The Energy Transition: Now is the Time

The Energy Transition — the commercialization of new technology — is the key to global stability. Until we get there, gas prices and inflation will wreak havoc. This is our responsibility as Americans, and the economic opportunity of a lifetime.

We have a MASSIVE societal challenge at hand. This even feels like an understatement. The environmental impact of our ongoing action is catastrophic.

But let’s talk money. The economic impact of the situation is enormous. We are experiencing unprecedented weather volatility, which translates to direct damages — a cool $19T this century, about one year of US GDP — as well as agricultural, transportation and widespread supply chain disruption. Texas, in the wake of last year’s winter storm, knows this well. Climate change costs.

And money has moved in response — en masse. More than $40T in institutional capital has committed to fossil fuel divestment. To give you a sense, this is about the market capitalization of the entire S&P 500 and more than the annual GDP of the US and China combined. The market has spoken.

Fast forward to today. Russia has invaded Ukraine, and disrupted global stability. And how was Russia able to do this? Resources. Russia’s strength in resources — #3 in oil (just shy of Saudi Arabia) and #2 in natural gas production — is threatening World War III.

Europe is heavily dependent. Russia is by far Europe’s largest energy supplier, by a wide margin. The EU has paid Russia $37B for energy since the invasion of Ukraine. Europe’s dependence is so great, that many argue oil and gas sanctions on Russia would hurt Europe more, economically, than impede Russia. This has given Putin a license to kill.

Now, oil and gas is back in the limelight, and prices are up — way up. Gasoline prices are up over 500%+ since the depths of COVID, and nearly 40% this year. We just experienced record gasoline prices. Oil and gas producers are moving as fast as they can, but activity takes time to ramp, and is impeded by equipment and labor shortages, and capital constraints.

Crude prices have sent oil and gas on a wild ride. After declining in value by 1/3 in 2020, the sector was up over 50% in 2021. Energy (largely oil and gas) was the best performing sector in the S&P 500 last year.

The clear question becomes — will investors return?

The likely answer is no: institutional capital movement is long term and committed. In fact, many are viewing this as an opportunity to avoid a fire sale as they make good on their divest commitments. Wild volatility in an already volatile sector contributes to the aversion, as well as deep long-term risk — geopolitical, regulatory, and importantly, technology.

And what’s more, oil and gas isn’t even investing in oil and gas. ExxonMobil and Chevron posted record profits in 2021. Under immense shareholder pressure, they have elected to pay this cash out in the form of dividends and buybacks — 75% and 52% for Chevron and ExxonMobil, respectively.

Inflation is also up, way up. This is felt throughout the economy, impacting the cost of agriculture, transportation and consumer goods. Consumer spending — 2/3 of US GDP — declines, and we now have a major economic growth problem.

What does this mean for us? It means gas prices are likely to stay high, at a time when inflation is a big problem. We are in a pickle. So, what now?

“Technology is the key to geopolitical power.” — George Friedman

We focus on technology, like never before. In the same way shale technology gave us the energy dominance we have today, as renewables disrupt natural gas and storage technology disrupts oil — energy technology is a key to the future.

This is nothing short of a global arms race. China is a real threat. As we catch news of a nuclear build in China and geopolitical tensions dominate, we are clearly at risk.

China is gaining on the US. Experts project China will outpace the US in economic power this decade. China is now a manufacturing powerhouse, controlling nearly 1/3 of global manufacturing capacity. They are investing in the energy transition at more than 2x the pace of the US. China is already dominant in energy transition equipment, with more than half the market in solar, wind, electric vehicle and lithium-ion battery equipment.

This is about America. And we are a nation of innovators. We can do this. But there is work to do.

We as a venture capital community have not been focused on energy. Now, massive later stage capital has flooded the market, with strategics and private equity hungry for investment. This money is not finding enough viable opportunity to invest in. R&D has been advancing for decades, and there is more to come. But these innovations lie in wait. We have hole in the market.

Venture capital has scar tissue from Clean Tech 1.0, and is still wary to take hard tech risk. We have been focusing on software for decades, and now, venture capital networks and expertise is departed from real (physical) assets.

So, we need to start at the beginning. We need to commercialize new technologies, and solve what is a major problem. We need early stage venture capital, focused on hard tech, who isn’t afraid to get their hands dirty and take solutions to market.

This is the economic opportunity of a lifetime. And the future of global stability lies in the balance.

LET’S DO THIS.

We hosted an Energy Transition Summit in partnership with The University of Texas Austin’s Energy Institute in April 2022. Grit academic, government, and industry partners participated, and discussed the complex landscape. The macroeconomic drivers for massive later stage appetite, and the need for early stage commercialization capital was clear.

Grit is tackling the biggest challenge, and opportunity — early stage capital to commercialize revolutionary solutions coming out of the labs. The opportunity of a lifetime.