Artificial intelligence is the biggest thing in the market these days. The growth catalyst provided by soaring demand for its products and services has driven the market higher for years. But AI doesn’t work without energy.
Energy is the respiratory system of the modern world. Technology doesn’t function without the electricity powering its systems. If you’ve ever lost power for any length of time, it changes your life. It’s like living in the Stone Age. There’s no lights, no TV, no internet, no heat or air conditioning, no refrigerator, no anything. Without gas or electricity, there would be no cars, buses, subways, or trains either.
The world doesn’t run on technology. It runs on energy. Wars have been fought over it. Price disruptions can alter the global economy, as with the oil embargoes of the 1970s. Energy shapes the global balance of power. Modern society can’t function without it.
But energy has dwindled in importance in the minds of most investors. Consider this. The S&P 500 index comprises eleven different industry sectors. The energy sector accounts for a mere 2.95% of the index, while the “Magnificent 7” stocks account for about a 40% index weighting. Artificial intelligence bellwether Nvidia (NVDA) accounts for about 8% of the index all by itself.
The energy sector only seems to garner interest when there’s a major price disruption. Most of the focus is on the need to transition to clean energy sources. The old-fashioned oil and gas companies are often viewed as dinosaurs, after the meteor hit. But that’s a mistake.
Sure, clean energy is the future, but not yet. In fact, the world still relies on fossil fuels (oil, natural gas, coal) for more than 80% of its energy needs. The U.S. still uses fossil fuels for about 80% of its energy consumption. This country and the world are expected to continue to rely overwhelmingly on fossil fuels for decades to come.
But fossil fuel consumption is changing. A new king is emerging: natural gas. It replaced petroleum as the number one energy source in U.S., and the rest of the world is likely to follow.
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Why Natural Gas Is Booming Now
Natural gas is by far the cleanest-burning fossil fuel. Clean energy is not yet cheap or reliable enough with the necessary infrastructure to replace the abundant and cheaper fossil fuel sources, and it probably won’t be for a long time. Even some of the staunchest alternative energy advocates increasingly see natural gas as a necessary transition to a clean energy future and a crucial grid stabilizer.
Natural gas is by far the fastest-growing fossil fuel. It is the number one fuel source by far to generate electricity in the U.S. and much of the rest of the world. Demand across the globe is booming and continues to increase. At the same time, the U.S. is the world’s largest producer of natural gas and the largest exporter. There are also powerful trends adding to the already growing demand.
The AI craze is real and growing. But the technology needs huge amounts of electric power to function. AI is generated from computer power, and those computers are housed in data centers. Data centers are specialized facilities designed to house computer systems. They have sophisticated temperature control systems, integrated fore suppression, redundant data communications connections, and backup power systems. Large data centers use as much electricity as a small town.
But that was before AI. AI systems require an estimated seven times as much electricity as traditional data centers. In order to accommodate AI, major technology companies are investing an estimated $1 trillion or more in data centers over the rest of the decade.
But it’s not just AI powering the growing electricity demand. Demand for electricity, and the natural gas that generates it, would be growing even without AI. Electric vehicles (EVs) also gobble huge amounts of electricity. There’s also a huge trend in manufacturing onshoring as the administration has targeted businesses to relocate an estimated $15 trillion to $20 trillion in manufacturing to this country.
After being stagnant for decades, U.S. electricity demand is growing at breakneck speed. As a result, demand for natural gas is booming right along with it. It’s also a global phenomenon. This country is by far the largest consumer of natural gas, accounting for 20% of global consumption. But 80% of demand is overseas and is also growing.
U.S. natural gas exports, in the form of natural gas liquid (NGL), are soaring. This country is already the largest exporter, and growth is staggering. U.S. NGL liquid exports over this past year have grown a whopping 67% over the prior year. And it’s just the beginning. The U.S. and Europe signed a framework trade agreement whereby the European Union (EU) agrees to buy $750 billion in U.S. energy, the vast majority of which is natural gas, over three years.
Natural gas was already the fastest-growing fossil fuel. The addition of soaring electricity demand and exploding U.S. exports adds far more growth to the demand. The U.S. is already the world’s largest producer and exporter of natural gas, and production, transport, and storage of the stuff throughout this country is poised for a staggering and unprecedented boom.
Companies involved with natural gas in the country, including midstream energy companies that transport, store and process gas, along with companies involved in exportation, were already strong dividend stocks. The natural gas boom makes these stocks some of the best companies on the market for dividends and total returns in the years ahead.
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