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THE AI-DRIVEN ENERGY BOOM

Centurion Publishing > A.I. > The AI-Driven Energy Boom

We’re in the midst of a massive artificial intelligence (AI) boom. Technological
innovations are aplenty. And you’d be hard pressed to skim the headlines these
days without seeing several mentions of the next-generation technology.

But without one key commodity, none of these ground-breaking innovations we hear
about daily will come to fruition. 

Energy. And we need a lot more of it.

Energy stocks have been struggling recently. Both old-school fossil fuel
companies as well as renewable energy businesses – what I call the future of
energy – seem to be hated by investors.

Since the start of 2023, the S&P 500 Index – as measured by the SDPR S&P 500 ETF
Trust – is up 46%. Meanwhile, oil and gas stocks – measured by the Energy Select
Sector SPDR Fund (XLE) – are up just 10% and solar stocks – measured by the
Invesco Solar ETF (TAN) – have fallen 43%.

But the coming AI boom should push both energy sectors higher in the years
ahead.

U.S. electricity consumption has been largely stagnant for the past 20 years as
the country has focused on more energy-efficient products. But starting in 2020,
that focus began to shift to AI and data centers. Those categories accounted for
2.5% of energy consumption in 2022 and are expected to increase to 7.5% by the
end of the decade.

And that’s a conservative forecast…

Rene Haas – the CEO of major AI semiconductor player Arm Holdings (ARM) – has
said that he believes data centers could account for 25% of U.S. electricity
usage by 2030. And the International Energy Agency sees electricity demand from
worldwide data centers growing 10X over the same period.

Electricity demand from AI is such a burden on the energy grid because large
language models (LLMs) like ChatGPT require 10 times more power than a
traditional Google search. I believe it’s only a matter of time before all
search engines implement LLMs, which means this electricity demand will only
continue and grow.

But AI isn’t the only thing that will drive electricity demand higher in the
coming decades. 

The continued adoption of electric vehicles (EVs) will have a direct impact, as
their large batteries require massive amounts of energy to charge. EVs account
for less than 2% of all passenger cars and light-duty vehicles on U.S. roads
today. But that number could be as high as 50% in 13 years.

We also must consider the world’s push toward renewable sources of energy. The
sun doesn’t shine 24/7, and the wind isn’t always blowing. That creates a
problem – and therefore more demand for electricity – in the short term. 

We know that increased demand for electricity will drive prices higher over the
long term. But what about outside factors?

Right now, oil prices appear to be stable… 

The ongoing war between Russia and Ukraine should have been enough to place a
major premium on the price of oil and gas. Add in the conflict in Gaza between
Israel and Hamas, and I wouldn’t have been surprised to see oil prices soar
above $100 per barrel. 

But West Texas Intermediate Crude Oil prices are at $80 per barrel and only
slightly higher than they were a year ago.

We suspect this stability is the result of the U.S. establishing itself as the
world’s largest oil producer in 2023 – outpacing both Russia and Saudi Arabia.
The lower dependence on countries entangled in geopolitical situations has
removed most risk premium from oil prices. 

But will this last? As electricity demand increases and geopolitical risks
resurface, we can expect oil prices and profits at U.S.-based oil producers to
rise. 

Then there’s the U.S. electrical grid. There’s no question that we’re already
placing a major strain on it. We can see this in the blackouts that occur
following severe weather situations… 

Think back to the Texas power outage in February 2021 that led to 4.5 million
homes without power, more than 55 deaths, and $195 billion in property damage.
It was caused by severe cold weather and snow. 

Now, most major cities have been lucky enough to avoid such catastrophes. But
when you consider the amount of new electricity demand coming online from AI
data centers, EVs, and more, it seems inevitable that we’ll experience more
blackouts in the future.

The Texas outage alone highlights the dire state of the U.S. electrical grid and
its need for long-overdue upgrades. A series of bills made it through
Washington, D.C. following the COVID-19 lockdowns, but they have yet to make
even a small dent in the situation.

That puts us at a crossroads. Money must be spent on the grid to make noticeable
fixes and clear the way for future energy demand. And that creates the perfect
opportunity for investors willing to think outside the box.

By no means am I suggesting that you should ignore long-term, AI-centric
investment opportunities. Instead, I am advocating that you consider balancing
your portfolio with the companies making the future of AI possible.

We see huge upside potential in two niche areas of the energy industry…

The first is high-voltage transmission lines. In 2013, about 4,000 miles of
transmission lines were added to the U.S. electrical grid. Today, only about
1,000 miles of new lines are added annually.

Unfortunately, this is not an overnight fix. Long-distance projects of more than
400 miles can take 15 to 20 years to complete. But as the grid is inevitably
upgraded in the coming years, more and more projects will begin.

The second opportunity is in transformers. Transformer prices have risen as
shortages have plagued the industry. Since 2019, the sub-sector of the Producer
Price Index (PPI) that has increased the most is transformer equipment – up 71%
over that period. According to research firm Wood Mackenzie, the wait time for a
new transformer order is approximately two years.

With that in mind, here are some companies worth keeping an eye on…

In the transmission lines sector, put MasTec (MTZ), MYR Group (MYRG), Nexans
(NEXNY), and Prysmian (PRYMY) on your watch list. And in the transformer space,
consider Hammond Power Solutions (HMDPF), ABB (ABBNY), Powell Industries (POWL),
and Mitsubishi Electric (MIELY).



Jun 27, 2024Leave a Comment on The AI-Driven Energy BoomA.I., All


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