Goehring & Rozencwajg commentary on the Natural Resource Market for the third quarter ended September 30, 2024, titled “Copper and Uranium: The Coming Divergence”.
Copper and Uranium: The Coming Divergence
“How the world’s biggest offshore wind company was blown off course: Denmark’s Ørsted was once seen as a model for how oil and gas giants could go green. Its recent troubles suggest that things may not be so easy” Financial Times, December 5th 2024
“Amazon, Google make dueling nuclear investments to power data centers with clean energy. Nuclear energy is a climate solution in that its reactors don’t emit the planet-warming greenhouse gases that come from power plants that burn fossil fuels.” Associated Press, October 16th 2024
We turned bullish on copper in the second quarter of 2016 when copper was $2.10 per pound. In the essay “Renewables and the Upcoming Huge Bull Market in Copper,” we outlined how the positive fundamentals emerging in global copper markets were overshadowed by the prevailing pessimism of copper prices that had fallen below $2 per pound.
We explored the traditional drivers of copper demand and delved into the impending impact of renewable energy expansion—a topic few investors contemplated at that time. Since that essay, copper prices have surged nearly 150% and copper stocks have been superb performers. The COPX, the most popular copper equity ETF, has soared almost 500%, significantly outpacing the S&P 500’s 260% return over the same period.
Today, everybody’s a copper bull. The metal has transformed from an unremarkable commodity into a must-have asset, even for those adhering to strict ESG mandates, chiefly due to its critical role in the renewable energy sector—a connection we extensively explored nearly 8 years ago. Investors now hail copper as the “greenest” of metals and believe investments in renewable energy can only skyrocket. What’s not to love?
This optimistic outlook is epitomized in S&P Global’s influential report, “The Future of Copper,” published in July 2022—a document that has become the gospel for copper bulls. S&P Global asserts: “Technologies critical to the energy transition— such as EVs, charging infrastructure, solar photovoltaics (PV), wind, and batteries— all require much more copper than conventional fossil-based counterparts. The rapid, large-scale deployment of these technologies globally, particularly EV fleets, will generate a huge surge in copper demand.”
S&P Global projects that copper demand will double between 2023 and 2035, climbing from 25 million tonnes to nearly 50 million tonnes. Almost half of this increase—about 17 million tonnes—is expected to come from renewable sources. Copper demand is anticipated to grow at a compounded annual rate of nearly 6%, doubling the growth rate of the previous two decades. Additionally, S&P Global foresees significant structural deficits emerging in global copper markets by the mid-2030s, driven by surging demand and stagnant mine supply.
If you asked us in 2016 whether these projections were reasonable, we would have agreed. However, since then, our perspective on renewables and their impact on global copper markets has radically changed. After extensive study of the energy efficiency of renewables compared to hydrocarbons and nuclear power, we’ve concluded that large-scale adoption of renewables—including EVs—will be unfeasible unless societies are willing to accept substantial declines in economic growth and living standards—a topic we’ll revisit shortly. Our research suggests that the universally bullish copper demand forecasts are poised to unravel, potentially leading to bearish copper price implications.
Shifting our focus to uranium, in the first quarter of 2018, just after uranium prices bottomed at $17 per pound, we published our first bullish report: “Uranium: The Quiet Before the Storm,” highlighting the positive fundamentals that had emerged in global uranium markets which had been ignored by investors still reeling from the Fukushima nuclear accident seven years prior.
Since then, uranium prices have climbed over 300% and companies like Cameco— the Western world’s largest uranium producer—have delivered returns exceeding 550%, vastly outperforming the general market’s 150% gain in the same timeframe.
Much like copper, investor sentiment toward uranium has turned markedly bullish. The looming structural deficit in global uranium markets is now widely acknowledged. Also, the significant advantage of generating electricity from uranium— namely zero CO2 emissions—is finally being recognized as an essential positive by environmentally conscious investors.
As evidence of this change, we highly recommend Oliver Stone’s 2023 documentary, “Nuclear Now—Time to Look Again.” The renowned filmmaker was the highlight of that year’s Davos conference with his compelling argument that nuclear power offers a clean and reliable alternative to fossil fuels—a viewpoint that resonated with the Davos attendees.
From a contrarian standpoint, the newfound popularity of both metals might raise cautionary flags about potential investment pitfalls. Should investors consider selling both metals? In the short term, we remain bullish on both copper and uranium. However, we believe a crucial fundamental divergence is emerging that will make one metal a far superior investment over the coming decade.
When the enthusiasm for renewable investments peaked at the end of the last decade, consensus opinion focused on the declining “levelized cost” of wind and solar electricity as proof of their inevitable dominance. The prevailing belief was that as these costs fell below those of hydrocarbon-generated power a massive expansion of the renewable industry was all but guaranteed.
However, our research revealed severe flaws in this framework. We argued that focusing solely on declining operating costs--cost that were distorted by falling commodity prices and interest rates---failed to capture the actual expenses associated with renewables. Instead, we turned to the Energy Return on Investment (EROI) framework championed by energy scholars such as Charles Hall, Mark Mills, and Vaclav Smil. We found this approach more accurately reflected the actual costs of renewable, hydrocarbon, and nuclear power investments.
By applying the EROI concept and recognizing that technologies with inferior energy efficiency have never supplanted those with superior efficiency (and vice versa), we feel better equipped to understand the forces shaping investments in renewables, hydrocarbons, and nuclear power, as we progress through this decade.
Though it might seem academic, adopting new technologies based on their relative EROI is a common real-world phenomenon. Consider two examples from a familiar industry, occurring just years apart.
In 1956, ocean liners carried 80% of passenger traffic between North America and Europe. The Boeing 707 took to the skies two years later, connecting New York, London, and Paris. By 1964, jets had captured 80% of transatlantic passenger traffic, decimating the ocean liner business in just six years. The reason? The 707 transported passengers one mile using 40–60% less energy than ocean liners. The superior efficiency of flying across the Atlantic in the Boeing 707 made the competition obsolete.
You might argue that reduced travel time was the decisive factor causing the demise of the ocean liner industry, but consider another scenario where the new technology offered even faster travel, but inferior efficiency. The result: the new technology failed to displace the old technology.
By the mid-1960s, aviation experts like Juan Trippe, CEO of Pan American Airways, who pushed Boeing relentlessly to build the 707 jet, believed supersonic aircraft were destined to displace subsonic jets. Boeing and a British-French consortium raced to develop aircraft that could cross the Atlantic in three hours. While Boeing abandoned its SST project in 1971, the Concorde entered service in 1976. Simply put, the Concorde was an engineering marvel that offered a huge advancement in the technology of air travel. However, despite cutting transatlantic travel time in half, the Concorde consumed 50% more energy per passenger mile than its competitor--now the Boeing 747. Its inferior energy efficiency prevented it from gaining market share or profitability. Instead of displacing subsonic jet travel, the Concorde never amounted to more than a plaything for Hollywood celebrities, investment bankers, and rock stars. High energy consumption prevented mass adoption. The last flight of the Concorde took place in 2003, three years after the unfortunate Paris crash, which produced a wave of negative publicity from which the plane never recovered.
These examples illustrate the importance of energy efficiency and how it often trumps other advantages such as speed. Applying this framework to various means of energy production, we believe societies will increasingly question their commitments to renewable investments. Replacing energy sources with EROIs of 30:1 (hydrocarbons) with those of 10–15:1 (offshore wind) or 5:1 (solar farms) will lead to severe economic destabilization.
If lower EROEIs indeed have such destabilizing effects, investors must reconsider the widespread assumption that renewable-driven copper demand will double global consumption rates in the next decade.
When we wrote our bullish copper essay in 2016, we had only started to explore the energy efficiency of renewables and we believed they had a strong case for increased adoption, especially amid rising energy costs. However, subsequent research convinced us that renewables would not achieve the penetration levels predicted by bodies like the International Energy Agency and firms like S&P Global.
In recent years, investors have rallied around copper as the quintessential “green” metal. Our research indicates that the surge in copper demand from renewables will fall short. The highly bullish sentiment, based on flawed assumptions about renewable energy adoption, is likely to unravel as the decade progresses.
At the October 2022 Grant’s Interest Rate Observer conference, we cautioned that further investments in renewables could have dire, unappreciated consequences. We told the Grant’s audience: “Attempts to fulfill various green initiatives, such as achieving carbon neutrality by 2035, will create many losers and few winners. Economic growth will be severely impacted and CO2 reduction goals will not be met. Due to their inferior energy efficiency, renewables produce only marginal surplus energy. Since surplus energy drives economic growth, pursuing renewables hampers economic progress and leads to destabilization—as evidenced by Europe’s current struggles.”
If this doesn’t describe the economic agony that grips Europe today, we don’t know what does.
Volkswagen’s recent announcement of plans to close up to three German manufacturing facilities underscores the deep-rooted problems afflicting Germany in particular and Europe in general. Over the past fifteen years, Germany has invested nearly $1 trillion in renewable energy, primarily wind and solar, doubling its electricity production capacity. Concurrently, the government phased out nuclear power—its most energy-efficient source—greatly escalating the country’s energy problems. Pre-Fukushima, nuclear plants supplied about 25% of Germany’s electricity; today, none remain operational. Replacing nuclear power with renewables, an energy source with far less efficiency , has led to unintended and unfortunate outcomes— precisely as we predicted.
In summarizing our views at the Grant’s conference, we concluded:
- Inferior Energy Efficiency Limits Renewables: Due to their lower energy efficiency, renewables cannot displace traditional hydrocarbons, even if CO2 costs are internalized.
- Adoption Requires Government Intervention: Large-scale renewable adoption hinges on heavy government subsidies. --Look no further than the US’s “Inflation Reduction Act” or California banning new gasoline-fueled car sales by 2023..
- Unfortunate Outcomes Are Inevitable: Pursuing green initiatives via renewables will severely restrict economic growth and CO2 reduction targets will not be met. The minimal surplus energy from renewables makes economic expansion challenging, leading to destabilization. Ironically, increased investment in renewables may result in higher CO2 emissions due to their poor energy efficiency.
In contrast, the fundamentals of uranium could not be more different. The nuclear power industry is on the cusp of radical change with the advent of molten-salt small modular reactors (SMRs), a significant technological advancement that promises to boost both the energy efficiency, and the perceived safety of nuclear fission.
Regarding renewables, we are just where the Concorde was in 1975—there was huge hype, but the underlying problem of energy efficiency couldn’t be overcome and the Concorde was never successful. However underlying fundamentals in the nuclear power generating business and uranium markets put the world just where the Boeing 707 was in 1957—one year before it entered scheduled service. With the 707’s huge lift in energy efficiency, the global travel world was about to be disrupted--with huge societal benefits that are still being felt. The SMR, we believe, is the Boeing 707 of today.
Currently, nuclear power relies on large, high-pressure, water-based reactors, which are already highly energy-efficient. For every unit of energy invested—from mining uranium to constructing power plants—we get 100 units of energy output.
However, these reactors require operating pressures of over 2,000 psi to prevent water from boiling at core temperatures of 600 °C. The pressurized vessel necessitates massive amounts of steel and concrete, consuming significant energy in construction—about 60–70% of the total energy invested.
Molten-salt SMRs, on the other hand, operate at atmospheric pressure since molten salt boils at 1,400°C--far above the reactor’s core temperature. The low pressure reduces the need for heavy materials and complex safety systems. We estimate that SMRs require 80% less energy to build than traditional reactors, boosting the EROI from 100:1 to 180:1. We believe the steel and cement requirements of a molten-salt SMR are almost 90% lower per kWh than a high-pressure water-cooled reactor. By drastically lowering the energy required for steel, cement, and manufacturing, an SMR’s EROI is nearly double that of a pressure water reactor.
The molten salt-based small modular reactor (SMR) is not only a marvel of energy efficiency, but it also introduces advancements in operational safety--important to an industry haunted by its history. The specters of Three Mile Island, Chernobyl, and, most recently, Fukushima still loom large in the public imagination, underscoring the necessity of a technology that prioritizes operational security and safety. Here, the molten salt SMR again distinguishes itself. With a circulatory fluid boiling point far beyond the 600-degree Celsius range and a design that operates at atmospheric pressure, it sidesteps the Achilles’ heel of traditional water-cooled reactors--- the risk of leaks and explosions related to high-pressure operating environments. The threat of radioactive water or vapor scattering into the air becomes essentially impossible with an SMR.
Safety isn’t the only point of distinction. SMRs powered by molten salt leverage HALEU—High-Assay Low-Enriched Uranium—fuel enriched to 20% U-235, compared to the 5% used in traditional reactors. HALEU burns hotter, reducing radioactive waste by as much as 90% compared to older designs. Far less waste addresses a criticism that has dogged nuclear power for decades.
Despite these advances, nuclear power remains the “most successful failure of all time,” as energy economist Vaclav Smil aptly describes it. Antiquated designs and a persistent fear of nuclear calamity have betrayed promises of an energy utopia. Lewis Strauss’s 1954 prophecy that nuclear electricity would be “too cheap to meter” and Nobel laureate Glenn Seaborg’s 1971 vision of a world in 2000 powered 100% by nuclear energy now read like wistful fantasies. Instead, nuclear contributes a meager 9% to global electricity generation today.
This stagnation stems from a fateful decision made nearly seventy years ago. Admiral Hyman Rickover, the U.S. Navy’s nuclear program architect, dismissed molten salt reactors in favor of water-cooled designs. His reasoning was pragmatic: water-cooled reactors suited the Navy’s maritime-water based environment--molten salt explodes when coming in contact with water. But this choice chained the nuclear industry to a design optimized for submarines, not power grids. Smil observed that today’s pressurized water reactors are little more than “beached versions” of Rickover’s submarines. The molten salt alternative, with its inherent safety and efficiency, was left behind. Today, the industry is finally shaking free of its midcentury constraints. Molten salt SMRs are poised to revolutionize energy production, addressing the fears of past accidents and the CO2 crisis that looms over our planet. Data centers—prodigious energy consumers—are already adopting this technology to meet their immense demands-- the uranium section of this letter lists all recent announcements. Regulatory hurdles remain formidable, but the momentum is undeniable.
The implications for investors are equally profound. The choice, as we see it, is between uranium and copper—between investing in the Concorde, a technological marvel that failed to take flight commercially, and the Boeing 707, the plane that launched the jet age. The Concorde sits in museums today; the legacy of the 707 is written in the contrails crisscrossing the globe. The parallels between SMRs and the energy revolution they promise are clear. At Goehring & Rozencwajg, we know which side of history we want to be on.
The Depletion Paradox
The great drama of American shale production may now be nearing its final act. For years, we have anticipated that the relentless growth in shale output would crest by late 2024 or early 2025, catching many off- guard. In hindsight, even this expectation might have erred on the side of caution. Quietly and without much fanfare, both shale oil and shale gas appear to have passed their zenith several months ago. Recent data from the Energy Information Agency (EIA) reveal that shale crude oil production reached its high-water mark in November 2023, only to slide 2%— roughly 200,000 barrels per day—since then. Likewise, shale dry gas production peaked that same month and has since slipped by 1%, or 1 billion cubic feet per day. The trajectory from here, according to our models, looks steeper still.
Our view has been met with no shortage of skepticism. Many of our conversations with clients and industry insiders suggest a broad belief that today’s declines are but a pause, not a prelude to sustained contraction. Optimists contend that higher prices and a deregulatory push will spark a new wave of drilling and fresh production gains. After all, President-elect Trump’s “Three Arrows” energy plan prominently promises a 3-million-barrel-per-day increase in US oil-equivalent production. But we see this optimism as misplaced. The primary forces behind the current downturn are neither policy-related nor purely economic—they are geological and inexorable. Depletion, not market dynamics or regulatory overreach, is the central culprit.
Admittedly, the incoming administration features several well-informed and capable figures in the energy sphere, including Chris Wright and Scott Bessent. Their leadership will undoubtedly foster a favorable climate for drilling activity. Yet, even with their expertise and the administration’s likely zeal for energy development, we remain convinced that these efforts will struggle to offset the entrenched declines now gripping the shale sector. The geology of the shale patch has spoken, and its verdict seems increasingly final.
Our thesis is built upon the enduring insights of the late Dr. M. King Hubbert, whose groundbreaking prediction of the peak in conventional U.S. crude production in 1970 remains a landmark in energy analysis. In this essay, we aim to show how we have adapted Hubbert’s foundational work, augmenting it with the latest advances in artificial intelligence, neural networks, and machine learning to address the complexities of shale production. The implications of our findings are profound. Our edge lies in an uncommon synthesis: the marriage of cutting-edge computational techniques with deep, domain-specific expertise in the energy sector.
Too often, we observe legacy oil and gas analysts tethered to antiquated models, while AI practitioners—adept at the math but unfamiliar with the nuances of resource extraction—arrive at flawed conclusions. Neither approach alone suffices anymore. Our unique combination of skills allows us to reach conclusions that defy conventional wisdom, and we are confident these conclusions will ultimately prove prescient.
Let us explain why.
In recent months, we’ve engaged with a range of investors and oil industry executives. While many grasp the logic behind our analysis, few are ready to accept its implications. At a recent talk before an audience of oil and gas operators at the Houston Petroleum Club, the most common counterargument boiled down to this: if shale production continues to decline, higher prices will follow. And with higher prices, operators know precisely where to drill next. Each operator, brimming with confidence in their ability to boost production, assumes that the industry as a whole will do the same.
The rationale seemed straightforward: with the rig count far below previous peaks, availability is unlikely to be a bottleneck. While the remaining drilling locations might be less productive, they could still yield acceptable returns at elevated oil and gas prices. Given the vast number of undrilled but economically marginal locations, operators were convinced that U.S. shale production would rebound swiftly, negating any nascent rally in prices.
Yet, as we will argue, this collective confidence may rest on shaky ground. The factors driving shale’s decline are far more structural than the industry at large appears willing to admit.
Our models point to a sobering conclusion: even with substantially higher prices and an abundance of undrilled locations, production is set to continue its decline. We call this phenomenon the “depletion paradox.” It is a familiar story, and history provides a clear precedent.
Consider the case of conventional U.S. crude production in the 1970s. Production peaked in November 1970 at 10 million barrels per day, with oil priced at just $3.18 per barrel. At that time, the industry operated a modest 302 rigs drilling for oil. The first OPEC oil crisis in 1973 sparked a response from President Nixon in the form of Project Independence—a sweeping initiative aimed at reversing the decline in U.S. output through deregulation and expedited permitting. Much like today, optimism abounded among oil producers, who believed that higher prices would unleash a drilling boom and restore U.S. production growth. They were confident they knew where to drill; all they needed was the right price signal.
Prices soared from $3.18 per barrel in 1973 to $34 per barrel by 1981. Producers, true to their promises, responded with vigor. The rig count climbed from 993 in 1973 to a staggering 4,500 by late 1981. Yet despite this unprecedented surge in drilling activity, U.S. oil production steadily declined throughout the 1970s. By the end of 1981, production had fallen to 8.5 million barrels per day—far below the peak achieved a decade earlier and lower than when Nixon announced his ambitious goals.
Three decades later, in 2010, U.S. oil production hit a nadir of 5 million barrels per day, even as prices hovered around $100 per barrel—30 times higher than in 1973. The depletion paradox had firmly taken hold. The industry’s assumption—that higher prices alone could counteract geological realities—proved tragically flawed. Today, as we observe the shale sector grappling with similar dynamics, it seems history may once again be repeating itself.
We believe the U.S. shale sector now stands at a crossroads eerily similar to that faced by conventional oil production in 1973. While shale’s achievements have been extraordinary, they remain subject to the inexorable forces of depletion. Yet, the industry, Wall Street, and the President-elect appear poised to repeat the missteps of half a century ago.
The lessons of history are clear: enthusiasm for growth, however well-intentioned, cannot override the fundamental constraints of geology. And if we fail to heed these lessons, we risk not just disappointment, but the stark realization that higher prices and bold policy initiatives are no match for depletion’s steady advance.
King Hubbert – a History
M. King Hubbert, a geologist for Shell, was born in 1903 and left an indelible mark on the study of petroleum resources. In 1956, during a meeting of the American Petroleum Institute, he presented a bold prediction: U.S. oil production would peak in 1970 at around 10 million barrels per day. At the time, his assertion seemed audacious, even implausible—after all, U.S. production had been rising steadily since Colonel Drake’s first successful well nearly a century earlier. Hubbert faced significant skepticism, but history proved him right. In November 1970, just as he had forecasted, U.S. production reached its apex and began its long decline.
Although Hubbert’s name is widely associated with the concept of “peak oil,” surprisingly few have taken the time to engage deeply with his original work. His conclusions may have sparked controversy, but the principles underpinning them are remarkably straightforward.
Hubbert’s central argument was simple yet profound: every hydrocarbon basin is a finite resource. As such, the cumulative production of a field will follow a predictable trajectory. It begins at zero, rises as extraction ramps up, and ultimately reaches an upper limit that represents the total recoverable resource in the basin. When plotted over time, cumulative production inevitably traces a curve with this general shape:
While Hubbert acknowledged that the exact profile of production could vary widely, he emphasized that it would always slope upward—what mathematicians call “monotonically increasing”—as cumulative production can only grow, never shrink. For instance, a field developed rapidly might display a near-vertical rise, while one extracted at a steady pace might show a slower, more linear progression before reaching its upper bound.
Hubbert proposed using a logistic curve to approximate this behavior. The logistic curve forms a smooth, symmetrical “S” shape: it starts at zero, accelerates as production ramps up, and eventually approaches a fixed value, which represents the basin’s total resource. This elegant model captured the essential dynamics of resource depletion and provided a framework that has shaped energy forecasting ever since.
Taking the derivative of cumulative production with respect to time reveals the field’s production profile. For a logistic cumulative production function, this derivative yields a bell-shaped curve, perfectly symmetric around its peak—a hallmark of Hubbert’s framework.
Read the full letter here.
