The ai-driven energy boom

We’re in the midst of a massive artificial intelligence (AI) boom. Technological innovations are aplenty. [Header]( The AI-Driven Energy Boom Dear reader, 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… I’m talking about energy. And we need a lot more of it. Energy stocks have been lagging recently. Both old-school fossil fuel companies as well as renewable energy businesses – what I call the future of energy – seem to be shunned by investors. Since the start of 2023, the S&P 500 Index – as measured by the SPDR S&P 500 ETF Trust (SPY) – is up 39%. Meanwhile, oil and gas stocks – measured by the Energy Select Sector SPDR Fund (XLE) – are up just 2% and solar stocks – measured by the Invesco Solar ETF (TAN) – have fallen 45%. [Performance] But the 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 the 2020s, 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 to 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 less than two decades. 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 around $75 per barrel and slightly lower than they were a year ago. 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 remain, 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…   [Major US Power] 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. I 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. [US Transmission Growth] 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). Here’s to the future, [Matt McCall signature] Matt McCall Editor, Market Insights Check Out My Latest Podcast [STEP 11]( The last week has been a rollercoaster for everything from stocks and bonds to cryptos and even the global geopolitical environment. All are likely impacting your investments. So on [this episode of the SteadyTrade Podcast](, Tim Bohen and I are breaking down exactly how the headlines are moving the markets. Then, we circle back to a discussion we began last week. We’re sharing the top stocks on our watch lists. Tim’s focus is on day trading. Meanwhile, I highlight two more small caps that I believe could be big winners over the long term – especially as the small-cap rotation I’ve been talking about continues. [Check out the podcast to learn more.]( [Centurion Logo] © Centurion Publishing 13809 Research Blvd, Suite 500, Austin, TX 78750 *Results are not typical. Past performance does not indicate future results. All investing carries risk. Our Privacy Policy, along with our Term & Conditions, governs your use of this site. By using our site, or by accepting the Terms of Use (via opt-in, checkbox, pop-up, or clicking an email link confirming the same), you agree to be bound by our Terms & Conditions and our Privacy Policy. 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