Energy transition is caught in a 'trilemma,' expert explains

Crude oil prices (CL=F, BZ=F) prices cool Wednesday morning as May's Consumer Price Index (CPI) print reported a 2% decline in overall energy prices. PGIM’s Head of Thematic Research Shehriyar Antia joins Catalysts in-studio to explain why oil price pressures and affordability aren't the only factors having a broad impact on the energy landscape (XLE).

"The energy transition is a really long, complicated process. It's not an event, so it's not it's likely not to happen as quickly as maybe we would hope. And so fossil fuels are going to have a long sunset," Antia says. "But, our research found that there are really two themes — one is what we call complementary infrastructure around renewable energy."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Luke Carberry Mogan.

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Video Transcript

The consumer price index indicating energy prices fell 2% over the last month, but still up 3.7% year over year.

That's coupled with today's ie a report on how the mismatch in supply and demand could impact oil prices moving forward.

That's exactly what we're going to discuss here for more on this.

We have Sharia on T he is on T sorry.

Uh P Jim's head of thematic research research and thank you so much for joining us in studio Sharier.

So I, I want to start on the CP I print because obviously that decline really good news for the Federal Reserve.

What does it mean in terms of oil prices that we can anticipate experiencing as consumers?

Well, you know, um lower, lower energy prices, of course, are good for consumers.

They're very, very good for uh corporate profit margins.

And of course, we've seen the price action um um today and energy affordability is of course a major major factor when it, when it, when it comes to the energy transition.

Um you know, but, but energy affordability is, is not the only factor that sort of goes, goes into the energy transition.

There's this energy trilemma, of course, affordability is one sort of anchor of that.

Another one is reliability.

And the technical bargain for that is dispatch ability.

That's the ability to dial it up or dial it down as, as needed.

And the third leg of that energy trial limit would be sustainability.

And that's basically that the production of energy and the consumption of it does no harm to the environment.

And one thing for, for investors, that's important to remember as they go, go forward here is that there is no single source of energy that's perfect along all three dimensions.

And so the energy system of the future is very, very likely to have renewables as well as some fossil fuels.

And the report that PJ just put out caught our attention because I think so many of our viewers out there, they're trying to figure out what makes the most sense investment wise where there is the most opportunity given the transition that's taking place, given the changes that we are expected to see uh specifically within the sector here over the next several years.

I'm curious just what you found and what you think makes the most sense in terms of the most attractive investments right now.

And what exactly that catalyst is going to be for those games.

So um so let me start by saying that the energy transition is a really long complicated process.

It's not an event.

Um So it's not, it's likely not to happen as quickly as maybe we would, we would hope.

And so fossil fuels are gonna have a long sunset.

But you know, our, our, our research found that there are really 222 themes.

Um One is what we call complementary infrastructure around renewable energy.

So, you know, when we think of renewable energy, we think of these big vast wind farms and off offshore turbines and that, that part of the energy infrastructure landscape is very well capitalized.

There's a lot of attention on it.

It's other parts of the energy value chain that are less uh that are lagging and are a little bit less developed and we see a lot of opportunities there.

So really, I'm talking about power transmission and power storage specifically.

Um The second theme out of out of our, our research is really around the greener end of fossil fuels because fossil fuels are gonna be with us for such a long time.

It really makes sense for investors to um to be thinking about how, how to, how to meet our rising demand as well as reducing carbon uh emissions over the over the future.

And a good way to do that is with is, is with natural gas and, and LNG.

So we really see um plenty of opportunities and pipelines LNG infrastructure.

Um you know, at that greener end of fossil fuels and where are you seeing the investment opportunities that might be a little bit over hyped in the space.

So I'm so so glad you mentioned that.

Um You know, we all, we all wanna be hopeful and we all wanna be um you know, techno techno optimist and certainly technology is gonna play a, a tremendous role and innovation is gonna play a tremendous role in this energy transition as it spins spins forward.

Um And there are, you know, a number of a number of innovations and technologies that, that have really captured the imagination of investors.

I'm talking about hydrogen, which is an alternate uh fuel source.

I'm talking about carbon capture and storage.

And you know, both of them have tremendous promise and they can really be game changers in in concept.

But in reality, right now, they don't offer a very attractive risk reward proposition for investors today.

So this is not a judgment about the technologies, certainly innovation has to be part of the energy transition.

This is more a judgment about how, what's that risk reward proposition today for an investor?

I, I'm curious just from your research that you've done um thematically when it comes to the, the changes that we, that we've seen in the sector, when it comes to the changes that we're expecting to see that timeline for investors, does it vary versus some of the other research that we've done from other sectors?

Just given the unknown, given that variable and given the fact that like you said, and like you started out that this is a transition that's going to likely take decades, obviously.

So, um there's no simple answer to it, you know, the energy transition, it's, it's taking uh it's, it's happening at a different pace in different places and different countries and different industries are, are going at different, different speeds.

So it's not a one size or one speed fits all situation.

And uh you know, um you know, energy is about more than just supply and demand.

I know we had that IIE a report but it brings in so many other other factors.

It brings in geopolitics, it brings in national security brings in the pace of technological innovation.

So anybody who's sort of forecasting, you know, oil, oil prices out five years, six years, 10 years, anybody who's forecasting, how long the energy transition is gonna take?

Boy, you better be making that forecast in pencil because it is really, really complex.

Sharia Antia.

It's great to have you.

Thanks so much for taking the time to join us here today of PJ.

Thank you so much.