If you pay even cursory attention to the news, you know that solar and wind power are increasingly important power sources. You probably also know that carbon fuels like oil and natural gas aren't held in high regard because of the emissions they produce. Kinder Morgan (KMI -0.64%) points out that these dynamics are unlikely to spell the end of oil anytime soon. Here's what you need to know.
Kinder Morgan is an important industry service provider
Kinder Morgan is known as a midstream company. It basically owns and operates the energy infrastructure that transports oil and natural gas from where it is produced to where it is consumed. The list of things that midstream companies own includes pipelines, storage, transportation, and processing assets. Kinder Morgan is one of the largest midstream companies in North America.
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There are a couple of notable things to take away from this fact. First, midstream companies like Kinder Morgan largely charge fees for the use of their assets. So, the prices of the products being transported through the system are less important than the demand for those products. Historically, demand has remained high even when oil prices have been low; this is driven by the importance fuel plays in the global economy.
The second important thing to consider is that buying and building energy infrastructure is expensive. With so much money put into each asset, Kinder Morgan wants to make sure that it owns a well-placed energy infrastructure that is likely to see strong, if not growing, demand over time. If the demand isn't there, it won't achieve adequate returns on its capital investment.
Basically, Kinder Morgan's future is tied directly to the future of oil and natural gas. And given the long-lived nature of its assets, it isn't looking out one or two years when it examines its business. Management is looking out decades into the future. So, if you are looking at the energy sector with trepidation because of the growth of clean energy, it is instructive to know what Kinder Morgan thinks. The news is good.
Oil and natural gas aren't going away
The big story here is population growth. Between 2022 and 2050, the U.S. population is expected to increase by 12%. Gross domestic product (GDP) is forecast to increase by nearly 70% over that span. The U.S. is Kinder's home market, but the trends are similar when you look at the entire world, with more people and increasing wealth. Energy is the backbone of modern society, so a growing population and GDP effectively means there will be an increasing demand for energy of all kinds.
Renewable power is going to be a big part of the solution here. Clean energy is expected to grow nearly 140% in the United States between 2022 and 2050. To be fair, that's off of a relatively small base, but it is likely to be the biggest winner in the energy sector by a wide margin. Coal, one of the dirtiest energy sources, is expected to get hit the hardest, falling 50% domestically. In the middle will be oil and natural gas, which are expected to see demand increase by 13% and 15%, respectively. That's not massive growth, but these fuels are clearly not going to go away anytime soon. That is why investors should feel comfortable continuing to invest in oil and natural gas companies, including midstream stocks and producers, even as the world focuses on clean energy.
What's interesting is that a new energy source entering the global power mix isn't a new phenomenon. For example, when coal started to be used for power, it took 60 years for it to achieve a 50% share of the global energy market. Oil required 60 years to reach 40%. And natural gas required just as long to get to 20%. In other words, the history of the energy sector suggests that oil and natural gas will probably be with the world for a very long time to come.
You can think long-term
Wall Street loves a good story, and clean energy is a great story. In fact, the growth of clean energy will be a big story for years to come, if history is any guide. But that doesn't mean that the story around oil and natural gas is destined to be a bad one. Looking at history for guidance, it seems likely that these two fuels will remain very important to the world for decades into the future. While this is the view of energy industry insider Kinder Morgan, it can't afford to be too sanguine, given the types of long-lived assets it owns. Thus, Kinder Morgan's positive outlook should lift energy investors' spirits even in the face of the negative view of oil and natural gas in the world today.
