What Drives Energy Investments?
Welcome to the Real Estate Special Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re talking about the link between energy and the economy.
I’m going to highlight a well-written paper by Jeff Curry, the Chief Strategy Officer of Energy Pathways at the Carlyle Group, one of the world’s leading private equity firms. Jeff Curry is a former Global Head of Commodities Researcher at Goldman Sachs, where he helped build their commodities business. He was there for close to three decades and became one of the industry-leading analysts when it comes to energy.
The paper called ‘The New Joule Order’ – ‘joule’ spelled ‘jo-u-l-e’, which is a unit of energy, was published in March of this year. In the paper, Jeff Curry introduces the transformative thesis in energy investing in geopolitics. It’s, in fact, security, not climate change, that’s the dominant force driving energy decisions. While climate goals remain important, the energy landscape is being reshaped primarily by concerns over sovereignty, supply chain resilience, and economic self-determination.
Historically, energy transitions were primarily thought to be cost or climate-driven. However, Carlyle argues that all of these past energy shifts, like the one after the 1973 oil crisis, were principally about national security. In fact, the security-motivated transition from 1973 to 1993 reduced fossil fuel usage more sharply than this from 1990 to 2000. As such, countries are moving towards diversified domestic energy portfolios that include fossil fuels, renewables, and nuclear energy.
We’ve heard a lot in recent years about peak oil. Peak oil is the idea that we’re exhausting the world’s oil supply and, as the supply dwindles, the price would rise. But this narrative evolves. Instead of peaking production or demand, Jeff Curry introduces the concept of the peak oil trade – the maximum point of fossil fuel flows between countries.
Since 2017, global trade in fossil fuels has actually declined, largely driven by geopolitical instability, rising tariffs, and strategic localization of energy supply. It doesn’t imply we’re using less fossil fuel, but there’s less fossil fuel moving around the globe. These fossil fuels remain essential due to their storability and transportability. However, as cross-border energy trade grows more unstable, nations are turning to local non-fossil fuel sources like wind, solar, and nuclear, which are inherently more secure, even if less tradable.
Our current international trade system was constructed on
the Bretton Woods Accord that happened in 1947, right after WWII. It supported US naval dominance and the dollar to enable safe, affordable, and global oil trade. Prior to WWII, countries were energy self-sufficient, but that changed following Bretton Woods. Bretton Woods enabled global economic growth but also cast vulnerabilities for energy-importing nations.
With the US achieving energy independence through the shale revolution, its motivation to secure global oil routes has declined. Countries like China have been heavily investing in domestic nuclear and renewable energy since the early 2000s. That is not done to meet climate change promises, but to reduce their strategic reliance on imported fuels.
Europe, by contrast, has moved in the opposite direction, they are more energy-insecure, extensively depending on fossil fuel imports at the same time as they’re, at least in some countries, ramping down domestic production of nuclear. Jeff Curry’s thesis in this white paper persuades investors to focus less on the source of energy, like oil, gas or electrons, but instead center on its delivery utility. In this perspective, return on equity should matter more than the levelized cost of energy.
Too much emphasis on cheap production led to congestion of the grid and misallocated investments during the net-zero boom of the 2010s. Then, of course, we have new electricity needs. Energy investing is increasingly intertwined with artificial intelligence, and we can’t exaggerate the amount of energy these systems require. AI isn’t just a technological shift; it’s a continuation of long-term trends of electrification that are actually escalating. AI data centers and the demand for that digital infrastructure could be almost equal to domestic household energy use. As we move increasingly towards electrification, it opens up optionality in some energy markets, backed by gas, batteries, and balancing systems, which allow for energy arbitrage across countries in ways not possible before.
With rising tariffs and the retreat from global trade, governments now view local energy as a strategic asset. Just as carbon taxes and green premiums were meant to encourage decarbonization, tariffs and energy premiums now incentivize local energy production, even if it means higher costs.
France might be one of the best case studies for this. Its low-emission energy mix was not driven by climate concerns, it was driven by a sense of national insecurity. After losing access to oil from Nigeria, they wanted to be energy independent. About 80% of France’s grid is nuclear-powered, and that was not done to lower emissions; it happened to have been an accidental consequence.
The United States is in a potentially vulnerable position because they’re focusing heavily on fossil fuels and they’re not developing nuclear assets like China, France, and many other countries. China, on the other hand, is spurred by energy security and they’ve been constructing capacity that started decades ago. Leading the world in nuclear construction, wind and solar, and EV production, they’re doing this not to save oil, but to become energy independent.
Europe is perhaps the most vulnerable due to shrinking fossil fuel production and they’re overly reliant on imports. We saw this particularly with Germany. Higher interest rates have halted the zero-rate environment that supported poor investments into unprofitable green assets. In this new landscape, credit and equity distributions have to be far better targeted.
So, there will be a new map of global energy. Different nations will form distinct energy portfolios. The U.S. and China can rely on domestic fossil fuel resources and localized renewables. Europe needs to scale up renewables with storage and possibly expand nuclear to avoid being overly dependent on imports. India and Japan will face unique challenges as they have to balance coal, nuclear, and imported fuels with renewables. That regional differentiation is going to be mirrored in investor portfolios.
We frequently fixate on just the price of oil or natural gas. It’s no longer price-driven. This paper frames the coming decades as an energy era defined less by decarbonization for its own sake and a return to national self-interest and security.
Whether you’re an energy investor or you’re invested in communities where infrastructure, it’s vital to understand this because, after all, energy is the economy. As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you tomorrow.
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