‘Doomberg’ on E.U.’s Energy Crisis, Coal’s Future, and Nuclear Power

Doomberg is an anonymous team of energy writers working on a popular financial publication on Substack. Motley Fool senior analyst Nick Sciple recently caught up with someone speaking for the group to discuss: 

• Tradeoffs made during Europe’s energy crisis.
• A durable shift for coal demand.
• Countries shutting down (and investing in) nuclear energy.
• An energy storyline that “many analysts are underestimating.”

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 23, 2023.

Doomberg: I do think ultimately, most normal thinking environmentalist would eventually come to the conclusion that it will be impossible to decarbonize without destroying people’s standard of living in the absence of a nuclear renaissance. The quicker we all come to that conclusion, the better. If we truly care about carbon emissions, then this is a path that we must follow.

Chris Hill: I’m Chris Hill and that’s Doomberg, a writer on the number one financial publication on Substack. Doomberg is anonymous. If you look for a photo on Twitter or Substack, you just going to find a cartoon chicken. But you’re also going to find a deep understanding of energy policy. You may recall that Motley Fool Senior Analysts, Nick Sciple interviewed Doomberg last fall about Europe’s energy crisis. Today, they talked about some key things that have changed since then, as well as the future of nuclear energy and one storyline that could be bullish for the price of oil.

Nick Sciple: One of the topics we talked about last time and something I’ve heard you talk about elsewhere is the idea when it comes to energy policy, there’s really no solutions to energy problems, just trade-offs. Before we get into some of the energy topics of today, for our listeners can you walk through that concept and why it’s the case in energy?

Doomberg: You bet. When it comes to energy, the first thing that you have to understand, which we talked about last time is that energy is, of course life and your standard of living depends on how much energy you get allocated to impose order under local environment. These are the standard laws of physics that are just immutable and can’t be circumvented through any form of magic. Given that all humans everywhere, would like a higher standard of living, the question becomes and should be the emphasis of our discourse. How do we generate as much clean energy as possible for as many people while minimizing our carbon emissions? There’s this belief in the renewable sector and the anti-fossil fuel sector, that there’s a magic wand that we could wave where everybody has as much energy as they need and everybody has a great standard of living and there are no consequences, and there are no trade-offs. That is really a false bargain that has been sold to the general public in the name of Faiman alarmism. Once you have that equation in mind where the numerator actually exists and it evolves the integrated standard of living of all humans on earth divided by our carbon emissions, then and only then can you begin to make reasonable trade-offs about which energy forms we will exploit and which energy forms we will avoid and what the consequences to both the carbon emissions and the global standard of living, what those consequences will be. That’s what we mean by there are no solutions, only trade-offs. That’s a phrase we’ve stolen from somebody whose name escapes me right now but that’s really the core to the energy argument. The key fly in the ongoing debate is this concept that we’re simply not implementing renewables because big evil oil and gas companies don’t want us to, which couldn’t be further from the truth.

Nick Sciple: Sure. With that in mind, let’s revisit some of the topics that we talked about last time, some of the things that have happened over the past six months. Last time around we’ve talked about Europe’s coming energy crisis, a crunch, partially due to Russia’s invasion of Ukraine, partially due over the long term, in particular to the tax on the Nord Stream Pipelines. You look at how Europe came through the winter. The crisis doesn’t seem to have played out as extreme a level as maybe some had expected. With that thought process of, there’s no solutions only trade-offs, how would you rate how Europe solved its energy crisis over the winter?

Doomberg: I would object to the use of the word solved. Let’s walk through the trade-offs that were made in order to circumvent the worst-case scenario tail risks that we have been discussing and we’re fear for about six months ago. Let’s focus on Germany, of course, because that is the heart of Western Europe and the epicenter of the energy crisis for lots of reasons, many of which self-imposed. How did Germany get through the winter? The first thing they did was they postponed the shutdown of their last three remaining nuclear reactors, which was a wise decision and one that we applauded. Second, they scoured the world for every BTU of energy they could get their hands on regardless of carbon footprint, cost, or impact on the emerging world and there was serious impacts to the emerging economies, which we can discuss. They’ve also blew half $1 trillion in this effort. Then third, and most fortunately, they were blessed with a incredibly unseasonably warm winter, a three to four Sigma event for the warm side, which was in many ways miraculous and in all ways quite welcome. Because of that luck, we wrote a piece at the end of December called the whims of Gaia. 

First of all, we were very grateful that the winter was so mild that they could muddle through without sort of true catastrophe. But we warned that the leaders of Germany should not confuse good fortune with good strategy and our fear which has since materialized, is that the German leaders are taking all of the wrong lessons from this spell of good fortune. Let’s just talk about one example of a trade-off that was made in order to make it through the winter. The Germans brought back coal at historic pace, at a pace that nobody in the market modeled as being even possible. In the dead of winter when it was slightly cold and the wind wasn’t blowing and the sun wasn’t shining. The Germans relied heavily on the dirtiest, the fossil-fuels to get through the winter. Of course, now that they were able to get through winter, we learned last weekend that they have stubbornly decided to close those last three nuclear reactors and there’s no talk of reopening any other ones. That’s what we shall see. They seem intent to go into the winter of 2023, ’24 with the least amount of reliable energy possible and continuing down the same path. What happens if there’s a three to four Sigma winter to the cold side, and this year nobody’s cheering for that and I should say upfront, we have many good friends in Europe and we’re not sitting around hoping for catastrophe to be proven right. We’re just pointing out the riskiness of the strategy and the potential pitfalls to it. They made a big trade-off last year. They burned a ton of coal they had among the brownest electricity grids in Continental Europe. If this is succeeding, I don’t want to see what failure is.

Nick Sciple: To your point, coal use hit an all-time high in 2022, both because of increasing use of coal in Europe, but also because of increase in coal use on a global basis as Europe bid up liquefied natural gas prices. To what extent is the increase in coal use on a global basis connected with how Europe chose to muddle through the winter?

Doomberg: I think it’s entirely connected. We wrote a piece and February called the Streisand effect. Basically, the Streisand effect is where you try to draw attention away from something and in so doing, you only bring more eyeballs to it. In the way, the rush toward renewables in Germany caused the catastrophe, the crisis, which caused the response and the trade-offs that we just described, which caused the emerging world, billions of people to look at what Germany did and ignore what they’re saying and to act accordingly. In that piece we described how Indonesia, China, India, Pakistan, who were all damaged by the consequences of the bidding up of liquefied natural gas and the associated extreme price rises in coal and to a lesser extent oil and they said, we’re not going to be fooled again, and they are returning to the coal mines. Pakistan in particular, had built a much of its electricity grid around the assumption that there would be reasonable clean, liquefied natural gas at reasonable prices for them to use and when that was not the case and they were literally shut out of the market, they said never again, and they’re going back to coal. We suspect that the total global demand for coal will continue to grow and set records and as a direct consequence of the energy crisis in Europe. There’s no amount of self-imposed carbon reductions that the western world can implement that will offset what the developing world is going to do and who are we to tell four to five billion people that they should not develop their own standard of living and that they should allow us to live on the top of the totem pole while they struggle and muddle through, this is not going to happen. It’s simply not going to happen. We just need to recognize that upfront.

Nick Sciple: Just to double underline, do you think we’ve had a durable, permanent shift upward in coal demand because of what’s happened in the past couple of years?

Doomberg: Absolutely. There’s just no question about it. That piece we say, you’re ignoring the path function of progress and shooting nuclear technology coalesce in the very cause of coal’s dramatic global renaissance. This is ultimately the opening quote to that piece was from a brand guy and alias named Mark Nelson. You can find them on Twitter @energybants. He’s a nuclear expert and he gave a great coal master class on Dr. Chris Keefer’s podcasts decoupling. The quote that I love from that podcasts is, “if you don’t love coal, you’ll never get rid of it.” You have to understand the attributes that make coal desirable. What are those attributes? It’s relatively inexpensive. You can store it outside as a mountain. You could just make a big pile of it and then you’ll know that you have all the supply you need to get through the winter. There are ways to burn it relatively cleanly, certainly not from a current perspective, but from all of the other cats and dogs that come from the uncontrolled burning of coal that technology has developed pretty well. If you are staring into the abyss and your choice is between serving your populations needs today and risking some potential consequence decades from now, that is no choice at all. Shame on us for putting them in that position. But they have made, in our view, the only rational choice before them.

Nick Sciple: We’ve talked some about what’s happened over the past six months. Let’s talk about some of the things that are going on. Now you mentioned Germany’s decision to shut down the last of its nuclear power plants over this weekend. I think in this environment it seems like there’s a divergence and views around nuclear energy as Germany is shutting down its nuclear plants. Finland just started up the first new nuclear plant in Europe, I think in over a decade. You’ve also seen several multilateral agreements among large countries, Canada, the United States, UK, Japan, around nuclear fuel supply. What do you make of developments in nuclear policy over the past six months or so? Do you think there is a growing divergence between the German wing and other global operators?

Doomberg: I feel like at this point it’s Germany versus the rest of the world. One major example that you omitted from your very extensive list is, of course, is the United Arab Emirates, where they have brought their third of four brand new 1.4 gigawatt nuclear reactors to critical. This project was done on time and on budget, and well set up that small country for decades to come with clean, carbon-free, safe, limitless energy effectively. Of the suite of energy choices presented to rational thinking political leaders, it’s just undeniable that nuclear power has the least of the trade-offs, i. e. we have to deal with a relatively small amount of nuclear waste, which everyone in the world knows how to handle. Compare it against the other trade-offs like with all the mining needs to go into renewables are the carbon emissions that come with fossil fuels, or the other pollutants that come with coal, or the environmental damage of drilling and or strip mining for all of these so-called green metals, nuclear’s trade-offs are a pittance compared to the rest.

 Wherever you look, be it Canada, even the United States, Poland is looking to expand and now by the way, Poland burns more coal than even Germany did last winter. If you’re looking for a place where nuclear can have the biggest impact on the Western World’s carbon emissions, like getting pulled in to go nuclear would be by far one of the biggest impact strategies that we can envision. Outside of Germany and Belgium you’d be hard-pressed to find momentum to the negative side. In fact, momentum is really, I do think ultimately most normal thinking environmentalist would eventually come to the conclusion that it will be impossible to decarbonize without destroying people’s standard of living in the absence of a nuclear renaissance. The quicker we all come to that conclusion, the better. If we truly care about carbon emissions, then this is a path that we must follow and we will. One of our expressions is that, which can’t go on forever, usually doesn’t. The moment that the Germans slip into a crisis because of their full hardiness, the existing leaders will be swept out of power, either democratically or by other means and then I think sanity will return. One hopes and one suspects, although I don’t know for sure, that the coal shutdown of these Germany nuclear reactors have been done in a way that at least preserve optionality for future generations of leaders to reverse course. Let’s hope they’re not irreversible deconstructed in a way that makes it more challenging to build them a new.

Nick Sciple: You mentioned Poland. Poland has signed several agreements around small modular reactors in partnership with them, some Canadian and US companies. What do you make of the emerging trend toward small modular reactors? Do you think that is the technology that will be the primary driver of expansion of nuclear technologies to the extent that happens?

Doomberg: I would say that there is mixed views within the nuclear community around the need for and the hype around SMR technology. What do I mean by that? There’s nothing wrong with large modular reactor technology that exists today. As proven by the very successful project in the United Arab Emirates or what’s going on in Finland or with Canada with the CANDU reactor designs like this is a solved problem, and so there’s a fear in the nuclear energy community that the support for and hype around SMR technology is somehow going to be used as an excuse to postpone and/or avoid much needed new large modular nuclear reactor builds, while never eventually manifesting their true potential. In other words, there’s a fear that there will be a rug pull on the part of environmentalist just when we’ll get ready to implement these things. There’s lots of things to be excited about with SMR technology. Not the least of which is its potential use in energy intensive industries, where you could make designer SMRs for use in the chemical sector, for example. Just take one example, there’s an enormous amount of energy that goes into cracking of hydrocarbons and all this stuff. Where that industrial heat comes from today obviously it’s burning of fossil fuels. If we could replace that with heat derived from nuclear technology, that would be a true meaningful breakthrough in reducing our carbon emissions. There’s been some headlines to that effect and to the extent that companies do deploy small modular reactors at industrial sites, then this is revoked as being done under the DOE’s advanced reactor demonstration program. There’s some headlines people can search. I think the chemical company Dow announced something in the beginning of March and their plan to install such an SMR. These are great and fantastic so long as they are additive and not an alternative to the existing safe, modern designs of large nuclear power plants that will serve us quite well for 60, 70, 80 years at a time.

Nick Sciple: The in conjunction with extension of current plants, do you think that there are prospects for new build large modular reactors where in an ideal policy scenario that would be a logical route to take?

Doomberg: That’s what we see in the United Arab Emirates and that’s what we’re seeing in Finland the bringing on old large reactors back on stream in Japan and so on. We’re in the prospects for getting that done in the United States today from scratch it’ll be difficult, especially given the nuisance lawsuits and the environmental radicalism that still persist around nuclear power, but theoretically, there are no technical or legitimately financial barriers to doing so. Now the financial barriers to doing so today are all artifacts of seen regulatory oversight and or nuisance lawsuits. The two related, by the way, I mean the credit to the environmentalist. They have managed to infiltrate many government regulatory bodies around the world and have done their level best to delay, postponed, and increase the cost of nuclear power only to turn around and claim we shouldn’t do nuclear power because it’s too expensive and it takes too long as though they had no role in producing that outcome as an overt strategy of their organizations. Unless and until we confront and defeat these radical Malthusian environmentalists. It will be very difficult to do in the western world, but in the developing world where they have a more visceral relationship with energy and what it means to their society to go without, especially after this winter, I suspect that such organizations would have far less impact and one should hope that they do have such a minimal impact. Looking at China, for example they’re building dozens of nuclear reactors and India exploring their own set of reactive designs. All the countries you named earlier, it’ll get done there. Whether it gets done here as a whole different question.

Nick Sciple: That makes sense. We’ll have to see how the policy environment develops as to whether we can see that investment take place here in the United States. Moving on to maybe some other energy topics. Two weeks ago, we saw Saudi Arabia, in conjunction with its OPEC partners, announce a surprise oil cut of over one million barrels per day that’s going to run from May until the end of the year. In your view, how has that action changed the state of play in energy markets today?

Doomberg: We wrote a piece just this morning on this exact topic called uniting states. We viewed the OPEC cut in the context of a larger pattern of headlines and events that we found quite curious. Most notably, a strong push by the Chinese to create unity and peace across the Middle East as much as they possibly could. Driven in part by Saudi Arabia’s desire to implement a, “Saudi first policy.” As we said in that piece if Saudi first is a relatively new phenomenon, it begs the question of who was first before. The answer to that rather uncomfortable question is the United States. It looks as though there is the possibility of a serious rupture between Saudi Arabia and the United States. In the intervening periods since when China shocked the world by establishing a detente between Saudi Arabia and Iran, there has been a series of other headlines that fit a pattern of reconciliation and peace in the middle east and unity aligned with China and the BRICS nations. What are those headlines? We saw a relatively interesting breakthrough in the war between Saudi Arabia and Yemen, which is basically a proxy war between the US and Iran, and a massive prisoner exchange over the weekend and photographs of joyous prisoners being returned home were splashed all over the news media in the Middle East. Not so much here. 

This is not being covered in the west. We saw Qatar and Iran get back together and end their dispute with Saudi mediation. We saw Saudi Arabia and Iran both apply formally for a membership in the BRICS organization. Our view and the piece of course, this is part of a broader strategy on the part of China to be seen as the diplomatic peacemaker of the world in so that they can position us as the provocateur and stable that the Rattler Stables in the Taiwan issue and that they could get more international support coming conflict between the US and China over Taiwan. It’s very complicated geopolitical maths, one might say with lots of possibilities. But our view is the pattern of headlines that we’ve seen in the past two months point to a lasting potential rupture between Saudi Arabia and US, which has very meaningful consequences to both the energy markets, of course and to geopolitics and general and we think many analysts are underestimating this possibility.

Nick Sciple: What do you think those long-term implications would be assuming that occurs more OPEC cuts less leverage for the United States when it comes to getting energy supply we need? What are the type of implications you’re thinking about?

Doomberg: Zoltan Posner had really interesting piece called commodity encumbrance. I believe it was the title where he talked about there’s the oil market of 100 million barrels a day and then there’s the amount of that oil is actually freely traded and available for sale as opposed to consumed, broadly word is produced and that the free float of oil. If China is soaking up incremental supply in that floats shrinks. At the same time that the US is reaching the limits of its ability to grow its oil production. Historically, whenever OPEC had market power, they’ve tend to use it. If the swing producer has truly shifted from the shale patch back to OPEC at a time where the OPEC nations are historically unified, then one wonders whether the floor price of oil might already be in for the next few years. Whether it maybe $100 a barrel or $120 a barrel might be the new target range and we opened this piece with the story of the Red Sea project, which is basically an entire luxurious city being built in the desert by MBS as part of his grand plan to reduce Saudi Arabia’s dependence on oil and diversifies economy. This is all part of what’s known as the Saudi Vision 2030. They’re expected to spend several trillion dollars on these projects. This was just one of many megaprojects, complete with a beautiful brand new international airport and Championship Golf Course and space for all the mega yachts that globetrotters will be bringing to this new luxury resort. All of that has to be paid for out of profits from their oil and gas sector. That means that the Saudi Arabia is interested in a high price of oil for Saudi Arabia’s sake. China’s more concerned about actual supply and also printing wan to pay for that energy. There’s a lot of intrigue going on. There’s a potential for a substantial shift that I think two decades from now, historians might be writing about this time period in a different way than it’s currently being covered in the media.

Nick Sciple: There’s something that you mentioned there that I think is worth maybe exploring further for our listeners. You talked about the Saudi cut and the extent to which it could be connected to US shale production topping out relative to where it had been over the last decade. You think about if this production cut has taken place in 2013, in the middle of the shale boom, likely to see US, North American production jump up in order to gobble up the market share that the Saudis are seating. But with this cut today there is a belief among some which you alluded to that there is no meaningful capacity to increase US shale production to match the supply reduction that the OPEC carried out. What is going on in the shale patch such that would lead production to top out? Just to clarify that for folks.

Doomberg: This obviously is a topic of much debate. Let’s just take an example. Most of the growth and the shale patch somewhat argue all of the growth in the US oil production industry is coming in the Permian Basin in Texas and Oklahoma. In that area, as we wrote about in a different piece, that they are constrained by an inability to move natural gas out of the region because of lack of pipeline. Why does that matter? Well, in the Permian Basin where all the growth is coming from? That oil comes with it. A significant amount of natural gas that’s called associated gas, as opposed to drilling for gas on its own, which has done in the Marcellus. In the Appalachian region, that associated gas is flooding the US market. There’s a lot of it in the Permian Basin, as we wrote about in that piece, you can get natural gas for as little as $1 per million BTU and sometimes it trades negative, i.e. oil producers would pay people to take it. This is the very same molecule that Europeans were paying $100 spoon BTU for the last time we were talking. It just shows you how difficult it is to transport natural gas, how that market is highly regionalized and there’s massive arbitrage plays. But in that piece would describe how in California today natural gases $8 or $9 a million BTU, because they have no pipelines to bring in natural gas from that bounty. 

Of course, governing Gavin Newsom is talking about price gouging and market manipulation when in reality, this is just the only predictable consequence of their opposition to building new pipeline infrastructure. If all the growth is coming from the Permian Basin and one of the things that’s constraining them is offtake of natural gas, then you could see how challenging this becomes and how policy decisions in one area affect the potential to respond to OPEC cuts in another. Now, to be fair, within the next 18-24 months, there is some new capacity coming on line that should solve this problem and allow them to continue to grow. But there are very few market analysts who predict that the US will substantially exceed the rate at which was producing oil pre-COVID in the next few years, if ever. If they do, it won’t be by March and it should turn over. Why is that? Unlike traditional oil and gas drilling, decay rates of the new wells in the Permian Basin and the she’ll patch in general are much quicker than traditional oil wells and most of the tier one assets have been relatively depleted. There’s a few companies like Pioneer, for example, that still have a very good inventory of Tier 1 assets in the Permian. But those will be drilled out and when they do what everyone moves to Tier 2 and Tier 3, the expense and the price they need to be profitable rises and you get less bang for your buck. There is a fear that the US may have topped out or may soon be topping out. If that phenomenon coincides with an especially unified Middle East with Saudi Arabia taking the charge to resolve all of the family business internally and to be aligned with China and Russia, which by all indications they certainly are so far. It’s probably pretty bullish for the price of oil in the next 2-3 years.

Chris Hill: That’s all for today, but tune in on Monday for more from Nick Sciple and Doomberg. They’ll be talking about electric cars, investing in energy and more storylines to watch. As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.