For a decade, the world benefitted from cheap energy thanks to shale, which lowered energy costs, and accelerating globalism, which reduced labor costs. These two significant trends, happening in parallel, glossed over the high-risk feedback loops in the global financial system and taught the wrong lessons. Specifically, governments embarked on monetary and fiscal policy experiments with few consequences during this period. Countries increased the money supply and ramped up spending, but the inflation hangover never came. Spending became even more tempting as politicians could now see a way to give voters anything they asked for with few consequences, or at least few that appeared on a time scale that would point to them. These lessons became embedded even as cheap energy faded, and globalism turned to protectionism, both increasing costs. As a result, the world faces sticky inflation, and governments will soon need to decide how comfortable they are promoting low-cost energy of all types as energy demand increases.
Energy needs are only accelerating, and this is coming at a time when oil, gas, nuclear, solar, and wind farm projects are all being slowed down or blocked for a variety of reasons. Several structural trends are now at play, likely increasing energy demand growth in developed nations, which hasn’t been a factor lately. Specifically, we are experiencing accelerating AI power demand, a rush for metals for the energy transition and as an asset class, inelastic demand from retirees, and a rebuilding of the North American housing supply. Let’s examine each quickly below.
Power demand growth from AI was put into perspective when Arm’s CEO said that data centers could consume up to 25% of America’s power by 2030. An excellent way to understand how this could potentially occur is that ChatGPT uses nearly ten times more electricity than equivalent GoogleGoogle 0.0% searches, according to the IEA. No one spends enough time on either for this to be a problem, but ChatGPT eventually being used for hundreds of purposes (in-ear coach, co-worker, translator, museum curator, etc.) makes this a problem. Accelerating AI power demand is also self-fulfilling; the more power the tools consume, the better they get, the more ubiquitous they become, while steadily consuming more energy.
Metals, meanwhile, have recently broken out technically, hitting new all-time highs in multiple currencies. They are seeing increased demand as a store of value and for their critical role in the energy transition. Over the next few decades, the world needs more copper, silver, and other materials. Mining has been estimated to consume anywhere from 5% to 10% of global energy. It seems odd to assume we can spike demand for metals without any knock-on effects on global energy costs and supply chains. Entire countries are electrifying, and while this creates a long-term, more efficient energy future, there is a near-term crunch where all the metals required for that electrification need to be mined and refined quickly.
Retirees are growing, and they are proving to be inelastic consumers. Over the last 50 years, the percentage of the population in the United States that is actively retired almost doubled, reaching over 17%. This group has been planning to spend for years, often has income indexed to inflation, and is focused on travel. Retirees are also increasingly comprised of Baby Boomers, the wealthiest generation. This presents a very inelastic source of energy demand where they have time and money. In your old age, you are unlikely to push things off while you are still healthy. This unique dynamic adds a more durable source of demand that will set a floor even in periods of economic weakness.
The U.S. and Canada are facing a shortage of low-cost shelter/housing. The Council of Economic Advisors in the US said that one in four renters pays half their income on rent. Meanwhile, in Canada, the RBCRBC +1.3% housing affordability measure hit its worst level ever, and the number of Canadian households that can afford a home based on their incomes is half what it was two decades ago. High shelter costs hurt innovation, suck productive capital from economies, and rapidly increase inequality (as lower-income quartiles can no longer save), but it also just makes voters angry. For this reason, politicians in both countries, at all levels, are embarking on significant plans to get homes built. Home construction is one of the more important drivers of energy demand, and the number of new homes that countries like Canada are proposing would have to double the record high for homes ever built in the country. A lot more energy is required.
