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OK, let’s get straight to the burning question of the day.
What on earth is going on with energy prices and is there any way I can use my investment portfolio to hedge against the out-of-control household heating bill I’m going to have this winter?
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What on earth is going on with energy prices?
I’m just going on a short “big picture” digression here – please indulge me, it’s relevant.
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Well before the pandemic, and in fact, well before the election of Donald Trump or the Brexit referendum, the world was moving from a period of ever-increasing globalisation to a period of slowing and in some cases, even reversing globalisation.
That’s a big important trend shift which among other things, means that the economic backdrop is far more prone to inflationary pressure than it was when competition was constantly being added to the system.
Covid-19 has now given us another really important trend shift, which is also inflationary. The best way to think of this one (in my humble opinion) is that we’re moving from a “just-in-time” world, to a “just-in-case” world.
To an extent, this is also a function of the changing trend in globalisation. If you no longer want or trust other countries with key aspects of supply chains, then you need to construct your own. That’s “just in case” rather than “just in time”.
The problem of course is that moving from a system with no redundancy to one with redundancy built in as a feature rather than a bug, takes time. And we’re only making the move because circumstances are forcing us to.
So the convulsions we’re seeing today in various markets, from semiconductors to shipping to – most prominently right now – your household electricity bill, are all symptoms of this shift.
Put simply, the problem is, we’ve got a “just in time” energy system with very little redundancy, and right now it is reaching the limits of its capacity.
So yes, we’ve been hit by all sorts of short-term stuff. One of the big extension cables that plugs our electricity system into the French nuclear network (and other European supply, obviously) has been knocked out by a fire.
Our wonderful wind farms, of which we were so proud and which contributed to the UK using next-to-no coal last year, turn out to be of little use when it’s not windy. Unfortunately, it’s not been as windy as Britain normally is at this time of year, so that’s not helped either.
Then there’s problems with Russia sending less gas in the direction of Europe (distinct lack of forward planning there, though that one’s mostly not Britain’s own fault). And also with liquefied natural gas (LNG) going to Asia rather than Europe, a) because Asia booked long-term contracts earlier this year and b) because even in the spot market (the “buy now” market) Asian buyers are still paying more.
But there’s a longer-term issue too. We neglected our natural gas capacity in favour of politically less challenging headlines about “green” energy. As Karl Williams notes on CapX, rather than using gas as a less-bad fossil fuel to get us through the shift from dirty to clean fuels, gas became “a hurdle to be leapt over in the sprint towards renewable energy”. And obviously, we’ve neglected nuclear for a wide range of reasons too.
How to invest to offset higher energy bills
So this is all bad news for your energy bills. On that front, the fact that Rishi Sunak will be eyeing up a set of public accounts next month which are in much better shape than he expected this time last year is excellent news. There might be some relief for households in there, given that the government knows how toxic energy crises are politically.
But I’d imagine that any assistance will be temporary and restricted. And it’s not going to help boost supply in the short term, just move the pain of paying the bills from some individuals and onto wider society.
The question for investors is: who is likely to profit from this? After all, if you’re going to be paying over the odds for your energy this year you might as well see what you can do to offset it with your portfolio.
The first thing I’ll say is that utilities are a risky bet. On the one hand, the market will be a lot more concentrated by the time this shakes out. On the other hand, the subject will be politically toxic and we all know what happens when voters start feeling the pinch – politicians point the finger at the evil corporations and shareholders and their profits. So you’d have to be very careful and very picky.
The most obvious option to my mind is to invest in oil and gas producers. For a start, they produce the stuff we all (still) need. For another thing, oil has lagged the surge in most other fuels. There are good reasons for that – people aren’t heating their houses with it (by and large). But if the entire energy complex is going through the roof then I suspect it’s only a matter of time before oil follows suit.
We’ll be looking at this in more detail in an upcoming issue of MoneyWeek magazine (get your first six issues free here), but one straightforward way to play the sector is through the iShares Oil & Gas Exploration & Production UCITS ETF (LSE: SPOG). It’s risen a lot since its pandemic low, but it’s actually still below its pre-pandemic levels.
