Around 1900, coal began to replace firewood in a serious way as fuel.

Around 1950, oil and gas began to replace coal.

Around now, renewables are beginning to replace oil and, to a lesser degree, natural gas.

This is a complex issue, with many competing global economic and political interests, both inside the US and abroad. If I were still managing money professionally, I’d be torn between having no exposure at all to the traditional Energy sector or having maybe half the 4.4% index weighting. I’d probably choose the second, emphasize renewables and own the bigger names. My idea would not be to gain performance in the sector–too time-consuming for something that small–but rather to limit the damage that ignoring the sector might do. Elementary triage.

basic facts, as I see them

–the big three global oil producers are: the US (19 million bbl/day), Saudi Arabia (10 million) and Russia (10 million). Russia makes something like 4x its oil earnings from natural gas, but oil is much more easily transportable, so it’s still very important.

–the largest global consumers of oil are: the US (21 million bbl/day), China (14 million) and India (5 million). Other than the OPEC oil producing countries, the US and Canada both use about twice the oil per capita of any other advanced countries

–the global demand for oil is relatively inflexible and the world has limited storage capacity for excess output. So small changes in global supply or demand, which is roughly 100 million barrels daily, can lead to large changes in price. Just look at a chart of the oil price over the past decade

–in the US, transportation takes about 2/3 of the oil we use. This amount is split roughly 60/30/10 among gasoline, diesel and jet fuel. The other third of total use is industrial, with a small amount of that going to electricity generation.

So US oil use is mostly for autos. The domestic auto manufacturing industry has been heavily protected against foreign competition for decades–with the highly predictable result that the “Big Three” are financially weak and technological laggards in fuel efficiency.

The result of this, though, is that passenger cars and light trucks in the US make up about 12% of the world’s daily oil usage. A doubling of the fuel efficiency of the US fleet would clip 6 million daily barrels of oil from world usage, presumably sending the oil price plunging. The Obama administration put plans in place for this to happen by 2025. This would be bad for Russia, bad for OPEC, bad for Big Oil …and bad for US automakers, who would presumably be technologically unable to meet these goals. The plans were rolled back by the Trump administration, however, before being reinstated in somewhat weaker form this April.

more on Monday