• Yves Siegel

Market Commentary: The Vitality of Fossil Fuels


In October, the International Energy Agency (IEA) published its World Energy Outlook (WEO) 2022. Our top takeaway is that while renewable energy grows rapidly for decades to come and gains market share in the energy mix, traditional energy, such as oil, natural gas, and coal, will still be vital to fulfill the world’s energy needs and provide for human welfare. For decades, fossils fuels’ market share of energy supplied hovered around 80%. The IEA projects under its Stated Policies Scenario (STEPS) that fossil fuels’ market share will fall below 75% by 2030 and to just above a still meaningful 60% by 2050.

The WEO explores three energy market and climate outcomes based primarily on government policies. Specifically, STEPS assumes a trajectory based on current policies, including the U.S.’ recently passed Inflation Reduction Act (IRA). In our humble opinion, a more appropriate name would be the Clean Energy Accelerator Act. The Announced Pledges Scenario (APS) “assumes that all aspirational targets announced by governments are met on time and in full.” The Net Zero Emissions (NZE) Scenario envisions a pathway where global warming is limited to 1.5 degrees Celsius and universal access to modern energy by 2030. In our view, the biggest caveat is that governments come and go, and public support can wax and wane, especially in democracies.


1. Traditional energy companies can still strive during the energy evolution.

2. Concerns about terminal values for traditional energy companies and stranded assets are probably misplaced and exaggerated.

3. Significant growth for renewable energy companies for decades to come seems undeniable.

4. Russia’s invasion of Ukraine is a game changer. As countries pivot toward energy security, they will likely increase investments in clean energy and energy efficiency.

5. Russia is a big loser. IEA projects that Russia’s oil and natural gas production will fall by 2 million barrels per day and 200 billion cubic meters (bcm), respectively, by 2025, relative to last year’s outlook as it will be unable to find new markets to fully replace European demand.

6. It’s expensive! Under STEPS, clean energy investment could exceed $2 trillion per year by 2030, an increase of over 50% compared to $1.3 trillion today. However, this still falls short of the $4 trillion plus requirement by 2030 under the IEA’s NZE by 2050 scenario.

7. Not enough spending on fossil fuels. In the STEPS, an average of almost $650 billion annually through 2030 is spent on upstream oil and natural gas investment, more than 50% higher than what has been spent in recent years.


We continue to believe that the energy sector should be a meaningful weighting in equities’ portfolios for value-oriented investors seeking income and modest growth. Many of these traditional energy companies sport strong balance sheets, robust cash flow, growing dividends, and stock buybacks. In addition, many of them are investing in clean technologies and will be critical providers of requisite infrastructure for the clean energy future. We believe growth-oriented investors with a long-term time horizon, ability to cope with near-term volatility, and greater risk tolerance, should also consider clean energy companies for their equites’ portfolios.

Fossil Fuel Demand in the Stated Policies Scenario, 1900-2050 (in exajoules - EJ)

Source: IEA, Fossil fuel demand in the Stated Policies Scenario, 1900-2050, IEA, Paris, IEA. License: CC BY 4.0

The IEA posits that Russia’s invasion of Ukraine is a pivotal event for energy markets and will hasten the transition to clean energy as countries (primarily Europe) diversify away from Russia’s fossil fuels. To note, Russia has been the world’s leader in fossil fuels exports. While pinpointing the global energy crisis on Russia, the IEA under-emphasizes other sources of the crisis such as surging energy demand following the pandemic and years of underinvestment in fossil fuels. We would argue that greater energy investments for both traditional and clean energy are required to meet growing energy consumption tied to global economic and population growth and to provide electricity to impoverished countries.

Under the Stated Policies Scenario, the IEA projects for the first time a peak or plateau for fossil fuels. Total energy supply is set to grow nearly 8% by 2030 and 19% by 2050 (from 2021). Renewables and nuclear account for all the growth and primarily displace coal. The IEA explains that “In the STEPS, coal use falls back within the next few years, natural gas demand reaches a plateau by the end of the decade, and rising sales of electric vehicles (EVs) mean that oil demand levels off in the mid-2030s before ebbing slightly to mid-century.”


· Renewables supply grows by 58% from 2021 to 2030 and by 192% from 2021 to 2050, (a CAGR of 5.2% and 3.8%, respectively).

· Nuclear supply grows by 21% and 53%, respectively.

· Coal supply declines precipitously, by -9% from a peak in 2021 to 2030 and by -32% from 2021 to 2050.

· Oil supply increases by 8% by 2030 and 7% by 2050, which implies that supply remains flat from 2030 through 2050. (Isn’t that a surprise!)

· Natural gas supply remains fairly steady, growing just a modest 3% by 2030 and 2% by 2050.

Source: IEA (2022), World Energy Outlook 2022, IEA, Paris, License: CC BY 4.0 (report); CC BY NC SA 4.0 (Annex A)

Relative to a year ago: The most meaningful change in the IEA’s forecast is for natural gas primarily driven by a faster projected switch to clean energy. Under the IEA WEO 2022 STEPS, forecasted natural gas supply in 2030 and 2050 is -4% and -15%, respectively, lower than estimated gas supply in the WEO 2021 report published a year ago. The IEA now expects growth of ~3% (compared to ~13% previously) between 2021 and 2030 under STEPS, down from ~20% growth experienced between 2011 and 2020. For example, the Inflation Reduction Act (IRA) lowered estimated U.S. natural gas demand in 2030 in the STEPS by more than 40 billion cubic meters (bcm) vs. last year’s IEA projections. Global natural gas demand in 2050 in this year’s version of the STEPS is 750 bcm lower than projected in last year’s version.

Relative to the STEPS: The IEA has a more optimistic outlook for renewables and less sanguine for fossil fuels under its other two scenarios. Under APS, renewables supply grows by 92% from 2021 to 2030 and by 334% from 2021 to 2050, (a CAGR of 7.5% and 5.2%, respectively). Growth is further accelerated under NZE with renewables supply growing by 134% from 2021 to 2030 and by 407% from 2021 to 2050, (a CAGR of 9.9% and 5.8%, respectively). Conversely, fossil fuels supply (i.e., gas, oil, coal) decreases by -10% from 2021 to 2030 and -50% from 2021 to 2030 under Announced Pledges. The drop in fossil fuels supplies is more meaningful under NZE at -30% and -81%, respectively.

Source: IEA (2022), World Energy Outlook 2022, IEA, Paris, License: CC BY 4.0 (report); CC BY NC SA 4.0 (Annex A)


Energy has become relevant again and is the top performing sector in the S&P 500 (i.e., S&P 500 Energy year-to-date return of 68.6% vs. S&P 500 of -17.7% as of 10/31/22). Given its outperformance, energy’s weighting in the S&P 500 (i.e., 5.36% as of October month-end) has slowly increased this year (it was just

under 4% as of February month-end and 2.67% as of 12/31/21).

Source: Bloomberg and S&P Global

Although the weighting is up from about 2% during the pandemic, it is still well below 6.1% at 2017 year-end and the last peak of 12.3% at the end of 2011. If energy stocks continue to outperform, as we foresee, the sector’s weighting will continue to grow. We suspect that both retail and institutional investors will be attracted to energy stocks because of a fear of missing out (FOMO) given the strong returns, while portfolio managers given the higher sector weighting need to pay attention or risk posting poor relative returns.


In October, SAM’s Infrastructure Portfolio produced a return (net of fees) of 9.5% compared to 8.1% for the S&P 500 and outperformed its customized benchmark, which generated a 6.6% return. SAM’s ESG Infrastructure Portfolio generated a return (net) of 7.5% vs. 3.3% for its customized benchmark. The biggest portfolio laggard in October was the clean energy sector that generated a total return of -1.7%, as measured by the S&P Clean Energy Index (SPGTCLTR). The Philadelphia Stock Exchange Utility Index (XUTY) and the Alerian Midstream Energy Index (AMNAX) posted a total return of 1.5% and 11.1% last month, respectively. For October, every sector in the S&P 500 reported a positive performance with Energy posting the largest monthly gain.

The S&P 500 Energy sector is still the best performing of the 11 S&P 500 sectors year-to-date with a return of 68.6% as of October month end. This compares with the S&P 500’s negative year-to-date return of -17.7%. Year-to-date, SAM’s Infrastructure Portfolio produced a return (net of fees) of 18.0% compared to 11.6% for its customized benchmark. SAM’s ESG Infrastructure Portfolio also outperformed and generated a year-to-date return (net) of 8.2% vs. 2.8% for its customized benchmark.

Sam Partners’ Infrastructure Income and ESG Infrastructure Strategies seek to provide sustainable income and growth with capital preservation. This is accomplished by investing in a concentrated portfolio of high-quality clean energy companies, midstream energy companies and utilities that are well positioned to participate in the energy transition to a net zero carbon future. A diversified approach to investments across these sectors should optimize risk-adjusted returns, in our view. Our Infrastructure Income Strategy offers investors a current yield of ~5% and growth potential of ~7%; while the ESG Infrastructure Strategy that is more heavily weighted with clean energy stocks and adheres to strict ESG criteria, offers investors a current yield of ~3.5%. In a world starved for yield, we believe these Strategies offer a compelling value proposition.


Siegel Asset Management Partners is a registered investment adviser located in Great Neck, New York. The views expressed are those of Siegel Asset Management Partners and are not intended as investment advice or recommendation. This material is presented solely for informational purposes, and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness, or reliability. All information is current as of the date of this material and is subject to change without notice. Third-party economic, market or security estimates or forecasts discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates or forecasts. Certain products and services may not be available in all jurisdictions or to all client types. Unless otherwise indicated, Siegel Asset Management Partners' returns reflect reinvestment of dividends and distributions. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

November, 2020