Invest Like the Best with Patrick O'Shaughnessy
· John Arnold
[00:00:00] S1: Maybe stepping back about what are the goals of the energy system. I think about systems a lot these days and what the incentives are, what the rules are, what the goals of a system are. In energy, you can think about having a product that's affordable to the consumer, that's reliable, that whenever you want it, you can access it. You can think about times, whether gas lines in the 1970s, or blackouts, when reliability hasn't been there. Having reduced emissions, a cleaner system. And then energy security. Then maybe fifth, I'd say that it creates good jobs for whatever country or whatever locale you're in. If you have those as goals, then how do you meet those? You were saying America's blessed with tremendous energy resources. It has a lot of oil, gas, coal. It has a lot of wind and solar resources. We're a very innovative country – ability to deploy solar and wind, and thinking about both traditional nuclear as well as advanced nuclear. So we have all these inputs and we're trying to get to the system that meets those goals. And then the challenge is in how do you devise policy and the rules of the system to do so. It gets tricky because the priority or the ranking of those goals changes from administration to administration. It's an industry that is slow. It takes a long time to build the infrastructure. You need stable supply chains in order to be able to meet the needs, and you have these changing goals of it. So the industry gets sent, every four or eight years, a different set of priorities or price signals about what we want as a society. Then the industry has to scramble. Then you throw data centers in here, which is just load growth, and being less concerned about price and more concerned about speed than any consumer of energy that we've seen in this country, maybe ever. Put it all in the mixing bowl and try to get a system that works.
· Patrick O'Shaughnessy, John Arnold
[00:00:00] S0: If you could imagine a U.S. energy future? I'd love to paint the poles and have you imagine the best possible scenario you can imagine for us 10 years from now, and what the components of that system would be that are different than how it is today. And maybe the worst possible version of the system that you can imagine in 10 years. Just to get a sense of, having studied the system so carefully, I love your way of thinking about the competing goals and this weird data center variable as well. We’ll start with bad. What would be the worst scenario that you can imagine that would get you concerned about the state of the U.S. energy system in 10 years’ time? [00:00:00] S1: The worst scenario is that the energy system becomes the bottleneck for both U.S. innovation as well as individual flourishing in this country. On U.S. innovation, especially on technology and AI data centers, it's largely around – can we build, can we create the supply that industry is demanding? And on individual flourishment, it's can we do so and maintain the affordability and reliability components that Americans have come to not only desire, but demand? There's this politics around energy and food and housing, because we need all of those. Those aren't optional for people. But there's this politics around it, that if you start to lose affordability of any of those, then there’s real, tremendous political ramifications of it. You can start to see if an energy system goes bad, it will have a huge impact on politics in this country.
· John Arnold, Patrick O'Shaughnessy
[00:00:00] S1: The worst scenario is that the energy system becomes the bottleneck for both U.S. innovation as well as individual flourishing in this country. On U.S. innovation, especially on technology and AI data centers, it's largely around – can we build, can we create the supply that industry is demanding? And on individual flourishment, it's can we do so and maintain the affordability and reliability components that Americans have come to not only desire, but demand? There's this politics around energy and food and housing, because we need all of those. Those aren't optional for people. But there's this politics around it, that if you start to lose affordability of any of those, then there’s real, tremendous political ramifications of it. You can start to see if an energy system goes bad, it will have a huge impact on politics in this country. [00:00:00] S0: If you think about that bad case scenario, both supply and demand wise. I'm curious, starting with demand, how certain you feel that this big increase in demand, for really the first time in decades in the U.S. – how lasting it feels to you. Does it feel pretty certain that we're just going to get a ton more data centers, almost no matter what, or demand for them anyway? And then on the supply side, what the reasons would be that we just fail to meet that demand? Why we would stumble and not succeed?
· Patrick O'Shaughnessy, John Arnold
[00:00:00] S0: If you think about that bad case scenario, both supply and demand wise. I'm curious, starting with demand, how certain you feel that this big increase in demand, for really the first time in decades in the U.S. – how lasting it feels to you. Does it feel pretty certain that we're just going to get a ton more data centers, almost no matter what, or demand for them anyway? And then on the supply side, what the reasons would be that we just fail to meet that demand? Why we would stumble and not succeed? [00:00:00] S1: Visibility through 2030 is pretty clear. The investments are being made. The actors that are making these investments are the largest, most profitable companies that have ever existed on this planet. Many of them are growing at very healthy clips, and so their free cash flow is increasing. They have the financial capability to execute on these plans, and they're making the investments today. I think the 2030s on is – who knows? The assumptions that have to go into any model on this have such wide error bars, and you extrapolate out that many years, and you just create a garbage in, garbage out model. [00:00:00] S0: What about our ability to meet that demand? What would screw us up on the supply side most?
· John Arnold
[00:00:00] S1: I think it's policy. It's gotten harder and harder to build in this country over the years. There's always this tension between what the needs of society are and what the preferences of a local community are. Everybody realizes we need transportation and housing and energy. People also want it not in their neighborhood. This is the whole NIMBY movement. "We need affordable housing, workforce housing. We need transportation. We need energy assets. But don't put them by me. And if you try to, I'm going to go fight you in the courts." For developers, time is money. Opponents to projects have gotten very clever about how to use the existing regulatory laws to delay and delay projects. And in doing so, can often kill them. I've been very focused, through our foundation, on how you do permitting reform. To make sure that the projects that are good for society and aren't unnecessarily painful to any community, will get built. While maintaining the parameters that the bad projects don't get built. This NIMBYism and this difficulty in building is what would lead to the problem of not being able to supply, or energy becoming the chokepoint for development of the United States. And particularly, bringing it back to the first part of the conversation, on China and just the speed and scale that they can build. They don't have this problem. I'm confident of that. It is one of the biggest differences between the two countries, and I really worry about if energy becomes a choke point in the U.S. – it has real ramifications for the strategic ranking of this country.
· Patrick O'Shaughnessy, John Arnold
[00:00:00] S0: If you were a politician, would you use the China story as fuel to the fire to try to communicate and market this concept that we're getting lapped by someone that's – if not our adversary – our competitor? [00:00:00] S1: Yeah, 100%. Not only is it a good narrative, but it's true. If energy becomes the constraint, we will become less competitive vis-a-vis China. [00:00:00] S0: You mentioned the asset side being so exciting on the energy side. If I was an energy asset investor, and I really wanted to fund stuff that would help us solve this problem, where you've got the joint growth in demand and this rise of NIMBYism, where does this whole thing break down? Is it in transmission? Is that the problem? Because, presumably, if we could just produce lots of energy in remote places that nobody lived or cared and transport it efficiently, the problem would be solved. Is that the right way to think about it? Do you think about it differently? I want to get towards the best version of things you could imagine in five, ten years’ time, that would solve this problem and make us energy abundant and not slow.