Oil giant Exxon Mobil’s (XOM - Free Exxon Mobil Stock Report) annual publication of its long-term view for energy supply and demand draws important conclusions that investors should consider when constructing their portfolios.
To begin with, the sheer size of the increase in energy demand from the study’s 2010 base year to 2040 is a whopping 183 quadrillion BTUs. Breaking that down into easier-to-understand figures, 35% more energy is projected to be consumed over the 30-year horizon, translating to an average annual increase in energy demand of 1%.
One might wonder why the extra energy demand is only expected to come in at 1% a year. The prospect of increasingly efficient automobile engines, appliances, and buildings is the offset, notably in mature industrial regions, such as Europe and North America. But even a 1% annual rise off of such a large base translates into big numbers.
Two main factors will drive demand: economic development and population growth. The global economy is estimated to expand at 2.8% a year over the very long term, with much of the buildup supplied by developing nations. It is also expected that two billion more people will be living in 2040, bringing total global population to nine billion. In short, the world will need more fuel, and plenty of it, to support the trends in economic and population growth. That suggests it would be wise for long-term investors to have an allocation in shares of resource companies.
By 2040, oil’s portion of total energy supply is forecast to ease a bit, from 34% in 2010, to 32%, but its percentage is still expected to be the largest. The big shift is predicted to be toward natural gas, from 22% to 27%, and away from coal, from 26% to 19%. The relatively clean-burning aspect of natural gas and its newfound abundance make it the favored fuel over coal for electricity generation in the long run. Nuclear, biomass, hydro, and other renewables will also become more prominent in the mix, according to Exxon.
Perhaps the most striking observation arising from the Exxon study is that the United States will likely become a net energy exporter by 2025, or little more than a decade from now. That is not to say we will become energy independent, particularly in the case of oil. But technology has unlocked new sources of natural gas and oil in the United States, and costs for developing the Canadian oil sands have come down. These close-to-home assets might make the nation less susceptible to the energy crises that have bedeviled the economy every so often during the past 40 years.
Thinking long term isn’t always easy in these days of online access and instantaneous communications. But the world does change over time. Thirty years ago, for instance, China was an afterthought in the scheme of the global economy, and today it has the world’s second largest gross domestic product. On the downside, thirty years earlier, Japan was in the midst of a major boom that made its business practices among the world’s most admired, but that island nation’s economy has since fallen into a dormant state. An important shift in the global economy out to 2040 stands to be the increasing prominence of Asian nations, and their booming populations will require ever more fuel.
It may even be possible to find a handful of stocks that can be held until 2040. Shares of the big, financially strong integrated petroleum companies, including those of Exxon Mobil, Chevron (CVX - Free Chevron Stock Report), Royal Dutch Shell (RDSA), and Total (TOT) can usually be owned for extended time horizons. Stocks in that group provide good current income, and steady dividend increases should support higher share prices over time.
At the time of this article, the author did not have positions in any of the companies mentioned.