolutionize the copper industry.

THE NORWEGIAN ILLUSION

"Electric vehicles (EVs) are piling up on lots across the country as the green revolution hits a speed bump, data show." USA Today, November 14, 2023

"Hertz Global Holdings announced Thursday it planned to cut one-third of its global EV fleet over the year. Following the announcement, Hertz CEO Stephen Scherr suggested the road to electrification could be bumpier than anticipated." Bloomberg, January 11, 2024

Starting mid-point last decade, the investment community became convinced EV adoption would quickly surge. EV penetrations would become so great that global oil consumption would imminently peak, or so consensus opinion widely believed. 2019 was repeatedly referenced as the year that oil demand would peak and then decline. In retrospect, these concerns were misplaced. Despite the massive COVID-19 disruption, oil demand in 2024 should reach 103 m b/d - 2.3 m b/d greater than 2019. Undeterred by the surprising surgein demand, many analysts remain convinced that "peak oil demand" is still imminent. The investment community's belief that EVs will displace the internal combustion engine remains as strong as ever. We vigorously disagree.

In our last letter, we predicted that global energy demand would consistently exceed expectations for the next twenty years. Never before have so many people been simultaneously in their period of energy-intensive economic development. Our essay focused broadly on total energy demand and specifically avoided oil consumption. Our choice was deliberate: we wanted to highlight the critical drivers of total energy demand and avoid getting distracted by the debate on EV penetration. Today's essay focuses on oil and explains why we believe demand will surprise to the upside for years to come.

Our research shows that EVs will struggle to achieve widespread adoption despite massive subsidies and the growing threat of outright internal combustion engine ('ICE') bans. After carefully studying the history of energy, we have yet to find an example where a new technology with inferior energy efficiency has replaced an existing, more efficient one. Despite claims to the contrary, our research suggests EVs are less energy efficient than internal combustion engine automobiles. As a result, they will fail to gain widespread adoption.

Our claim is controversial; most pundits insist EVs are far more efficient. We believe the ICE is clearly the winner once the energetic costs of both the battery and the renewable power required to make "carbon-free" EVs are considered.

Although governments can encourage EVs through either subsidies or ICE bans, these measures will likely fail, as consumers will ultimately refuse to embrace a new technology that sports inferior energy efficiency. Better examples couldn't exist than Ford and Hertz dramatically scaling back their EV initiatives due to lower-than-expected consumer interest.

Mitigating carbon emissions is central to the case for electric vehicles. Advocates argue that displacing fossil fuels is essential to curbing global warming. We disagree. Replacing ICEs with EVs will materially increase carbon emissions and may worsen the problem. Manufacturing an electric vehicle consumes far more energy than an ICE. Most of this additional energy is spent mining the materials for and manufacturing an EV's giant lithium-ion battery. Mining companies use energy-intensive trucks, crushers, and mills to extract each battery's nickel, cobalt, lithium, and copper. The manufacturing process consumes vast amounts of energy as well. Many analysts eagerly tout the carbon savings from displaced fossil fuels without adequately accounting for the battery's increased energy consumption. Once these adjustments are made, most, if not all, of the EV's carbon advantage disappears.

If our models are correct, EVs will fail on two fronts: they are less energy efficient than the ICEs they are trying to replace and their adoption will do little to mitigate carbon emissions....

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