I recently interviewed Paul Sankey of Sankey Research. Paul is an oil and gas analyst that typically appears on platforms like CNBC, but he agreed to come slumming on my channel last week. We had a great chat. I wanted to talk to Paul so I could wrap my head around the energy implications that will spin out of the war in Ukraine. Outside of uranium and some other energy metals like copper and rare earth - energy has not been a core part of my portfolio.
But more than the potential investment opportunities, I wanted to understand the geopolitical consequences of this crisis, zeroing in on what the world’s Power Players are looking to gain or protect - meaning - from an energy standpoint, what are the long term opportunities and threats facing Europe, China and the US?
My expectation was that the US would put a hard ban on Russian oil and gas imports, Europe would want to, but would lack options, and China would happily step in and buy any available surplus that hits the market.
This seems to be playing out. The US imports less than 10% of its oil and gas from Russia, and although it lacks the refining capabilities to immediately replace that with domestic supply, it is a navigable issue. When Biden announced the US ban on Russian oil and gas imports, the deal was already done. US corporations had halted operations with Russian suppliers two weeks earlier.
In Europe it is a more complex issue. Russia is the world's largest exporter of natural gas, accounting for about 46% of the European Union's imports in 2021 - Italy single handedly bought 24% of Russia’s total gas exports. Norway, Belarus, Bosnia, and Serbia each import about 99% of their natural gas from Russia. The European Union now has a stated goal of decreasing reliance on Russian energy, but how they will accomplish this is less clear.
In China, as of two weeks ago, a deal is being drafted with Russian gas giant Gazprom to build a pipeline through Mongolia that could send 50 billion cubic metres of Russian gas annually to China - coincidentally, this is roughly the same amount that Russia currently sends to Europe via the Nordstream Pipeline.
Energy prices will continue to hit all time highs. Last year we watched inflation bubbles emerge in the tech and manufacturing sectors as chip shortages rippled around the world. The pain of paying more for a used car may soon be trumped by drivers inability to fill it up.
But while the world watches the prices at the pump, I am very curious about another important datapoint: Russia is also the world's largest exporter of wheat, sending 30 billion tons into the world food market every year. Ukraine is close behind contributing 20-25 billion tons, together contributing 25.4% of global wheat exports. Whether sanctions on Russia impeding access to global markets or combat disruptions in Ukraine, eliminating the harvest and subsequent seeding season, more than 25% of the world's wheat exports may disappear from the global food market.
These disruptions will butterfly around the world, creating more shortages, more inflated prices and more instability. If we thought the unrest and chaos of the last two years has been unprecedented, food and fuel insecurity will take things to an unseen level.
Although the 2020’s have already turned the world upside down, I expect this trajectory to continue for the decade. Unfortunately, I think we are just getting started.
Now, at the risk of sounding insensitive, born out of crisis are the most rapid adaptations and innovations. WWII was the catalyst for the world’s first computer, for penicillin, for nuclear power, and for pressurised plane cabins, jet engines and landing navigation - birthing commercial air travel.
I have never been a doom and gloom promoter - I'm usually the opposite. I look for entrepreneurial endeavours like Cubic Farms - a vertical farming company that is localising food supply, anywhere, any season. Their self-sustaining growing containers recycle water, reducing the drain on resources and are protected from the elements, removing the need for pesticides and herbicides. Their automatic watering and lighting system removes human error and labour, creating consistently cheap, organic produce. Production is not impacted by seasonality - meaning 12 straight months of output.
Companies like Cubic Farms are coming fast. The access will increase and the cost will come down. Eventually.
Between now and the abundant future, I expect volatility at a level I haven’t seen in my life. As a father of three very young boys, I am not focused on building a castle as much as I am focused on building a moat.
Right now I am exploring an alternative investment - land packages zoned ALR - Agricultural Land Reserve. These are acreages in rural municipal districts that are reserved for agricultural use - strategic food security reserves.
Property development on these lands is restricted and as a consequence, these acreages sell for 10-15x cheaper than land open for subdivision.
But I expect that to change.
COVID fuelled a wave of de-urbanization. If I am right about the trajectory of food and fuel shortages, the unrest in cities will accelerate. More people will depart the cities for quieter communities, inflating real estate and pricing locals out of the market. Politicians will be pressured to increase the housing supply, and the under-utilised ALR lands will provide key locations for property development. Zoning will be changed and the value of these land packages will skyrocket.
And if I am wrong about this, I still expect the economics of farm leasing to improve. Owning arable land in an environment where local agriculture will become not just a green initiative but a matter of national security is a strategic investment. Maybe it is the Saskatchewan blood in me, but I am happy owning soil.
I can feel critical eyes for my attempt to seek financial gain from the misfortune of the world. But here is how I see it:
If I am fortunate to have been surrounded by opportunity and choice, then I believe it is my obligation to generate personal wealth. A surplus of wealth gives me the optionality to be the rock that someone else may need to lean on. And the world needs more rocks. So I will build my surplus. I will put my cash to work. I will produce more than I consume. I will live beneath my means and store the balance.
If I succeed, I don't have to pay it forward. But if I am running a deficit, I don't have the option. So I will take control. I believe it is the least selfish thing I can do.
If you are interested in listening to my interview with Paul Sankey on the power plays China and the US will be making in the next few years, check it out on Spotify or Apple Podcasts.