How to Make Money From the Booming Demand for Energy

23:13But how is it just changed? I think it's actually a little bit more acknowledged than people would say out loud. I get yelled at sometimes when I talk about specific stocks, but there's a UK-based major energy company that went one way and then they've very publicly gone the other way. And I think that's normal when you see market conditions shift like this. Random question. The year 2040, are we still going to be using coal in this country? In our model, our model is global. So this country versus the world, let's just focus on the world. We have coal supply or sort of coal generation cut in half by 2040.

23:52I think that's ambitious. I would hope that it was zero, but the sort of energy pragmatists would say, hey, around the world, coal will be relied upon for a really long time. It will be a much lower percentage of energy markets, and we think it will sort of decline over time. But again, the idea of zero coal around the world by 2040, I think, is highly unlikely. Since we're talking about energy on a global scale, talk to us about what you're seeing or expecting out of China, because this is the other source of a million headlines nowadays, or at least a million headlines with very, very large numbers in them about what China is doing in terms of building out its energy capacity.

24:31Yeah, I think part of it is you think about the global geopolitics and you say like, well, why are some places more aggressively pursuing alternatives versus traditional? And why did Europe do as much renewables as they did? And a lot of that has to do with taking advantage of what you're endowed with or not. So here in North America, we have plentiful natural gas and crude oil, and our need to invest in renewables from a cost perspective is different than Europe, where they are an importer. And so the way to sort of convert from being an importer to self-sufficient is to harness what you've got.

25:03If you've got a lot of wind and you've got a lot of sun, you're going to want to overinvest there. I think China depends on the world for energy supply, and they're trying to reduce that. They want to be more independent. They're going all in on nuclear. They're investing massive amounts in their nuclear economy, coal generation as well, kind of everything. And I think just an effort to be more self-sufficient. But that's not China specific, right? That's kind of like every country right now is doing a similar thing and trying to be a little bit more self-sufficient in a post-COVID, post-Russia, Ukraine, rising geopolitical tension sort of world.

25:36I think I'm very skeptical that we're going to have a nuclear renaissance in the U.S. Like, I know there's tons of headlines, and I'm sure there's a few of those places that are going to get restarted. I am not an expert, so it's just my gut. Am I off the mark? What do you think? Where are we looking on this? So I think it really depends on what you mean by a nuclear renaissance. Give us a time frame, Joe. Like, okay, here's my—I don't even—why am I making predictions? I don't know anything about this stuff. But, like, I would be surprised if I'm on Polymarket or something. I would imagine that there's not—what's that plant in Georgia that came online?

26:11The Vogel. The Vogel plant. Like, I don't think there's going to be another Vogel in the next 20 years. I disagree. I'll kind of talk you through why. But let me tell you about what the nuclear renaissance. And again, I'm talking kind of global as opposed to just U.S., but we can definitely talk about U.S. too. So take another step. I like to take a lot of step back, as you can tell. We're going to talk about the galaxy. We're going to go away. No data centers in space in this conversation, I promise. No, actually, now that's a good idea. I'll ask you about that at some point. Yeah. Okay. So why are we talking about nuclear?

26:38Yeah. Right? It's pretty simple. You break the world into traditional and alternative. Good thing about traditional, so things like natural gas and coal, is it's reliable 24-7, 365 energy. Unfortunately, it has the emissions profile we don't like. Alternatives, let's just call it wind and solar, has the emissions profile we want, but it's intermittent and variable. If you're a data center CEO, you're feeling pretty good about your business today. You kind of wake up with night sweats about the power going out, right? You cannot lose power. You have a very expensive metal shell that's cooling servers and providing electricity and energy, which means, hey, I can't take the intermittency.

27:13I've got to use the baseload. Nuclear is sort of the one resource that can kind of serve both masters. It is 24-7, 365, low variable cost, very high capacity factor, and it's also pretty clean. And so that's kind of why we're talking about nuclear. There was an episode maybe a couple months ago where you said, hey, nuclear batteries. Yeah. I was about to ask you the same question, actually. I think it's all about energy storage. The whole thing is like, hey, how do I store energy to use it when I want it? Coal is effectively an energy battery. Natural gas is an energy battery. There's just no batteries for wind and solar that are viable today.

27:48But I'd love to solve that problem. And that would help in a lot of ways. But back to the nuclear race. You can't hold solar energy in your hand. You can't. I wish you could. And maybe, well, one day you will, but we think it's going to take quite a while to do that. But OK, so the nuclear renaissance. we've been shutting down nuclear generation capacity around the world for the last two decades. So step one is - Including in famously sunny Germany. Everywhere. So step one is like, let's just not shut it down. We think we're in like the seventh inning of that ball game. Like we're not shutting it down.

28:18Yeah. That's something. Yeah. So phase two is like, well, can we turn on any of the stuff that we recently turned off? We're in like the fifth inning of that game. I think that sort of is going from a slow bleed to, hey, flatten and then slow growth. So the next couple of years are about, hey, turning on Three Mile Island and other places. Phase three, which would be, I think we're in the second and third inning, and we're going to start to see some acceleration here, would be the sort of brownfield inside the fence nuclear facility build out. Hey, you worry about NIMBY issues, site supply, security, safety.

28:48I think that's been talked about here as well. We do think that that's going to start to pick up. But that's like a 2032 to 2035 in service. And then we talk about SMRs and Thorium and other opportunities. I think that'll happen, but it's like 2035 to 2040. So that's still a renaissance to me. We're taking something that we were sort of allowing to slowly melt, and we're sort of refreezing it, and then we're building it. And that's okay. Yes or no? By the year 2040, in the United States, will we see another - They're going to start a polymarket contract. Will we get another Vogel? I've got this like internal bet.

29:27So I have to say yes. But there is a caveat. No utility will do it themselves. Yeah. There is, I'd say, zero chance that a utility will say, hey, we're willing to do a Greenfield new nuclear facility with no cost overrun risk. But I think the cost overrun risk will get covered by the government. So we're starting to see some of this stuff. We're seeing it across the natural resources economy, right, where the U.S. government is taking direct equity stakes and they're having a more directly interventionist approach to all of critical minerals and resources. So what would I do if I was sort of the energy czar?

30:04I would say, hey, I'm the U.S. government. I'm going to backstop, guarantee cost overrun risk for 10 nuclear generation facilities across the U.S. I'm going to make sure they get built. I'm going to sort of shoulder the excess cost burden. And then maybe at the end of this, I'm just going to sell it to the highest bidder. So let's just make up the numbers. Maybe it costs$100 billion for the US government to do that. Maybe those 10 facilities get sold for$50 billion and the taxpayer has taken a$50 billion loss. But here we've got 10 new generators providing sort of cheap and clean energy. Maybe they can sell it for 150 and actually sort of help the deficit situation.

30:42But so again, to answer your question, I think it's going to happen. But I mean, one of my key messages, it's not going to happen alone. Like these supply chains are not going to come about because of market forces. You're not seeing a reaction in copper production. You're not seeing a reaction in uranium mining. You're not seeing a reaction nuclear generation without direct government sort of intervention has a little bit of a negative connotation, but direct government catalyst. You know, and I but I think that that's going to happen and we're starting to see it.

31:27this reminds me i did pull up the chart of the number of times public and private partnerships are being mentioned in news stories and uh yeah spiking into late 2024 and 2025 so we're we're We're back. We're back. But OK, talk to us a little bit more. Why doesn't the market like signal work for something like uranium? Or you mentioned copper as well. Yeah, I think, honestly, these are sort of markets that have been sort of forgotten by investors and companies are still being penalized for increasing capex and increasing supply. So it's kind of the shale story, that sort of thing? It's the shale story.

32:05So you look at sort of at the end of last year, some of the major mining companies talked about their 2026 CapEx. Most of them sort of cut CapEx expectations, or at least relative to consensus, came in below. And that's weird, right? Copper prices, all-time highs. Gold prices, all-time highs. Shouldn't the miners be increasing their CapEx and inviting that supply response we talked about earlier? the investors just revolt. They say, no mas. They want the discipline. You've destroyed so much value and they did, right? Shale destroyed a lot of value 2010 to 2020. And so it's not going to happen naturally.

32:42And maybe that's okay because these management teams, I mean, they should continue to be held to the discipline, but we do need the supply. And so that's why I think that the government is going to try to get it moving. And we've seen examples of that, right? You saw some rare earth stuff last year, lithium stuff last year, obviously the big nuclear backstop of contracts and so forth that was announced in the end of last year. A lot of it is not well defined, but we're going to start to get some more definition behind this stuff. You can't blame the shareholders. I mean, it must be so sick. You have these prices shooting through the moon.

33:15It's like, why not just take the cash? You know, I mean, as a long term oriented shareholder, as a shareholder, you know, I I think, listen, at these prices, returns on a lot of projects actually look pretty good, but you worry about administration changes and you worry about the supply response. And honestly, these companies did really poorly for a long time. And so the spreadsheet math might say, hey, start drilling again. But the sort of history would say, no, no, the returns need to be way better to justify that. And I think it's a rational response by the investor base. But I think step one is like people need to start looking at the, again, the old economy stuff again, but it's the new economy stuff.

33:56People need to be looking at natural resources stocks. They need to be looking at infrastructure stocks. They need to be feeling good about them providing capital to these companies. And then you will get that supply response. But again, it's early in the cycle. On the topic of natural resources and maybe investor reluctance, we're recording this on January 6th. And the big news in the markets is, of course, what happened over the weekend in Venezuela. I'm sure that's not your particular area of expertise. But, you know, as an infrastructure investor, when you look at a place like Venezuela, where we hear they need billions of dollars of capital to get the oil industry up and running, what do you think about that situation?

34:35Yeah. So let me just talk about it strictly from like an investor perspective and how you would sort of think about that. Being an infrastructure investor, we care a lot about one risk that very few people spend a lot of time on. So if you were to say, hey, Tyler, you talked about the data center CEO staying up at night for losing power. What keeps you up at night? For us, it's regulatory risk, right? You're investing in airports and utilities and things like that that are governed by a regulator. We worry about surprise. And you get regulatory surprise here, right? You look at what happens with utilities in Illinois.

35:08You look at what's happening with FERC and as they sort of change things. So we spend a lot of time - I don't know anything about utilities in Illinois. Well, like, hey, the utilities spent some CapEx and they said, hey, we want a higher return and we want to get that in our rate base. And the regulator just says no. And so you talk about our boots on the ground investing. It's trying to make sure that we understand those very difficult things to figure out before everybody else does. So take it to Venezuela. Like if I was to make a large foreign direct investment there from an infrastructure and resources perspective, I would really, really want to understand the legal constructs surrounding that.

35:50And that's really challenging in the midst of regime change. And so I'm very hopeful. Like, I think everybody would say, hey, we're hopeful that things get resolved quickly. And then you sort of figure it all out very fast. But it's going to take a while, I think, before you actually start to see some investments. Because as an infrastructure investor, the risk of expropriation, nationalization is very high. And so you don't want to go and suddenly see your assets stranded there. So maybe that answers your question. But again, a lot of it is about understanding regulation and law and what's happening in politics and so forth.

36:24Well, I'm also curious. I mean, we had President Trump is obviously very excited about the opportunities to rebuild that infrastructure and for American companies to come in and be part of that. But oil, West Texas, it's at$57 a barrel. Setting aside the obvious, highly uncertain regulatory environment of Venezuela, I don't know what pencils out at$57. And I'm curious, you know, you mentioned pipelines, like during the 2010s or sort of, you know, there's a lot of anti-pipeline politics. And I assume that the current administration is much more, you know, green light for pipelines. But who wants to build new pipelines at these prices?

37:02Yeah. So I'll use my favorite acronym, but I've got to give credit to Paul Sankey at Sankey Research because he's the one that coined it. But so a decade ago, we had a NIMBY world, which is like not in my backyard. That world transitioned to a bananas world. Bananas is build absolutely nothing anywhere near anything. Right. So the bananas world existed from like 2018 to 2024. And when I say bananas world, that's about the ability to build infrastructure. Okay. Not any other bananas out there, right? That does feel like it's changing a little bit in that, hey, there's starting to be a little bit more sort of certainty and sort of based in DC desire to build stuff.

37:39And so you're starting to see a little bit of pipeline construction activity, heating back up. We went from a world where, hey, we're never going to build another pipeline in North America. I think that's changing. It's going to be a lot more pragmatic than it was in 2010 to 2015. But you're starting to see this sort of willingness to make these investments. But again, it comes because this sort of - But did they math out? What pipeline is economical at current prices? It's all a function of what the customer is willing to pay, right? And if you've got natural gas prices in the high threes, and if you've got sort of wide oil differentials and other things, a lot of the pipeline activity that we're seeing today is natural gas pipelines feeding the data centers.

38:15Their willingness to pay is pretty high. And so that's really where we're, it's not an oil pipeline world today. It's a natural gas pipeline world. We go from we have no bananas to yes, we have no bananas. I love that. I've never heard bananas before. Please enjoy my 1920s cultural references there. Going back to U.S. energy and electricity. Again, every headline or every one person is like, you know, we have the chips, we have this that our energy is the bottleneck. You hear that over and over again. And I think Jensen Long said that again today in that CES, energy is the bottleneck, except we all know this, right?

38:51So in my mind, it's like, oh, it's all priced in. But like, as an investor, what parts of this energy story to you still feel underappreciated? Or where are there still opportunities in a story where it's like, literally, anyone is aware of this fact, the electricity constraints? Yeah, so I'd start with, we agree electricity is constrained. The demand is going to keep rising. I would note it's not just data centers. We spent a lot of time thinking about U.S. energy markets, and they went from zero growth in terms of electricity demand from 2007 to 2020. They've been growing like 1.5 % recently.

39:27We think it's going to go to 2.5 % per year. Doesn't seem like a big number, but going from 0 % to 2.5 % in a big industrial system is a huge one. Only about half of it is data centers. There's lots of electricity demand coming from EVs and from the industrial system and so forth. But where do we see the opportunity? I'd start with certain utilities. So utilities today actually trade at a lower multiple than they did a few years ago. And growth rates are a little bit higher than they used to be. So that's like a little bit of an odd thing to see. However, what we think is, hey, the average utility is going to see some challenges from affordability issues and from regulation, but the best utilities are not trading at a lot higher multiple than the average utility and their growth rate differential is way better.

40:14So to put some numbers around it, eight years ago, you had to pay an 11 % premium to get 1 % better growth. So the average utility group was going to grow six, best in class utility was going to grow seven. You had to pay an 11 % higher multiple for that trade. Today, the fastest growing utilities only trade 6 % more expensive. So actually cheaper relative to the average, they're going to grow 2 % more. So instead of six and a half, it's going to be eight and a half. That's pretty odd, right? You're paying lower absolute multiples. Do you have a theory for that? I think people are worried about regulation.

40:50I think people are worried about rising interest rates. They're worried about affordability. And what you're going to see is the pack will separate over the next three years. So it's rational that sort of the world has compressed in the way that it has from a utility perspective. But I think over time, those that are able to execute will really be rewarded. Outside that, I mean, the picks and shovels types companies to the data center and re-industrialization build out, we still see a lot of opportunity. Multiples are up, but they're becoming more predictable. Their growth rates are accelerating.

41:21It's more structural in nature. Who are some of those companies? I mentioned Caterpillar, but that's like... Yeah. I mean, the engineering and construction companies that are help building the large-scale infrastructure and so forth would definitely fall in that bucket. We look at some of the companies that are like aluminum smelters and so forth. Again, these are highly consolidated industries relative to where they were a couple of decades ago. And so this is like, it's the gold rush, who made all the money in the gold rush. It was the Levi's and the picks and shovels companies. And I kind of think that's where we are.

41:50You might get the best absolute returns in some of the direct ways to play this, but they might come with a lot more volatility. And we think the sort of at least risk-adjusted returns are more in the picks and shovels. Speaking of volatility, very quickly, one of the interesting things that happened last year in data center world was we had that big outage at the CME, which was the result of an outage at one particular data center that was run by an operator called, I want to say Cyrus One. Yeah, I think that's the name, yeah. You know, you talked about the CEO staying up late at night worrying about exactly this scenario, but do you as an investor in the infrastructure have to worry about operational risk as well?

42:26And then how do you actually assess that? Yeah, we do. I mean, let's use pipelines as like the best example, right? If you own a company that owns oil pipelines and they have an oil spill, like that is a big problem. So we get a lot of questions on, hey, how do you think about ESG and integrate ESG and so forth? And one of the key things that we do is we think about the incentives and we think about how these companies are doing maintaining their assets and what their local shareholder relationships are like and what the integrity of what they own and operate are. Because, yeah, with infrastructure, operational risks have major asset impairment risks with them.

42:58And so, again, for us, it's this big team around the world trying to do what we can to talk to not the CEO, but the plant managers and the sort of next rung down and ask one CEO what he thinks about the assets of another company. And are they maintaining them well and try to get some insights there? Because, yeah, it's a key risk, something that we worry about. So we're kind of in a post-banana world in the sense that from the D.C. perspective, you know, I think the administration clearly has a much more liberal attitude towards approving various things. On the other hand, and we've talked about this recently on the show quite a bit, the local backlash, particularly today at a center, suddenly people are really anxious about that.

43:41We see these town hall meetings going viral and there's misinformation about there, something. When you think about like the utilities that are the rapidly growing ones, the ones for whom there's perhaps an opportunity because they don't trade at a premium that is consistent with their growth potential. Do you worry about that aspect? And do you do much time thinking about like, yes, on paper, we know there's tons of plans to build more here, et cetera. But will it actually happen given the realities of local politics? Yeah, I mean, I'd start with there's been a lot of data center backlash. and is it appropriate or not?

44:17I mean, there are some utilities whose bills went up 15 % last year. So, and you think about a data center company that doesn't create any jobs in the local market. I mean, there's construction jobs, but then once the data center is running, it's just kind of like a big empty shell with some refrigeration and some power. And you're not really doing a lot for the local economy. So your sort of local residential customer who's paying 15 % more and is not seeing any sort of economic benefit to the local area from that, that is inviting a reasonable response from the regulator to say, hey, we actually it's not in our best interest to do this.

44:49And so we spend a lot of time on who is on the utility commissions. Are they elected? Are they appointed? Because that can matter. What has been the bill pressure? I take it the elected ones are more sensitive towards. All else equal on elected commission. You're saying, hey, they want to stay elected. And so they're going to do things that are more beneficial to the local electorate than someone that's government appointed or governor appointed who would maybe do something that's, hey, I know the bills might go up a little bit, but we actually want to invite this. I mean, just to put the magnitude of the opportunity.

45:19So there's a utility in the Midwest. It's been around for about 100 years. It currently has a system that's about 11 gigawatts. So one gigawatt is about a million people. It's like the city of Denver. So this Midwest utility, 11 gigawatts, took about 100 years to get there. They currently have data center demand to build 15 gigawatts. Think about that, right? 100 years ago, 11. What's the name? I want to look this up. What utility is it? Can you? I get yelled at by my - All right, fine. We'll look it up. We'll look it up. We'll look it up separately. We'll use data-powered AI platforms to figure it out.

45:52Yeah. They'll kick me under the table if I give too many specific stocks. But no, you just think about that, right? A hundred years ago to 11, and by tomorrow, they want another 15. That is really expensive. And so you're seeing this tension, and I think that's reasonable. Do you play Power Grid ever? Do you know that game? No, but I feel like I should. It's a board game. It's a board game where you're in charge of supplying electricity to various cities. It's kind of fun. I played the board game Pandemic in like late 19 and look what that led to. So maybe I'm a little bit scared. It's your fault.

46:24Well, play Power Grid and then we can all enjoy an efficient electricity system. Maybe things will change. That was a great conversation, Tyler Rosenlick. Thank you so much for coming on OddLot. So let's stay in touch. Now we're going to use our AI skills to backwards figure out what that 100 year old is. I'm going to draw energy from the data centers to crunch the numbers on Claude or whatever. Yeah.

46:58Tracy, I really enjoyed that. It does feel as though if you're in the right place right now, there's just a mountain of money coming. I mean, who knows if you're going to get it. But, you know, between all of them, he talked about every country wanting to have more domestic energy security, the secular trends, etc. If you're in the right place, government spending more money feels like you could stand in the right way of an absolute fire hose of money right now in this space. I mean, it feels to me and, you know, he kind of said it, but the government is the key risk, the regulatory risk. And also, I take his point about even though maybe the numbers pencil out at current commodity levels, if you look at future demand and stuff like that, it might not work because your assumption is, well, you know, in three years, we'll have a new administration.

47:47Or maybe in another 10 years, the pendulum will swing back towards clean energy or something like that. So that, to me, seems to be the big risk. Just on the Venezuela point, I mean, it's going to be a hard sell. I mean, imagine who wants to pony up$100 billion and granted shared between a bunch of different companies, presumably. It's still the same old regime. There hasn't been, you know, and then all the uncertainty there. And then the fact that, you know, oil just isn't as valuable as it was several years ago. Who are the brave sell side analysts that are going to go on a field trip to Venezuela in order to inform their research on buying like PDVSA bonds or something?

48:28Yeah, that's what we need. We need a sell-side report. Because the thing that's fun about the reports that you like is they often take a lot of pictures. Oh, yeah. So we need someone to do a report, like go into the Patovesa facilities. Just someone takes a thousand photographs of like, here is the state of this facility, this pipeline. Someone go watch an oil tanker being loaded up in Venezuela and tell us everything that you see. How is it? How efficient is it? And so forth. What it would actually take to repair it to optimal. I feel like I need to add a disclaimer onto that. Please do not go to Venezuela and do all this on our account.

49:05On our account. No, we are not asking you to do this. We're not asking anyone to go to Venezuela. We're asking someone in a professional capacity whose job would be to go there anyway to please include a lot of pictures in the sell side report. But we're not asking you to do it on our behalf. Is that a big enough caveat? Are we going to get an email from the lawyers? We got to reverse engineer what that utility company is in the Midwest because those numbers are staggering. I mean, the fact that – what is it? 11 gigawatt. By the way, can I as an aside here? Yeah. Energy math, I have the hardest time wrapping my head around it.

49:39I was thinking that like measuring one gigawatt as like powering Denver was actually a really, really useful way of thinking about it. Except the problem is I always forget that. But okay, one gigawatt Denver. One gigawatt Denver. Just tattoo it onto your arm, Joe, because, you know, that's a useful fact that you're probably going to be referencing for many years to come. And then a gigawatt is different than a gigawatt hour. And so these are like separate things and so forth. But the idea that here 100 years took them 100 years to get to 11 gigawatts. And now they're projecting 15 gigawatts more.

50:09I mean, it's staggering, staggering numbers. And I guess it makes sense why literally every company in this space is saying it's not chips. It's not. It's the energy. On the other hand, maybe we have some incredible technological breakthrough, a deep seek moment for chips. And these chips use, you know, one hundredth of the electricity that could happen. Well, I mean, again, going back to how we started the episode, you kind of saw a hint of that potential today. Such a fascinating space. Absolutely. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast.

50:40I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at CarmenArmond, Dash O 'Bennett at Dashbot, and Kale Brooks at Kale Brooks. And for more OddLots content, go to bloomberg.com slash oddlots for the daily newsletter and all of our episodes. And you can chat about all these topics 24-7 in our Discord, discord.gg slash oddlots. And if you enjoy OddLots, if you like it when we do these energy episodes, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, You can listen to all of our episodes absolutely ad-free.

51:17All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

51:44Thank you.