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2021/11/03

Transition Fuel or Growth Impediment?

 
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Natural Gas: Transition Fuel or Growth Impediment?

David Fessler | Engineering Strategist | The Oxford Club

Dave Fessler

I've been writing about natural gas for 15 years. And for the last 10 years, I've been writing about its role as a transition fuel.

Without natural gas, we wouldn't be on the road to being rid of coal. And as most of you know, coal is the most polluting fossil fuel.

With coal firmly on its way out, oil and natural gas are the last two remaining fossil fuels in use. As we electrify transportation, our use of oil will gradually diminish.

But what about natural gas?

Many Americans heat their homes and cook with gas. But those are minor uses compared with power generation, cement-making and steelmaking.

So is natural gas enabling the transition to renewables? Or is it impeding it?

The Big Natural Gas Debate

Here in the U.S., we use roughly 40% of our natural gas supply to produce electricity. We use the rest for water and space heating, cooking, and heavy industry.

Other countries burn about 80% of their natural gas for power and industrial uses. Europe depends on natural gas more than any other region, while the Asia-Pacific region is the least dependent.

So it is no question that natural gas will be with us for decades.

This will be the case even as the world rapidly switches to renewables. But scientists are wondering how much natural gas we will need to make the transition and how long we will need the fuel source.

Natural gas's role in the energy transition depends on its use.

If it's replacing an aging coal plant, that's good. That eases the transition to renewables.

But if a utility builds a new natural gas plant instead of a renewable source, that impedes clean energy's growth. This is the kind of role we don't want to see natural gas fall into.

The definition of natural gas will have to change with the times too. There are already experiments underway that mix hydrogen with natural gas. This makes cleaner-burning gas.

Someday, hydrogen may replace natural gas entirely. Because when you burn hydrogen, you get energy and water vapor. That's it.

The beauty of this scenario is that we will still be able to use existing pipeline infrastructure.

 

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Two Great Ways to Play

There are two natural gas exchange-traded funds (ETFs) that I like that provide excellent exposure to natural gas infrastructure.

And both have performed well since the beginning of the year. In addition, they both provide excellent dividends for income-oriented investors.

Chart - Natural Gas ETF Performances
 

The first is the Alerian Energy Infrastructure ETF (NYSE: ENFR). It has about $70 million in assets under management.

Year to date, it's up about 42%. This isn't surprising, as the price of natural gas is up 113% over the same time frame. It also has a yield of 5.62%.

The second is the VanEck Energy Income ETF (NYSE: EINC). It's up more than 40% from the beginning of the year.

It currently has a yield of 4.38%. That makes it another nice growth and income play.

It's clear that natural gas will have a role in the energy transition for decades. That means it will still be in high demand in many areas.

Investors who want exposure to natural gas as we transition to renewables should consider one or both of the above ETFs.

Good investing,

Dave

P.S. Check out my other articles on oil and gas here.

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