Source: Bloomberg Wealth
I’m bringing some bad energy to your inbox.
Not sorry for the terrible pun. Definitely sorry for the bad news, though: Wherever in the world you’re reading this, you’re likely just a few weeks away from a massive energy bill, if you haven’t been slammed with one already.
What’s happening:
Oil and gas prices are soaring globally. Low supply + high demand from a recovering economy = higher prices to move and make stuff. It’ll get worse if the winter is tough.
Some numbers to make you think:
$100/barrel: Bank of America Corp. has talked up an outside chance of oil climbing back to this price per barrel — as soon as this winter
1,300%: How much European benchmark natural gas futures have surged since May 2020
20: This number of Chinese provinces — making up more than two-thirds of the country’s GDP — that have announced some form of power cuts already
Quote that I can’t unhear:
“If the winter is actually cold, my concern is we will not have enough gas for use for heating in parts of Europe,” Amos Hochstein, the U.S. State Department’s senior adviser for energy security, on Bloomberg Television on Sept. 20.
Why is this happening?
People want to buy things, go places and turn on the heater (or AC, depending on where you live) at a time when lots of different energy sources are facing challenges. They are not limited to the fact that:
- It’s not windy enough. Wind speeds in the North Sea, where the U.K. generates a lot of its power, are among the slowest in 20 years. That’s meant idling turbines and soaring electricity prices in Britain.
- Too many people love natural gas these days. Nations are more reliant than ever on natural gas to heat homes and power industries amid efforts to quit coal and increase the use of cleaner energy sources. But there isn’t enough gas to fuel the post-pandemic recovery and refill depleted stocks before the cold months.
- OPEC+ is being OPEC+. The 23-nation coalition is, so far, only slowly adding barrels of oil back to the market after a disastrous 2020.
…and how will it all play out for you?
Great question. You’ll probably be paying more:
- At the gas pump. Brent closed at the highest in nearly three years a few days ago. In Britain, stations have literally had to turn away customers. (I was at a gas — or “petrol” — station last weekend and it was mayhem.)
- For your electricity bill. Remember that lots of electricity is still made from fossil fuels. For example, 23% of EU electricity was generated from gas in 2019, just behind the 26% that came from nuclear plants.
- To heat your home. New York natural-gas futures are on track for their steepest annual jump since 2000, when an early winter sparked massive consumption at a time when domestic energy production was stagnating. Sound familiar?
- On things you might not have expected. Remember that lots of little things go into making the device you’re reading this on. They all have to be moved and often rely on fossil fuels to be made. If those prices go up… you know what happens.
Email a friend?
I wrote to a few financial advisers to see if they had any energy-crisis, money-saving tips beyond the obvious stuff like “buy a warmer blanket.” Here’s how they responded:
“I think that you will begin seeing people seek out more energy-efficient vehicles like hybrid and electric cars, especially since the savings rate for most Americans has increased,” said Dana Menard, the founder and CEO of Twin Cities Wealth Strategies. “All that extra cash will allow them to make larger upfront purchases versus trying to nickel and dime their way to savings.”
Darla Kashian of the Nicollet Investment Group says this fall she’ll be installing solar panels on her home. “A big reason is witnessing the recent absolute climate disasters,” she said.
Marguerita Cheng, a financial adviser who runs Blue Ocean Global Wealth in Gaithersburg, Maryland, has two hybrid vehicles herself. “I’m by no means suggesting that everyone purchase a hybrid,” she wrote. But the Honda does get 42 mpg and the Toyota? Closer to 50.
And Sarah Behr, founder of Simplify Financial Planning, told me that hybrids and solar panels all see a spike in demand when energy prices go up. “But it’s hard to know if the newfound demand will be sustained once energy prices normalize,” she said. — Charlie Wells
You Ask, We Answer
Is it really possible to live off your investments? I see this phrase in a lot of articles and videos about how after you’ve invested X amount in Y funds, you can “sit back and live off the investments.” But I’m not sure how that works in practice. Does this work with a Roth where you just withdraw each month what you need at the time? How does it keep growing if you’re pulling money out? — Jacob Lindsey, 28, Nashville
Short answer: Yes it is possible to “live off investments.” Long answer: It’s complicated and takes a lot of work! It’s also important to separate what is an asset from what is income. The investments in an account are an asset that generates income in the form of interest, dividends, and capital gains. That income can be drawn on for living expenses and allows your asset (i.e. investment) to keep growing. The amount of growth will depend on the risk profile and amount you regularly take out, but your investments can still grow even while you are drawing income from them. This strategy is common for investors who have diligently saved and are now reaping the benefit of their savings efforts and is used across account types such as IRA, 401Ks, ROTH, and standard Brokerage accounts. Be mindful of tax consequences on both the contributions going in and the distributions you take. — Elliot Pepper, financial planner and director of tax, Northbrook Financial