Jeff Currie
Global Head of Commodities Research at Goldman Sachs

Revenge of the Old Economy

January 23, 2023 | 44:40

Low interest rates and a focus on being green led to significant underinvestment in the old economy. Netflix rose and Exxon fell. But we’re now beginning a rotation away from the new economy back to the old, says Jeff Currie, global head of commodities research at Goldman Sachs. In this episode of The Active Share, Jeff tells Hugo how he sees the future of energy, from green tech to oil, from the east to the west—who will win, who will lose, and how investors can prepare.

Meet Our Moderator

Hugo Scott-Gall, Partner

01:19 Host Hugo Scott-Gall introduces today’s guest, Jeff Currie.
01:39 The revenge of the old economy and why these cycles keep repeating.
07:28 Other considerations in time to make the necessary investment.
12:52 Will public companies take their shares private?
14:50 When will there be a steady equilibrium with the supply?
17:29 What is in short supply in creating a new green energy system?
22:16 Will there be a shift in geopolitical power?
25:57 Europe has shifted from energy dependent on Russia to now the U.S.
28:40 Will less energy flow from Russia or flow in different directions?
31:16 The role of climate change on the location of production.
40:01 Closing thoughts on these cycles and why they will never completely go away.

Hugo Scott-Gall: Today I’m delighted to have with me, Jeff Currie. Jeff is the global head of commodities research at Goldman Sachs. He’s been doing that for an impressively long time. Basically, since oil was first discovered. He’s one of few genuine gurus of the industry and I’m delighted to have him on the show. Jeff, welcome.

Jeff Currie: Great. Thank you, Hugo. And it’s a pleasure to be here and it’s great to see you again.

Hugo Scott-Gall: Yes, yes, yes. It really is. It’s a treat. You’ve been writing a lot saying it’s the revenge of the old economy. What do you mean? Why do these cycles keep repeating? And then let’s talk after that about how to quantify that.

Jeff Currie: Well, let’s go back to the February 2002 when the dot-com bubble was bursting. That’s when they coined the term, the revenge of the old economy. And what it was meant to capture was the fact, over the previous decade, the dot-com boom had stolen so much capital from the old economy, it had prevented it to be able to grow the supply base.

And at the time, we thought it was something totally new. Then we saw it again resurface in the 2010s. Then the new economy, instead of being the dot-com boom, was the fame boom. But it was doing the same thing. It was syphoning returns or syphoning capital away from the old economy, choking off the investment that it needed to grow the supply base. By the way, I want to be perfectly clear here. Investors made the right decision to be buying Netflix over Exxon over the previous decade because the returns in Microsoft; the returns in Netflix and the rest of them were far superior. But ultimately, that underinvestment choked off the supply base that now, the returns from being in the old economy are substantially greater. I’d like to point out, last quarter, Exxon printed $20 billion of free cash flow versus Microsoft at $17 billion.

So now, Exxon’s printing bigger free cash flow numbers, how are the valuation of Microsoft still four times that of Exxon. So, we’re just beginning this rotation away from the new economy and towards the old economy. Another way to say it is, the old economy is now taking its revenge. But before I—you asked another point, that these are broader cycles. I’m beginning to realize; the revenge of the old economy is probably the wrong term for this. What it really is, is the inflation duration trade off. It’s an inflation duration cycle. To understand what that is, let’s go back to 1960. And we look at 1960—you had excess commodity supply coming off all of the investment in the post-war era. This led to low and stable inflation.

Actually, very similar to the 2010s. The low and stable inflation led to very low interest rates. Again, very similar to 2010s. What do investors want in that environment? They want duration. Duration in the 1960s was the Nifty 50. What was it? It was brand names. Things like Coca-Cola and Gillette. This did the exact same thing it did over the last decade. It choked off capital to the Exxons of the world. In fact, make a chart of Coca-Cola and Exxon. You can see these cycles clearly over this time period. Let’s go to the 1990s. Exact same setup. Excess commodity supply coming off of the boom in the ’80s and you have the collapse of the Soviet Union, led to low and stable inflation, low interest rates. Remember you had Greenspan talking about irrational exuberance. Investors chased the dot-com, which was duration then.

And then similarly—I’m not go over the story—we all know the 2010s. Exact same setup. So, are these environments inherently inflationary? The answer is no. But what occurred in 1968? LBJ’s great society. What occurred in 2002? China’s admission to the WTO. What occurred in March of 2020? COVID stimulus. By the way, all three of those, to commodity demand, very similar in magnitude. But what they did is they represented that transition point where you began to price higher inflation and higher interest rates. And what do investors then do? Then they chase shorter duration. The duration comes in. And so, here’s the final point to this. What do the ’70s have in common with the 2000s and could have in common over the next decade? Huge capex booms. And ultimately, what people, I think, miss, is you need the higher rates to actually create those capex investment booms.

They don’t kill it off. They actually create it. Why? They discourage the duration trade. Means, where do you put your money into today?

Hugo Scott-Gall: Yeah, which is a little bit counterintuitive, that actually making capital a bit more expensive encourages more spending. Have you had a go? So, this is—we follow the money. You had capital cycles, capital goes over here, then it stops. Then it’s over here. Then it goes back the other way. So, this is a supply side driven phenomenon, plus you’ve created a ton of money. Have you attempted to try to quantify the level of underinvestment? Because that’s not an easy calculation. I know trying to be precise is ridiculous, but to try and quantify, plus time to rectify. Because I think the second point of my question is maybe even more important than the first, which is, the time to make the necessary investment has other considerations, such as, how do I model the payback period?

If we’re going to hit our emissions targets, can I really—how long is this project going to exist for? And the secondary, which I think we should get onto is, attitude, beliefs, societal beliefs, which you could also describe as ESG. So, I’d actually hold my return on investment, plus the risk of making the investment, is a different equation, I think, from previous capital stops supply shocks. Because my period for payback is much more uncertain.

Jeff Currie: Yeah, and by the way, I don’t think—initially if you would have asked me this exact question six months ago, I would have separated the ESG story from the duration story. What I’m beginning to realize, ESG and green tech or green hydrogen, all of that’s duration. Is it any different than crypto, big tech or anything that has been hit really hard? In fact, you look at the selloff in green tech. It’s very similar to what the rest of the tech sectors look like. To answer your question, is if you have to rely on that duration investment, it’s going to be really difficult to stimulate that investment because you have to mismatch in the duration—with that green tech.

I’m going to take a step back to answer that question in a different way. We have a lot of technology available today that could reduce emissions. We’re not reducing emissions. I like to point this out is that, in a 0 percent interest rate environment, being green has no cost. It’s just part of that duration play, whether it’s net zero 2050 or whatever it might be—these lofty ideals. They make a lot of sense in a low interest rate environment. I just want to lump them into duration. And as in what is happening right now, because of the underinvestment in oil and gas, which are relatively clean burning fuels, what is the world doing? Particularly the low-income countries and low-income groups within places like Europe and the U.S.

What they’re doing is they’re substituting into the lowest cost, fastest cycle, energy source, which happens to be wood and coal, which wood emits five times coal and coal emits two times gas. So, we’re making emissions worse today. Now, I want to bring this back to the duration and to answering your question, is instead of being focused on net zero 2050, we need to be focused on today. And higher interest rates are going to force that duration in a much more closer manner and we use the technologies that are available today. Employ them. Get emissions down through 2023.

I don’t know if we’re going to get there. I doubt it. But let’s say we do focus on getting them down in 2023. Higher interest rates and shorter duration means, let’s get them down and let’s get to the end of 2023. Get them down. Let’s focus on 2024. We’ll probably talk about policy later on in this podcast, so I’ll wait to address that, but that’s the way I’m thinking about the answer to your question because what you’re asking, is this thing any different than in the past?

I don’t think so. And I think that that focus on green tech and everything like that is really caught up in this whole idea of duration. On your question of capital misallocation, I think if you think about the capital misallocation being driven by ESG or low interest rates, I think the capital misallocation driven by low interest rates is far larger than the ESG. In fact, I don’t know if we know if ESG is binding or not. Investors don’t like this space because of a history of bad returns. They don’t like it because of the high volatility. And the focus on duration over the previous decade made this sector really uninvestable.

So, as a result, do we know that the lack of investment is due to ESG or to these other factors? Because once we see the rates of return of this sector on a three-year moving average start to get above the Nasdaq and the new economy, if we don’t see the capital flowing then, we’ll argue, hey, maybe it is ESG.

But my bet, capital will flow. They will chase these returns. But I think the key point is, why is the capital misallocation so incredibly large this time around? I think it’s, 1.) The losses that were generated by these sectors in the 2010s make the 1990s look like a walk in the park. I like to point out in the 1990s, USEMPs destroyed 27 cents on every dollar. In the 2010s, they destroyed 54 cents on every dollar. Is it ESG that’s causing people to not like the space or is it that fact? 2.) The other point I like to emphasize is, we’ve never seen 0 percent interest rates. And even the French philosophers go, hey, you’re going to get a capital misallocation at 0 percent interest rates. And they figured that out 300 years ago.

So, anyway, to give you that unprecise number, I think using Michele’s numbers—Michele Della Vigna—he’s our carbonomics specialist. He basically makes the point that the capital misallocation within your core non-OPEC are the ones that produce the traded companies is net $300 to $500 billion. So, we’re talking very large sums of capital misallocation. You spread it across the rest of all the other sectors, we’re talking trillions of dollars.

Hugo Scott-Gall: If energy prices stay where they are, or indeed go higher, I would have thought the marginal return on the marginal projects is getting pretty attractive. Do you think there is going to be a reticence on the part of public companies to make that investment for some of the things we’ve discussed? And actually, should they, therefore, even be public companies? Wouldn’t it become so attractive, in near-term yield, to take these things private?

Jeff Currie: The share counts speak for themselves. Some of these companies, their share counts are dropping 3 percent every quarter. And the reason why, it’s because they can get a higher return on their capital buying their shares back than putting a drill bit in the ground because the valuations are so low relative to their cash flow.

Similarly, you can go out and if you’re a U.S. oil producer, you can buy European oil assets off of the European companies. Because I will—when I say impacted by ESG, there is substantial evidence that the European companies are being impacted by this. I don’t think the U.S. ones are, but again, if you’re a U.S. company, it’s probably cheaper to buy European assets than it is to put a drill bit in the ground. Also, cost inflation has been tremendous. Here’s a stat—the unemployment rate in the U.S. oil sector is 0.2. I don’t think I’ve ever of such a number, but it indicates that the inflationary pressures in these spaces are substantial. And with oil’s recent pullback—and we can talk about what has driven that as well—you’re now at a level where the economics just don’t make that much sense in terms of putting capital to work today.

So, we’re just not seeing it and that’s going to have profound impacts when we look further down the road.

Hugo Scott-Gall: Yeah, I mean, reluctance to invest just puts off the evil era and leads to a bigger crescendo at the top. I would have thought, certainly, I remember back in the days of 2007/2008 when I was an airline analyst and airlines were suddenly paying prices they’ve never seen or even thought possible for kerosene. So, it’s a pretty fascinating equation. To round it all up, when do you think there will be a sufficient supply side response to keep energy prices within a range—and I guess that’s probably energy cost relative to GDP—when do see a more steady equilibrium? How slow do you think the supply response is going to be?

Jeff Currie: Well, I think to your point before about ESG and the need to rebuild—replace the old carbon economy with an old green economy.

Because it’s still old economy, it’s just got to be green. It’s going to make this the largest capex initiative the world’s ever seen. So, it clearly is going to make it far more difficult. But let me give you the answer of what we learned from the ’70s and the 2000s. And I picked this up from asset allocators and you can see it in the data. The first three years of one of these commodities super cycles is required to create a track record to convince investors it’s investable. Because remember, the ’90s and the 2010s have created the image that this sector’s uninvestable—probably in metals too. I wasn’t around in the ’60s to attest to what the returns were back then, but my guess is they must’ve been pretty bad as well. Then years four through six, you see capital rotate into the sector.

So, we’ll see if we get the rotation like we did in ’05. By the way, I’m confident that when these asset allocators tell me this, it’s true because ’02, the super cycle began with China’s admission to the WTO. Just like this one began with the COVID stimulus. And it was in ’05 that we saw the capital rotation. And by the way, the rotation just came out of the new economy. It’s not like you’re bringing in new capital.

Everybody thinks you have to bring in new capital. No, you take it out of the old economy. So, that’s what happened in 2005—or call it year four of the super cycle. What follows? Now they have all this capital, they try to spend it and they spend it against this 0.2 unemployment rate, what’s going to happen to the prices of everything?

They’re going to go up. They experience substantial cost inflation. This drives commodity. In the case of the 2000s, it took oil from 50 all the way up to 100. I have no idea what it’s going to do this time around, but I’m pretty sure you’re going to see it. This time, it’s going to be competing with the green capex.

Hugo Scott-Gall: Yeah.

Jeff Currie: Which will be competing for resources as well.

Hugo Scott-Gall: I want to talk about that—what it takes to build a new green energy system. And obviously, it takes a lot, is the short answer. But I guess it’s sort of skills, capital, materials, laws, regulations. What would worry or concern you the most? What is in shorter supply? What are the impediments that infringe upon that?

Jeff Currie: Metals are going to be the biggest bottleneck. Now, copper—we’re out of copper right now. Inventory’s extraordinarily low. The big copper supply increase that everybody expected for 2023 has been ratcheted down from 8 percent growth down to around 4 percent to 4.5 percent growth in supply.

I mean, after that, there’s really nothing behind it. At a time when demand is going to explode from all of these green capex you’re referring to and we haven’t even gotten into the issues around rare earth metals, as well as aluminium. Remember, aluminium is basically solid energy and given the energy crisis going on, it’s hard to come by. So, you have all of that demand that’s going to act like a break on that investment. And let me take a step back and talk about all of this green investment and the approach that we’re taking. And I want to start with the observation, what is food? Food is a carbohydrate. What is oil? Oil is a hydrocarbon. The only thing separating the two is an oxygen. What do they all have in common? It’s organic chemistry—it’s the carbon hydrogen bond.

And when we think of how you create the fossil fuels, it’s basically the plants, all of the carbohydrates—wood is a carbohydrate? As they sit there and rot and go down to the bottom of the surface over thousands and thousands of years, that oxygen disappears. Oh, other point too. You want to fly to Mars? You have to have one fuel on board that feeds the human and goes into the rocket booster. So, we have to get the technology to move that oxygen in and out of the food supply and in the fuel supply to be able to bring one fuel on board if we want to fly to Mars. But you get the point here.

Now, why am I bringing this up in the context of the green investment? The carbon hydrogen bond is what makes earth earth and actually sustains our lives. So, it’s a really critical component of the planet earth. In fact, that’s what makes earth different from all of the other planets.

And when we think about the following observation—if you’re driving a car today, an internal combustion engine car, you have the 80 kilo person on board, and you have the 20 liters of petrol on board. Not a whole lot of weight involved with those two things. Now think about a Tesla. Depending on the quality of the Tesla you have and the speed, the battery weight of this thing is somewhere—anywhere from 1,500 pounds to 3,000 pounds. It’s enormous. Why is it on there? Why is all that weight and all those green metals that we’re talking about right now? Because you’re using inorganic energy to replicate organic energy. You’re replicating that thousand years of that deterioration of that oxygen off of that carbohydrate. And then you have to go, okay, we’ve got thousands of pounds of metals on board of this car versus the 80 kilo guys or the 20 liters.

Now let’s start to scale up from 10 million cars on the road that are currently EVs to the 1.3 billion internal combustion engines. You get my point here? It’s going to put an enormous amount of stress on the availability of green metals and other types of natural resources. So, that’s, I think, one of the really big keys we need to be thinking about and the ability to generate this green revolution.

Hugo Scott-Gall: So, I want to end—finish on a more optimistic note—but we’re not there yet, because where I really want to end up is, do we get to energy abundance and what happens then? But before we get there, I want to talk a bit about geopolitics and I’m always interested in power and where is power and how does it move around the world? So, energy moves around the world and where it’s going to and from creates power—it creates geopolitical capital. So, are we moving to a world where power is going to reflect different energy flows? And perhaps a sort of lazy way of characterizing that is the dollar.

Why should China buying materials energy from Russia or Australia—why should they use dollars? So, I’m interested in that question around, I guess, is supremacy of the dollar, but really, I’m interested in with some countries having access to materials that weren’t so relevant in the past but are becoming more relevant now. Does that see a shift in power? Big picture questions, but I know you’ve thought about them.

Jeff Currie: Absolutely yes. And when we think about the world, who has access to all this? There’s a point people like to make that, oh, China has all of the world’s rare earth metals. By the way, it has all of the production of them right now in the supply chains, but guess where all the reserves sit? Sierra Nevadas in the United States and the Andes in Latin America. It sits in that whole range of mountains basically from California all the way down Argentina.

The western hemisphere has everything the world needs. It has all the oil, has all the gas. It has all the metals, all the chemicals, all the fertilizers, all the food baskets. It has everything the world needs. Which then begs the question, I like to say, what makes this commodity super cycle really different from the one we saw in the 2000s, is just how strong the dollar is. And I have to ask myself, if America has everything the world needs, how does the dollar ever get out of the way of itself? And I really struggle with that view, particularly for food and metals.

So, when we think about, where does the power go? By the way, Brazilian economy’s doing pretty well right now. They actually tamed their inflation far more quickly than the rest of the world. And let’s not forget, they have all the same kind of stuff. They’ve got all the food. They’ve got all the metals. They’ve got all the—in fact, agriculture yields in Brazil and Argentina are the best in the world. That’s the most fertile land on the planet earth.

So, when we think about the other place in the world that has a lot of the resources that the world needs, and particularly solar and wind, is the Middle East. In fact, I like to point out, they’re the only true Switzerland left in the world. You look at Switzerland, it’s lost its secrecy banking, secrecy capability. It voted obviously in the U.N. against Russia, as did Singapore. So, if you really think about where is neutrality, I’d argue Dubai is going to attract a lot of the world’s capital and it already is. Not only the capital, but the human resources, particularly out of places like Russia, more recently.

So, the other place outside of the world, basically it’s the Americas and the Middle East that are going to be the ones that really benefit in this environment we’re going into. One last point on this point about where are the resources. If we know we need to decarbonize, and we know that you don’t want to invest in long cycle oil productions like these deep-water projects off the coast of west Africa, and you want short cycle oil, they only exist in three places.

U.S. shale, the Arab Gulf, and Russia. Russia’s out. It just leaves you two options—U.S. shale and then the Middle East. And by the way, in terms of thinking about the Middle East, their solar and wind capabilities are absolutely massive. They can create things like blue hydrogen, green hydrogen, out of the natural gas. It can put industrial activities on top of those gas fields and be able to produce the goods without emitting anything.

Their position is very strong, and the problem is they don’t have the same food supplies that the Americas and Brazil have. But anyway, I think you get the point. The dominance is, North America, Latin America, and the Middle East going forward because they essentially have everything that the world needs. Now, the bottom line is Europe, India, China, and northeast Asia, they’re not endowed with the type of commodities that the world’s going to need going forward.

Hugo Scott-Gall: It looks like Europe has shifted from energy dependency on Russia to energy dependency on the U.S. Maybe that’s what the U.S. would want?

Jeff Currie: Here—on that point, I’d like to make the following observation. What was L&G invented for? It was invented to deal with the London fog problem in the 1950s. It was a quick, very expensive source of gas for power generation to reduce the dependency on coal and get rid of the smog problem. It’s not a fuel that you run your industrial economy off of. It’s too expensive. Why is it too expensive? Just think about what you’re doing. You’re taking natural gas from somewhere in the world. You’re liquifying it. Putting it on a $300 million ship that is a floating thermos that is frozen, and you put it in there and then you have to sail it off to wherever you’re putting and then re-gasify it. Put it in a pipeline and send it to the industrial activities.

It’s too expensive to do. I like to point out, ship the BMWs, don’t ship the L&G, or ship the gas. So, move the BMW plant on top of the gas field and ship the BMWs. It makes much more economic sense, which then begs the question, what is Germany going to do? Do they just move all of their industrial activity to the rest of the world or do they realign themselves with Russia?

So, the bottom line is, they may talk a tough game right now, but in terms of looking at the long-term viability of German manufacturing, more likely than not, they will likely come to an agreement. Because pipe gas is just far more economical, environmentally friendly, than really any other types of energy sources available to them.

Hugo Scott-Gall: I guess Japan’s interesting in this context and that Japan has shifted all of its manufacturing overseas. So, it still owns the revenues, but it’s shifted its production to a cheaper labor cost and more abundant labor, but also energy access as well. So, I guess that gets you back to the deindustrialization of Europe argument. You mentioned Russia and again, this is just ignorance for me, I don’t understand this sort of simplistic idea that I think has issues with it, that Russia can just shift its energy east. It’s not that easy. It takes a long time to build pipes. If you’re going to pipe a lot of gas into China, that takes time.

And secondarily, do you agree with the argument that there are skills that Russia still lacks—some of the U.S. companies that have been in Russia have a greater skillset to enable extraction of energy from difficult places. Does that add up to—is the net result is that that energy just flows from Russia and some of those wells just eventually close and don’t get reopened? Or given time, the energy will still flow, but just flow in a different direction?

Jeff Currie: To answer the first question about investment, that technology that you’re referring to—the foreign technology and the foreign capital was critical to the growth of the Russian energy sector. I’m not going to say it’s going to impact anything in the very near term. They’re still going to be able to extract it. When we think about the longer-term prognosis for the Russian energy sector, it becomes a significant headwind on supply growth. Even the energy minister of Russia says it’s going to create a problem in several years. But I think going to this broader point about, oh, redirecting everything to China.

Do you think the Chinese want to be 100 percent dependent on Russia after everything they’ve just seen with Germany? Highly unlikely. So, I think making this bet that you’re going to rotate everything east overnight, there’s not the appetite from the consumers as well. I mean, think one of the key themes to our commodity outlook on the super cycle, is this whole idea of diversification of supply sources. Everything around the world that basically diversifies your risk from these kinds of problems. And I think your point too, doing that redirection is very expensive. We’re already seeing how expensive it is in oil. We have an enormous amount of oil floating at sea right now. We ran out of tankers just because steaming a tanker from the Baltics down to Rotterdam doesn’t take that long—a week or so. Steaming a tanker around through Suez to China takes four weeks.

And the amount of tankers you’re tying up and oil sitting at sea is starting to put a lot of upward pressure on tanker margins. Which tells you just how difficult these types of redirections really truly are when you try to do them on a longer-term basis. Particularly when the fact that you already had Iran do a lot of this more recently. You tied up the resources from that perspective. So, yeah, I think your point is spot on that such redirection is not only really difficult to do and time consuming to do, but it’s likely to be extremely expensive.

Hugo Scott-Gall: We talked a little bit about where resources are and we talked a bit about what might be in short supply, but I guess I’m interested again in where might production go—so, yes, it goes where labor’s cheap. Yes, it goes where energy’s cheap, but climate also plays a role in that. How do you think about the role of climate change on the location of production and what that means for commodity flows?

Jeff Currie: If we all did renewables, which part of the reason why Germany is so advocating renewables, it makes the entire world deglobalize. Chemical energy, you can put it on ships and move it around the world. It connects the world. Electrons can’t go very far. They’re too hard to ship, which makes everything deglobalized and local. Which means, you’re no longer dependent upon outside resources or anything, but the metals and the basic goods that go into those renewable production. By the way, when we talk about environmental policy, I’ll give you the—I don’t think it’s a done deal we’re going that direction yet—but when we think about, in that environment, the world becomes completely deglobalized. And by the way, when we think about the three big themes that drive our commodity outlook, we call it REV-ing commodity demand.

Redistribution policies—and we call that the war on income and equality— the E from REV, R-E-V, the E stands for environmental policies. Call that the war on climate change. And the V, versatility in supply chains, which is what we just talked about, call that the war on free trade. So, deglobalization. So, war on climate change, which is the R, redistribution policies. War on income and equality, which is the redistribution policies—that’s your R. The E is the war on climate change, which is the environmental policies, the E. And then the V is versatility and supply chains—that’s your deglobalization.

Now, what I want to point out, they’re all three the exact same thing. Because if you decarbonize with renewables, you’re deglobalized. And when we think about why do we like all that green capex? Because it solves income and equality because who’s going to get the jobs? It’s going to be the lower income groups. And so, we think—and the protection for the lower income groups, forces deglobalization.

And so, in one way, all of these three, R-E-V, REV-ing up commodity demand, are all essentially kind of one in the same under this idea of renewables. Are renewables going to be the definite answer here? I don’t know and I have a lot of questions around renewables, but there is the potential that, let’s say, a climate change technology came into place and we just end up with chemical energy being the dominant. But going to 100 percent electrons, we still can’t do it technologically.

Hugo Scott-Gall: Can we talk about moonshots? Let’s be a little more optimistic. Depends with your commodities if you’re optimistic or a pessimistic, but if you’re on the wrong side of rising commodity prices, it’s pessimistic. But moonshots—things like nuclear fission. Do you get excited about that? Do you think at times this could be a genuine thing or a genuine source of energy in the energy equation?

Jeff Currie: I think we need a shift in policy around climate change to create carbon markets and carbon prices to get a real moonshot.

You need the venture capitalist to just start throwing money at all these different technologies and one of these moonshots will probably pay off. In the current environment, we’re not incentivizing that kind of investment. And I like to point out, we go back to the war on acid rain in the 1960s. By the way, it’s in our DNA as human beings. We know how to solve cross-border, international, environmental problems. We did solve acid rain in the ’60s and the ’70s. But we did it by creating rules and regulations and fines around not meeting those targets. I always like to ask this question. How much did Volkswagen pay for violating the catalytic converter rules which came out of that war on acid rain? The answer is $20 billion. But once you get those rules and regulations—and by the way, I like to point this out.

Would anybody be turning on coal plants in Germany this last year if they’re going to get fined $20 billion? Absolutely not. That’s how you’re going to clean up the world. You have to get to that point where people do not have the option to be able to do this. But I think the key point when I bring up the war on acid rain, is what we got out of it were functioning sulfur markets. By the way, for those of you that don’t know what acid rain was, acid rain—it was due to the aerosols and the sulfur in the fuels that went up and created the smog. By the way, that smog cooled the planet because it reflected the sun back into the atmosphere.

So, getting rid of all that, we could breathe and see again, and it got rid of acid rain, but it also warmed the planet. But I think the key point here is by the way—for those listeners, I’m not trying to say, getting rid of carbon is going to be as easy as getting rid of sulfur was, but the political frameworks that were put in place were very instructive. And once we got a functioning sulfur market, then all that venture capitalists could go to work.

And I’m sure there was a guy sitting around just like me in 1960 going, solving acid rain’s going to cost trillions of dollars—investment the size of China over the next two decades. Guess what? Once you had that functioning sulfur market and these brilliant engineers went to work, they solved the problem. Ironically, they were all in Germany, in there. It wasn’t in the U.S. or any place like that. It was the engineers there. It was BSF and Englehart that ended up solving it.

They weren’t oil companies. They weren’t car companies. They weren’t utilities. They weren’t any of the usual suspects. They were big engineers. But you had to incentivize them and let them work their magic. And by the way, solving acid rain cost a fraction of what anybody ever thought it would. Because once you debottleneck the flow of capital going to the engineers, you came up with one of your moonshot solutions. You talk to people that are in the PGM markets.

They go, who would have thought in 1970 that platinum and palladium would have solved your acid rain problems or the aerosol problems. They did. Nobody would have thought. It’s kind of like your question about these moonshots. That’s the kind of moonshot we’re talking about, but we don’t have the political arrangements put in place to get a carbon price to be able to harness that kind of ingenuity and investment that could come in and ultimately create one of the solutions.

By the way, on that note, if somebody creates a carbon capture technology that’s scalable, everything else is moot. It’s a winner take all, which there’s a lot of risk to any of these types of investments that are there. And by the way, why am I not a big fan of renewables? I do want to go over that so people understand that, is when we think about waste—energy waste—it’s directly proportional to energy density. Meaning, you take wood—it creates far more waste than let’s say, nuclear. Nuclear is the most dense of all energy sources.

We think about nuclear power plants waste is the size of your fist. You bury it in a safe place. That’s your waste. You think about wood, it’s got carbon emissions, ashes—it’s pretty nasty—like coal. Both of them are pretty nasty. Let’s think about the waste associated with renewables. It’s going the wrong direction. Renewables is the least energy—we’re going backwards from the wood age because think about how much damage you’re doing to the environment with all the windmills, all of the farms, and what do you do with all of the waste once you’re done.

I mean, you think about nuclear, which I think is your question about these moonshot technologies, is you want to get the smallest energy density you possibly can to really begin to reduce that waste. And the other problem with renewables, we still don’t know about how to deal with the storage because to go back to your question, who has the power and the flows and everything like that, is that because you can’t move electrons around the world and they go basically, you have to get away from the entire concept of storage and have everything done directly.

You start to run into problems with the intermittency issues that are associated with renewables. Because we still can’t overcome that. The question is, will technology get there? But I think the key point there with thinking about nuclear and these very energy dense type of technologies, you don’t have those kind of problems. Before we can have these discussions in earnest, we need to see a change in policy.

Hugo Scott-Gall: Well, one of my favorite quotes of yours is, if you give the engineers long enough, they solve it. If you give the politicians long enough, they screw it up. And I think that’s what you’re saying. So, I guess where we started was the revenge of the old economy, capital cycles—we’ve seen this movie before. So, I guess my final question to you—trying to be upbeat and maybe too utopian—you kind of answered already—but when do we start seeing these cycles because energy has become abundant? That energy costs, as it pertains to GDP, become de minimis and just not relevant in how to run a modern economy.

Or is that just way too Star Trek? That’s not going to happen.

Jeff Currie: I think it’s way too Star Trek. I think these cycles will continue. I do believe it’ll be in decreasing—and you just look at it over time. Energy and food, which our society’s become and the more technologically evolved that energy and food will small, and it will converge way off. But here’s the reason why it can never completely go away. And we’re experiencing that in Europe right now. Even though it may end up being a small point of it, it still controls the ability for the system to grow.

So, on a percentage basis to GDP, it’s super small, but in terms of a physical capability for GDP to grow, it’s super large. It kind of goes into financial shares versus physical shares. And the physical component will always be there, which underscores the importance of reliability. In fact, when we think about the issues around new energy sources and your choices, clearly reliability and affordability are way up there as well as emissions.

And then one that seems to be forgotten out of the three—yeah, reliability and affordability has been an important factor. You have low carbon emissions here, but low pollution. By the way, did you know EVs are recreating the aerosol problem? We’re going backwards on solving acid rain with the hybrid EVs because the hybrid EVs, when they burn, they release noxious toxins because the battery keeps the temperatures too low. And so, we need to look at that balance between all three of them when we start to think about these longer-term questions.

Hugo Scott-Gall: I try to be optimistic, Jeff, but you talked me down. I want to say, thank you very much for coming on the show. It’s great to see you again. It’s been too long. But that was, I think, a very productive run through your encyclopedic knowledge of the past and present and the future with regards to commodities. So, thank you very much.

Jeff Currie: I want to say that the areas—one optimistic point in this is that the long-run return on this, we will solve the problem. I see on your point about don’t bet against an engineer. Get them enough time and money, they’ll solve the problem. We will solve climate change. We will solve these problems. And I think there’s going to be good returns for investing in the commodity space. So, there’s your optimistic answer. Near term, look to commodities for good returns and hey, believe in the engineer. They will solve these problems on a longer-term basis.

Hugo Scott-Gall: That’s a much better note to finish on.

Jeff Currie: Great.

Hugo Scott-Gall: Thank you. Jeff, thanks very much.

Jeff Currie: Thank you.

Meet Our Moderator

Hugo Scott-Gall, Partner

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