Coal has been used for cooking/heating homes through various periods in history, but became the standard around the Industrial Revolution in the late 1700s. The steam engine replaced the water wheel, as watermills started to be replaced by coal mines in Great Britain.

The Titanic, the largest sea vessel ever made at the time, was powered by coal and sailed in 1912.

Coal paved the way for oil and gas to become major energy sources around WWI. Though they didn’t replace coal, they began to coexist.

This progression makes sense. We start with firewood, watermills. We moved to coal since it’s cheaper and more reliable (you can’t power a Titanic with a watermill). Then we discovered oil and gas, which was even better. You can’t power motorcars with coal, but you can with petroleum. A coal-burning stove in every house is impractical, but gas stoves are wonderful.

Each progression happened naturally since we were moving to a cheaper and more reliable source of energy. After all – if someone offers you a cheaper and better way to get electricity, you’ll take it, right? This is the essence of technology.

Here’s where the problem with green energy begins. The progression to green energy is not motivated by cost or efficiency. In fact, green energy is more expensive, less efficient, and less reliable (I’ll touch on this in a moment).

For the first time, people are being asked to use a worse energy source to satisfy political goals. The motivation is not cost-related or effectiveness-related. It’s social responsibility-related.

How do we know this?

Because if it were cost/efficiency-related, the government wouldn’t need to convince us. There would simply be EV cars coming onto the market for 30% less than gasoline cars, that work way better and cheaper, so people would naturally buy them.

Why would you buy a gas car for $30,000 if you could buy a superior EV car for $15,000?

But that’s not the reality.

It’s more like: Why should I buy an EV for $60,000 when I can just buy a gas car for $8,000? Why should I spend 1 hour riding my bicycle to work when I can just drive my nice car and get there in 20 minutes?

Well – because it’s good for the environment! (yes, we know it’s more expensive and not as convenient, but just deal with it!)

Unfortunately, most people’s response will be: No thanks!

So since justifying it economically is impossible, we must be guilted into it.

“If you don’t start using this more expensive and less useful option, you’ll destroy the planet!”

The problem is, humans like money more than they like being socially conscious.

But that only applies to a small part of the world.

For the rest of the world, it’s not about liking money, it’s about liking being alive.

Here’s a thought experiment:

If I clicked my fingers and all fossil fuels instantly disappeared from the world, how long do you think you’d survive?

A month? Six months?

You’re dreaming.

I predict the entirety of New Zealand would fall into mass panic within 24 hours.

50% of the country would be dead within 10 days.

98% would be dead within a month.

The trucks that deliver produce to the supermarket every morning are powered by oil. The cars that 99% of people use to drive to the supermarket to pick up their food are powered by oil. The machinery and vehicles used to farm and process our food are powered by oil. The ammonia we use to fertilise our crops are made from natural gas. In New Zealand our grid might be powered by 80% renewables, but the cars, trucks and machinery that maintain our grid are powered by oil. Not to mention our water system, telecommunication lines, sewerage system and natural gas system. Keep in mind we have engineers that have full-time jobs fixing these things every day, because these infrastructural systems break or stop working somewhere in the country every day. They require fixing daily with tools and vehicles powered by? Oil. We don’t make these vehicles and machinery in New Zealand. They are delivered to us by tankers powered by? Oil. Not to mention everything else we import, such as cars, phones, medicine, are only able to arrive on our shores because of huge freight ships and planes powered by? Oil.

So will this scenario look like?

Within 24 hours there will be no more food in the supermarkets, the power grid will be down, and the water system will be down. This means your house has no heat, no water and no electricity, so you don’t have a working phone, fridge, light, heat, or water source. Remember there are no fossil fuels so your gas stove is useless, your car is useless, if you have a generator it’s useless, the only way you can get around is on foot or bicycle. Also remember there are no police patrolling (their cars don’t work, and even if they did they’re not going to work, they’re in crisis mode like everyone else) so if you venture out of your home, everything you have is at risk of being stolen. You’re at risk of being hurt/killed by people who want what you have. Of course, the government would try and calm the panic but guess what – they can’t communicate with anyone because nobody has power or internet. The only way you are surviving once you exhaust the food, water and medical supplies inside your house is if you can venture outside and hunt/gather supplies without getting killed. This rules out ~80% of the population surviving the first two weeks. Another 10% will die of starvation over the first month. The final 10% will be those who have guns and/or live in rural areas where food is grown (they’ll be safe since nobody can get to them, there are no working cars) so they will probably have some chance of surviving with a Middle Ages existence.

Still want to get rid of fossil fuels?

Okay, great.

Now that you’re no longer living in Disneyland, here’s the reality:

Fossil fuels have saved more lives and raised more people out of poverty than probably any other advancement in the history of humanity.

Even today, we see countries like Germany, the fifth biggest economy in the world, almost come to a standstill when its supply of fossil fuels is interrupted. When the Ukraine war started, they lost their supply of Russian gas and quickly fell into an energy shortage. The government had to reopen the country’s coal plants under emergency to stop the country falling into a full-fledged energy crisis. Without coal as a backup energy supply, things had the potential to get very bad, very fast. We know this because in countries with less stable economies and less money, things indeed go very bad, very fast.

The reality is the only reason 99% of the world won’t die tomorrow due to lack of heat, food or electricity is because of coal and oil.

The phone you are reading this article on can only exist with fossil fuels, because all mines require oil to function, not to mention any machinery can’t exist without coal, since coal is required to make steel and iron.

99% of the food in the supermarket is only there because of fossil fuels.

Over 50 million prescriptions for pharmaceutical medicine are dispensed in NZ every year. Guess how medicine is made? Fossil fuels. Petrochemicals are the essential ingredient in analgesics, antihistamines, antibiotics, antibacterials and almost all other drugs. Sterile plastics cannot be made without oil, and are required for heart valves and other esoteric medical equipment and practically everything used in surgery. Literally, everything in our (overloaded) hospitals requires oil to exist or function (fun fact: the pharmaceutical industry’s reliance on oil is one of the ways Rockefeller became so rich).

Look around your house and take note of everything that contains plastic. Your washing machine, television, dishwasher, microwave, furniture, laptop, phone, even your shoes and any polyester clothing. None of this exists without oil.

You get rid of fossil fuels tomorrow, we suddenly have no medicine, no hospitals, almost no food, no water system, no electrical grid, no cars, no internet, no sewerage system, no heating, almost every person on earth dies and we go back to the Stone Age (but we will have reached net zero, woop).

So do I think investing in fossil fuels is ethical?

Well, our two choices are:

• Keep using fossil fuels the way we are, and the planet might eventually become uninhabitable for humans and maybe we all die in a hundred years, or;
• Stop using fossil fuels, and 95% of humanity dies by next week.

Which is the more ethical choice?

Of course, we do have a third option, based on common sense (something people aren’t big fans of these days) which is:

• Keep using fossil fuels, while making an effort to develop renewable alternatives, and if (big if) those alternatives eventually become cheaper/more efficient than fossil fuels, people will naturally transition to them.

Maybe that’s too logical?

So I Should Invest In Coal And Oil?

Not only do I think coal and oil are ethical investments, I believe it would be unethical to not support these industries.

After all – they bring dignity to humanity. They provide medicines that cure illnesses and prevent death, food and water that prevent widespread starvation, electricity and mobility which creates economic opportunity. Every aspect of life in the modern world depends on fossil fuels, and literally every modern convenience you enjoy today such as your iPhone, your car, your job, your clothes and every single infrastructural resource such as planes, airports, trains, hospitals etc only exist because of oil.

However, the narrative that fossil fuels are going to kill us all presents an interesting investment dichotomy. On the one hand, you have this magical resource that humanity depends on. On the other hand, you have governments demonizing it and trying to stop everyone from using it.

Since the politically correct position is oil and coal are bad, we can expect oil and coal will artificially become more expensive and less efficient.

By “artificially” I mean like this:

We know that getting electricity from coal is cheaper than solar or wind in the majority of cases. Data shows that solar on a per-unit basis is cheaper to generate, but when we account for the cost of producing a solar panel, the cost of the batteries to store the power (because we still need power when the sun isn’t shining), the cost of replacing and disposing solar panels (they have a short lifespan) and most importantly, the cost of backups like diesel generators or coal plants (for when we don’t have sunshine for days or weeks), solar is much more costly and complicated than just simply having a coal plant.

However, what if the government says – we are now imposing a carbon tax of $500 on every ton of coal.

Then coal would no longer be the cheaper option. It would be the much more expensive option, not due to any inefficiency related to coal itself, but simply because the government has decided to manipulate the market and make coal very expensive.

Currently, this isn’t practical.

A recent episode on the We Study Billionaires podcast put this in context:

• California generates 21% of its electricity from renewables, and it’s priced at 19 cents per kw-hour.
• Germany runs on 44% renewables and its electricity prices are 44c per kw-hour.
• If California doubled its renewables generation (remember renewables are more expensive) and increased its prices to Germany’s level, every California household’s power bill would be $3,000 higher per year.
• Consider the fact that 40% of US households are not able to afford $400 for a medical emergency, you would plunge many families into poverty.

This works in the fossil fuel industry’s favour, because even if the free market can be manipulated, it still counts for something. However, it makes investing in the industry difficult because, even though the product is essential to civilization and supremely effective and useful, you have a bogeyman with absolute power (the government) trying to constantly erode your profits.

Run the numbers on many coal, oil and gas companies today (coal especially), and they have the potential to make super profits long term, with endless demand for their product and trading at historically low valuations.

However, what happens when they grow their profits from $1b to $3b, and the government decides, well, we’re going to tax 40% of that for environmental reasons?

Now $1b to $3b becomes $1b to $1.8b.

Then they grow profits from $3b to $5b, and the government decides, well since you’re making so much money, we’re going to tax 60% of it now.

Instead of $3b to $5b, it’s $1.8b to $2b.

If you think that sounds unrealistic, it’s happening in Australia right now. For example, the Queensland government charges up to 40% tax on every ton of coal mined and sold. That’s on sale price, not profit. And it didn’t used to be that high. But now it is. And it will go higher. This is the reason I’ve refrained from investing in Australian coal, despite superb unit economics. Many companies have also pulled out of developing mines in Queensland, despite extremely bountiful and high quality coal reserves.

This is likely to happen to all fossil fuels eventually. And unfortunately, the one enemy you don’t want under any circumstances is the government. Their power is absolute and they can make your profits disappear at will.

Yet despite all this – I still think fossil fuels are a promising investment. They are that useful and necessary.

Warren Buffett agrees with me – even though Berkshire Energy is investing billions in renewables, two of Buffett’s biggest stock holdings (around $40b, or 10% of his portfolio) are Occidental and Chevron, and he seems to be buying more and more Occidental every quarter.

For those unaware, Oxy and Chevron are two US oil giants with wells in the Permian Basin (famous for being an oil field where you can pretty much drill with your eyes closed and still find oil).

If the king of investing, who owns a multi-billion dollar energy company is allocating 10% of his portfolio to oil and gas, what does that suggest?

It suggests even though governments are going to tax and tariff and regulate fossil fuels out the ass, they’re still going to make mega profits. Because the demand is that high and they are that important.

As for my personal opinion:

If the industry had the support of governments rather than their disdain, my portfolio would be over 50% coal and oil.

That’s a bit out of context, because if governments were friends of the industry, coal companies wouldn’t be as cheap as they are today. Coal would be trading at 15x or 20x earnings, rather than 2x or 3x, and Buffett probably wouldn’t be plowing money into OXY every quarter because it would be way more expensive.

So the real question is – even though coal and oil companies are cheap right now, are they cheap enough? Has the market correctly priced in all future taxes and regulations and red tape the industry is likely to see?

To me, this is too unpredictable. It’s impossible to know how much profit will be eroded for political reasons, or perhaps if and when these businesses might be made outright illegal. Too much depends on things outside your control – for example, you have Trump saying “drill drill drill!” while the blue team is practically Greenpeace 2.0. If you invest in the industry, your performance will largely depend on who wins elections, regardless of how good your business is.

But remember – every business can be a good investment if it’s cheap enough. As I write this, I have no positions in coal and a very small position in oil. But as uncertainty rises, I have a feeling these businesses could become very cheap in the coming years. My advice is build a fossil fuels watchlist, keep your eye on it. Things change quickly in this game!