JPM Chair of Investment Strategy Says ‘Ignore All the Hype’ in Energy Transition

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“The IEA predicts that the world could still be 66% dependent on fossil fuels in 2050. What does that mean?” JPMorgan’s Chair in Market Strategy and Investment examines current trends driving the energy transition. The paper acknowledges the ongoing transition, while signaling headwinds to rapid adoption. Chairman Michael Cembalest said, “With demand for energy still outstripping supply, I believe the MSCI Global Energy Composite will outperform both renewable energy stocks and the wider stock market (TO SPY) again next year.”

The contrast between the disruptive impact of technology in the energy sector and the impacts of technology on other sectors highlights the author’s point. Carpooling represents more than 80% of trips made in New York, compared to around 10% 7 years ago. 90% of American adults own a smartphone, up from zero two decades ago. Meanwhile, electric cars still only make up around 2% of the global car fleet. And two decades of solar and wind investments have captured around 5% of the world’s primary energy market.

The author shares three reasons why low-carbon energy has underperformed the hype. First, much of the reduction in carbon intensity in the United States and Europe results from the export of carbon-intensive work to developing countries. Second, the “levelized cost” of energy calculations has misled investors and the public about the impact of technology on the full cycle cost of intermittent power sources. Third, marketed low-carbon energy solutions focus on a very narrow slice of the primary energy pie.

As Cembalest argued in 2020 and 2021, oil (NYSEARCA:USO), gas (NYSEARCA:UNG) and coal stocks (NYSEARCA:XLE) have not suffered over the past decade because they have been rendered redundant by cleaner fuel sources. Energy stocks performed poorly because fossil fuel producers focused on growth rather than returns. It is unclear whether ESG policies, perceived irrelevance or the near-death experience of the pandemic have changed attitudes in the boardrooms of fossil fuel producers. However, attitudes have changed, fossil fuel producers are no longer expanding at all costs and as a result the outlook for oil, gas and coal stocks globally has never been brighter.

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