Coal is Dead and Other Thoughts on Fossil Fuels from Peter Zeihan

With energy setting records as the worst performing sector year-to-date, we were curious about Geopolitical Strategist Peter Zeihan’s thoughts on fossil fuels in the context of the United States’ continued retreat from the global theater. We recently caught up with Peter to ask his opinion. Below are excerpts from that conversation.

KLC: What are your thoughts on fossil fuels given the United States’ continued retreat from the Bretton Woods era and global trade system?

PZ: Coal is dead regardless of what happens with the Trump administration. Because natural gas is a waste product of the shale sector, it’s flooding in and taking the entire market. Shale production has doubled from 20% of the fuel mix to about 45% today, and it will definitely cross the 50% threshold before the end of the decade.

Alternative power sources are not yet in a position where they can make up the difference because most power demand in the United States happens after dark in the winter. So if you’re in the northern tier of states, solar just isn’t appropriate. Now if you’re in Texas and the belt going from Texas to Southern California, solar is brilliant in that zone. And in terms of electricity generated as opposed to installed capacity, I expect electricity generated from solar in Texas to increase by a factor of five in the next six years. Not because Texans are green, but because Texans can do math. So don’t look to how many panels are up. Look at how much power actually comes from it that is actually fed into the grid and used. This destroys coal. It makes solar kind of a wash outside of the Sunbelt.

KLC: What’s the most promising alternative source, in your opinion?

PZ: The next technology to keep an eye on is wind. The new towers that are going up aren’t just 30 meters tall, they’re 70 and 80 meters tall, which means they tap a stronger, more reliable wind current structure. And they can be built almost anywhere. The primary wind zone extends from the Great Plains into the Rockies and all the way to Chicago, and the offshore capacity on the East and the West Coast is phenomenal. So we might be able to get 15-20% of base load capacity nationally from wind. The infrastructure build-out time is long, however. Building an 80-foot-tall wind tower is as hard as it sounds. And, if you think there was a “not in my backyard” problem with the towers that were 30 meters tall, these new ones can be seen from 11 miles away.

KLC: Would more wind towers be good for copper prices?

PZ: In theory, yes, but only moderately. Existing wind towers only work in specific areas, so the electricity has to be wired long distances (West Iowa to Chicago, for example). However, the taller towers work in a wider range of areas and so can be positioned closer to demand. Many more towers, but less of a need for long-haul transmission.

KLC: Isn’t there an underinvestment in the infrastructure for transmission lines?

PZ: Yes, and transmission is the issue. That’s one of the reasons wind looks so interesting: it’s local everywhere. So you don’t have to build a wind farm in Nebraska and wire it all the way to Chicago. You can build a wind farm outside of Chicago. The more you can make that alternative energy generation local to your demand source, the less of an issue transmission is.

KLC: How soon until shale takes off in China?

PZ: You need a bunch of things to make shale work. Obviously, first you have to have great geography and geology. Only the United States has shale where the people are. Most of our shale plays are stacked plays, most of them in the rest of the world that have been discovered so far are single plays, and the Chinese really only have one geological region that looks good, and that’s in Szechuan. The Szechuan region is a secessionist region, so the Chinese have not really prioritized shale development there because the last thing they want to do is make a secessionist region energy-independent.

Also they would need to have the infrastructure in place, and a natural gas transport system takes at least a decade to build. They also would need scads of petroleum engineers because in the early days of a shale revolution, most output is only at a few hundred barrels per day per well and the fall-off is pretty quick. It’s not until you get to the second, third and fourth shale revolution that it picks up. The US has more petroleum engineers than the rest of the planet put together.

There are only a few places that have the resources for shale to help with energy demands on anything less than a generational scale, and those are Canada, Mexico, Argentina and Australia. They could get shale booms there, not revolutions, but booms. Anywhere else, they’re going to have to pick away at it slowly. The Europeans are experimenting with shale in Russia. They can’t do it at home, and the Russians basically do everything they can to talk shale down anywhere else. So it’s not that shale technology is proprietary: it is leaking out. It’s just that it can’t be applied with the same ferocity that it is here in the United States.

The views are expressly those of Mr. Zeihan and are not necessarily the views of Knowledge Leaders Capital or its investment professionals. Mr. Zeihan provides consulting and research to Knowledge Leaders Capital and is compensated for those services.