Energy investment is essential for AI and sustainability

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published 13 May 2024

One striking feature of today’s markets is how much investors seem to dislike energy. The sector isn’t exactly languishing: the MSCI World Energy index has returned 25% per year over three years in sterling terms.

Yet it still feels like a most reluctant bull market in which many buyers would rather not participate. It certainly doesn’t help that the heavy focus that many asset managers put on sounding green and sustainable left them completely on the wrong side of the market when oil roared back after the pandemic. But the general sense of discomfort around the sector goes deeper than that.

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The cynic in me thinks that Buffett’s comments may be a rather obvious effort to jawbone regulators and courts into going a bit easier on his firm than a convincing threat to bail out. But I can certainly see that many Berkshire shareholders would be happy if the conglomerate stepped back from investing in energy and handed out more of its cash as share buybacks or even a dividend.

Energy investment and AI come hand in hand

This reticence about investing in a difficult, grubby, old-fashioned sector is a problem. The world will need a significant amount of investment in energy infrastructure in the years ahead to achieve goals such as decarbonisation or electrification, as well as meeting our continually growing demand for more energy.

It seems odd that the market is fixated on the potential of artificial intelligence (AI), without factoring in the demand that AI systems will create if rolled out on the scale that their proponents suggest. Even if AI falls flat, the same goes for other digital-economy themes such as cloud computing.

Already, annual electricity consumption by data centres is forecast to double between 2022 and 2026, to almost 1,000TWh, according to the International Energy Agency – roughly the current annual consumption of Japan. A true AI revolution – on which I remain unconvinced for now – will surely push demand far higher.

How is the energy sector performing?

This is why energy strikes me as increasingly interesting – it’s a beneficiary of many trends and yet it remains unloved. The caveat is that the technology isn’t a one-way bet. Last week, I wrote about the exchange-traded funds (ETFs) that have done well over the past year (including nuclear power).

If you also look at those that did badly, they include hydrogen, solar, clean tech, green energy, rare earths metals, strategic materials and so on. These ETFs are often very concentrated, with high weightings to smaller, pure-play companies that are prone to boom and bust.

Some will be poised for a rebound – but personally, I see areas such as liquefied natural gas, copper and nuclear as being simpler ways to play the overall trend of higher demand for electricity.

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Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.