Q: Which sectors do you think have been impacted most by COVID-19?
A: Hospitality took a heavy hit, and has yet to recover completely. Nowadays, hotels are about 75% back to pre-Covid-19 occupancy rates. At the high end, occupancy rates right now are running at about 70%, which is far below 2019 levels.
Leisure travel is doing great; it’s mostly back. But hotels that see most of their traffic due to business travel are in trouble. It may never recover. That’s because businesses have realized that it’s much cheaper to jump on a Zoom call than it is to travel across the country and have meetings in hotels. It saves so much hassle and expense.
This could be the new normal for the hotel business, which means marginal players (smaller hotel groups or hotels with less attractive properties) won’t be able to afford the upgrades it would take to compete. They’ll likely sell to investors that can afford to upgrade.
By this stage of the pandemic, for the most part, the hotels that were going to die are dead. But I don’t think we’re going to see many new hotels come online until this occupancy issue resolves itself, one way or another.
Q: What do you think are the main drivers of that resolution?
A: Return to work policies might help a little. You’re seeing the big banks and other firms do their best to compel office attendance. By and large, it’s not working. People are resisting being forced back in.
So the real catalysts will likely be mergers & acquisitions. The industry will “right size” itself as no new inventory comes online. It still remains to be seen how a looming recession will further impact the industry.
Q: How are airlines faring?
A: Airlines, interestingly, are doing great. The airline industry is back. And again, those airlines that were going to die are dead. The survivors are doing ok. They’ve cut back on the number of flights per day. Thanksgiving was the biggest travel day since the beginning of Covid in 2020. This September, United had its best month in its corporate history.
Corporate travel is only 80% back. But surprisingly, work from home has been this huge boost to the airline industry. If you’re working remotely, nobody knows if you ducked out on Friday, and caught a flight to have a three-day weekend out of town. It’s been great for the airlines. Friday used to be the lowest travel day.
The strong dollar has been really helping international travel, particularly now that Japan has opened back up, right. Europe’s travel industry is booming, in part because of closures in China. But all in all, for the airlines the pandemic is not an issue. The industry recovered much better than anybody expected.
Q: Is energy is a more complicated story?
A: Energy is not a COVID-19 story anymore and it hasn’t been since we started reopening. Oil prices quickly recovered. Energy’s problem right now is the government. I’m not singling out the current administration, because all the way back through the last five administrations, the U.S. has adopted a problematic energy policy and almost every other western nation has done the same thing. In short, we’ve made promises and tried to accelerate renewable energy at a pace that simply is untenable.
Under the current American administration, the carbon industry has no incentive to spend any money building refineries to increase our capacity. As a result, it’s in their best interest to keep production levels where they are, collect the cash, enjoy the very high cash flows, pay dividends and buy back stock. They figure if the government is never going to love them, they might as well make their shareholders love them.
The Energy Information Agency (EIA) itself has said that by 2050, we’ll still be using more oil and gas than renewables. Yes, renewables will be the fastest growing sector, but there’s no doubt we’ll still be burning oil.
The thing is, we don’t have friends among the oil-producing nations to meet that demand. You just saw that when the Saudis basically told us to go do impossible things to ourselves. I’m wildly bullish about energy because of this supply/demand imbalance. It’s not going away.
Germany is on course to be 100% green and turn its nuclear plants off. If they get a cold snap, they’re going to be burning wood this year. Right now they’re fine because they have liquified natural gas (LNG) sitting offshore. But it hasn’t gotten cold yet.
Q: Net zero 2050: Is it a pipedream?
A: I don’t think even my kids will see net zero come to pass in their lifetimes. It’s going to cost $175 trillion to get to carbon net zero. Western and wealthier nations are supposed to pay all of that. Even the super bullish analysts last year at Bank of America, who are 100% pro renewables, admit that paying the cost of getting to carbon net zero would lower the standard of living for every single person on the planet. This can’t be ignored.
Q: Can solar help the problem?
A: We can’t build enough solar to solve the problem. We’d burn an incredible amount of fossil fuels to develop that much solar. Also there is a metals and rare earth problem. But the biggest challenge is that we haven’t yet developed a battery efficient enough to take the power generated in the day and save it for night. People are working furiously to develop better batteries, but we’re not there yet.
Q: If you had it your way, what would change about the energy situation?
A: We can’t make the situation better immediately, but it’s possible over the next 3-5 years if we shift attention to nuclear energy. We need to build new plants. And I know all the horror stories. I lived in Baltimore, 80 miles from Three Mile Island when that happened. Chernobyl was a horror. But we’ve been debating those plants since the 70s.
Meanwhile, the US Navy has been running nuclear reactors on vessels for the same 50 year period. The number of actual disaster incidents is shockingly low. There’s just a statistic out there with a rather grim name of ‘deaths per kilowatt hour.’ And the only thing safer than nuclear energy is solar. Everything else kills more people than nuclear.
A: Should I infer your stance on renewable energy?
I’m very pro renewable. I just think we can’t rely totally on renewables in the timeframe that we’ve told everybody we can.
We shouldn’t have cut back production and disincentivized the fossil fuel industry. It’s not just the rare earth metals that we’re going to run out of. Standard & Poor’s put out a report earlier this year warning that by the 2030s, we’ll certainly be short on copper. If everything goes right, and there are no wars, or floods, or labor issues to interrupt copper production, the shortage may last five or six years. But if the world acts how it’s always acted and something goes sideways, that shortage will become permanent. This is due to electric vehicles and renewable energy demand. There’s not enough of so many elements we need to meet the demand for EVs.
To meet the demand for EVs, we would have to increase the capacity of the electric grid in the United States by at least 25%. The grid is regulated state by state. So you can expect to have states struggling to work with electric utilities to fund this massive cost: trillions of dollars. That cost is going to get passed on to consumers, which bumps the inflation rate up very nicely at a time when we really can’t afford to be doing that.
So there is nothing about the policy or geopolitics we’re set up for anytime soon that is supportive of lower energy prices.
Again, I’m not anti-renewables. I have recommended renewables before in bad markets. Brookfield Renewable Energy (BEP) is one of my go-tos. Renewables are the fastest growing source of energy in the future, bar none. But for at least three more decades, we simply need to burn quite a bit of oil and gas. And we did a really bad job of planning the transition.
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