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FEMALE VOICE:  This podcast has been prepared exclusively for institutional, wholesale professional clients and qualified investors only, as defined by local laws and regulations.  Please read other important information which can be found on the link at the end of the podcast episode.

MR. MICHAEL CEMBALEST:  Greetings everybody, this is Michael Cembalest from J.P. Morgan Asset Management.  This is the 2022 Eye on the Market Energy Paper Podcast.  We’ll actually be doing a series of podcasts with each week’s installment dealing with different topics from this year’s paper.

The events taking place in Europe underscore some of the unifying principles of this annual energy paper effort since its inception 12 years ago.  And those three principles are number one, energy transitions differ a lot from transitions in technology, healthcare, biotech, and other sectors.  We have a chart in here showing this, how the speed of disruption is very different in energy than it is from other things like broadband and smartphones and rideshare and things like that.

The second concept is that decarbonization of electricity is well underway, but decarbonization of industrial production, transportation, and heating lag much further behind.  That’s a really important concept in understanding where we are on this whole renewable energy transition. 

And the third principle that I was kind of writing about for a while in the wilderness is that countries that reduce their own production of fossil fuels under the assumption that renewables can quickly replace them face substantial economic and geopolitical risks.  That now seems obvious given what’s happened in Europe, but it wasn’t obvious at all over the last decade.

So as I mentioned, we’re going to do a few podcasts on this topic, and this podcast is going to be dealing with the executive summary of the paper, which is a discussion of some of the most important issues in the global world of energy issues.  This is really meant to accompany the paper.  It’s hard to do this without charts, so I’m not going to discuss everything, but I hit the main points here.  You should dial into the webcast or read the paper itself if you really want to see this come to life.

Anyway, what are some of the most important things I’m going to discuss on this particular podcast?  Well, let’s start with three things.  Why is the world still so reliant on fossil fuels, which still account for somewhere between 80 and 85% of energy consumption globally?  Even in Europe, which has really been a leader in terms of renewable energy, they are 70% reliant on fossil fuels.

So three things.  Number one, you probably read about this concept called levelized costs.  I wouldn’t say ignore them, but they’re not great barometers of the pace of change.  The levelized cost that compares wind and solar on the margin to fossil fuels I consider a misleading measure, because these cost estimates rarely reflect the actual cost that you need to have a grid with a lot of renewable energy on it, which is a lot of cost associated with extra transmission, ‘cause you have to create large renewable coverage areas, for example, getting wind power from Texas to St. Louis or Tallahassee.  You also have to include the cost of backup thermal power required for times when renewable generation is low.  And if you’re not going to do that, you’ve got to include the cost of utility-scaled battery storage.  So I remain amazed at how much time people spend on levelized costs when they’re not really fully loaded for a real actual live economy. 

Second, as I mentioned, the benefits of grid decarbonization are great, but they’re limited by the fact that we haven’t really electrified at all industrial energy use, transportation and have only electrified heating a little bit.  And that’s one of the reasons why it still looks like the world may be 60 to 70% reliant on fossil fuels all the way out to 2050.

And then one of the third issues to pay attention to is the energy divide between the developed and the developing world.  If you look out over the next ten years, it looks like Europe, Japan, and the United States are all going to use a lot less energy over the next three decades than even they did over the prior one decade.  That’s great.  But over the last 25 years, the developed world has shifted a lot of its carbon-intensive manufacturing of steel and cement and plastics to the developing world.  So for all the congratulatory backslapping taking place in the developed world for lowering its energy consumption, a lot of that simply is a byproduct of having outsourced a lot of carbon and energy-intensive manufacturing.

Two countries that are, when you look at them, actually highly reliant, in places like China, India, Vietnam, and Indonesia, highly reliant on coal as a share of their energy.  So those are the three big topics from my perspective that explain why the world is still so reliant on fossil fuels: the misleading barometers of levelized costs, the low level of decarbonization outside the grid, and then this shift in the developed and the developing world. 

So where do we go from there?  Well, there’s a Mark Twain quote of, that goes like this: reports of my death are greatly exaggerated.  And I use that this year on a chart that shows the recovery of fossil fuel stocks and how they’ve massively outperformed renewable energy stocks since really the middle of 2020.  Some of the craziest, weirdest things I heard about, ever heard about energy, were said during the spike in 2019 and 2020 in those renewable energy stocks, and the short version went something like this: fossil fuels are dead money since the renewable transition is irreversible, gathering steam, and rapidly displacing them. 

I would agree that the renewable transition is irreversible, but the rest of it, not so much.  In our energy papers over the last two years, we argued that the stars were aligning for a substantial rebound in oil and gas profitability, and the primary reason being that the poor oil and gas stock price performance was primarily the result of management decisions to focus on market share and revenue and not on profits.  And global gas and coal consumption in 2021 are already higher than pre-COVID levels, and oil consumptions should surpass pre-COVID levels sometime this year. 

And even more importantly, looking further out, these aren’t my forecasts, a lot of the forecasts that you see from Wood Mackenzie, the Energy Information Agency, the International Energy Agency, and BP show oil demand, global oil demand in 2030, in 2040, they’re not that different from levels of oil demand today.  We also estimate that the US might need roughly the same amount of natural gas in 2035 as it consumes today.  So that’s a very different picture than the one that, than the market narrative that you were hearing 18 to 24 months ago.

Of course, the big issue in energy right now is what’s taking place in Europe, which is paying a really steep price for its reliance on Russian energy.  Essentially, Europe miscalculated.  It reduced its own production of fossil fuels a lot faster than it reduced its own consumption of fossil fuels, and they are now caught in the vice of Russian energy reliance.  The ramifications I think are just beginning to dawn on me and other people, which is a likely recession in Europe, energy consumption is going to displace non-energy goods and services in Europe, a lower rate of growth in Europe, less competitiveness of their exported goods, they may even require curtailment of industrial production in steel, fertilizer, and cement if they really go cold turkey from Russian energy, higher food prices, and political tensions domestically as some of the anti-establishment candidates take advantage of the household distress.  Of course, the latest news is that Russia cut off Poland and Bulgaria from natural gas shipments ‘cause they refuse to pay in rubles.

We have some charts here that show the history of Europe’s reliance on Russian energy, going all the way back to 1980, and comparing Europe, China, US, and Russia in terms of energy dependence and independence.  These are some pretty paramount issues right now, and you’ve got to see the electricity and natural gas price gaps between the US and Europe, because you have to see them to believe them.  At one point a couple months ago over the winter, natural gas in Europe was $30 compared to 5 to $6 of BTU in the US, and the electricity gaps were similar.

I will remind everybody that in 2012 during the presidential campaign in the US, Mitt Romney tried to warn everybody about what Russia was really all about, and he was first mocked on the left for doing so, and then you all know what happened later on the right and their quasi-embrace of Russia that took place during the 2016 presidential campaign. 

So can Europe quickly change course?  It’s real difficult.   The plan that’s been announced includes a very rapid uptake in wind and solar, where in real life, deployment is constrained by transmission delays and interconnection cues and things like that, electrification of home heating that so far is mostly a Scandinavian phenomenon.  Building out more LNG import capacity, it’s called regasification capacity, that takes years and billions of dollars to do.  And the most ironic one that came from the IEA was recommending greater use of nuclear power at a time when Europe is basically, outside France, abandoning it. 

So Europe is not the only region really at risk here.  And one of the charts you probably have seen before is that on a global basis, capital spending on oil and gas production is declining, but oil and gas consumption is not.  It’s basically back to where it was before COVID.

So countries are faced with three broad choices.  You either ramp up your own domestic production of fossil fuels, if you have them, to avoid a geopolitical and economic trap.  You rely on countries like Russia, Iran, Qatar, and the Saudis and Venezuela for imported energy.  Or you confront the obstacles to a faster renewable transition head on. 

And the last option is what a lot of people want, what a lot of us all want, but it’s not something you’re going to accomplish by feel-good policies like cutting off sources of fossil fuel financing or university divestment or stuff like that.  If you really want to make this happen, policymakers have to step in and curtail the ability of local communities to delay or cancel decarbonization and the transmission projects that are associated with them.  It’s happening all across the United States, and it’s happening in spades in the most progressive states in the country, which is a topic we’ll talk about in the next podcast.

Policymakers would also have to build consensus for an economy-wide price on carbon.  And without those two things, without confronting those states’ rights issues and the price for carbon, we’ll all remain stuck in the slow lane where we are now, despite the ESG policies and corporate carbon disclosure requirements and stuff like that.  A revival of the Build Back Better bill in the US could help a little bit, but there’s no news to report just yet. 

So over the next two or three podcasts, we’ll be getting into the details on this year’s topics.  Before we get started though, we had a page in here to just remind you of two topics from last year that we summarized, because they’re critical to understanding the decarbonization challenge. 

The first one is the challenges of electrifying industrial energy use.  The global industry uses more energy than any other sector, meaning homes, businesses, transportation, et cetera.  And electricity is a very, very small part of industrial energy use.  In the US it’s been hovering between 10 and 15% since 1980 and hasn’t really changed.  And that’s a testament to how hard it is to electrify industrial energy use.  And of course, electrifying it would then allow you to decarbonize it.  But if it’s hard to electrify, it’s hard to decarbonize. 

And the big issues are industrial production often relies on ways to heat energy, which is lost during electrification, which makes it a lot more expensive to electrify it.  And a lot of industrial products like plastics and cement and ammonia aren’t metallic to begin with, which makes electrification harder.  So there’s a summary of that. 

And then I know people hate to read this, but one of the highest, one of other topics we summarized is the highest ratio in the world of science, which is the number of academic papers written on carbon sequestration divided by the actual amount of carbon sequestration, which at last count was 0.1% of global emissions.  The infrastructure required to do this is enormous.  And I’m sorry, but the energy and materials requirements for things like direct air carbon capture are basically unworkable.  If you think, capturing 20% of global CO2 through direct air carbon capture would require 40% or more of all of the electricity in the world.  This is clearly an absurd proposition, and I’m not going to waste a lot of time on it.

So this year’s paper is called the Elephants in the Room.  And it’s a phrase that refers to glaring, glaring issues that need to be resolved.  So what are we going to be talking about?  Well, there’s three topics on electrification, the transmission grid, clogged interconnection cues, things like that.  Then we’re going to be talking about electric vehicle adoption and what policies might be needed to get US gasoline super-users, the one, that that small cohort of people consuming a third of the gasoline, how can we get them to switch to electric vehicles more quickly?

We’re also going to take a look at how rising metals prices affect battery cost.  And then we’re going to conclude the electrification section with a look at home heating and specifically these new bans on onsite combustion of natural gas, propane, and fuel oil in new buildings.  So far, mostly this is a Scandinavian phenomenon, but it’s coming to a city or country near you. 

And then after that, the next podcast is going to take a very deep dive into the hydrogen economy, which is a concept that really is still in its infancy, and we’re going to take a close look at the use cases that we think are a lot narrower than advertised once you look at costs around your proficiency, materials handling, competition from electrification, things like that. So that’s enough for this week.  Thank you very much for listening, and we’ll see you next time.

I do want to make one quick, brief comment before I go.  One of the topics that I’m not writing about this year is the climate benefits of the switch from coal to natural gas.  That’s still very much a work in progress.  I don’t think there’s any disagreement that on a pure CO2 basis, gas has a lower emissions rate than coal.  I mean that’s just kind of empirically true from a chemical perspective.  The issue is these methane leakage rates.  The EPA claims that they have fallen to just 1% of total production, but most of the climate science people I talk to don’t have a lot of confidence in those EPA numbers.  And when they conduct their own measurements, they find that they’re understated by 50 to 100%, maybe more.  So that methane, because if its concentration component as a GHG, that would offset a lot the assumed benefits associated with coal to gas switching.  So that is still unsettled science, from what I can tell.  Anyway, thanks for listening, and I will speak to you all next time.  Thank you, bye.

FEMALE VOICE:  Mike Cembalest’s Eye on the Market offers a unique perspective on the economy, current events, markets, and investment portfolios, and is a production of J.P. Morgan Asset and Wealth Management.  Michael Cembalest is the Chairman of Market and Investment Strategy for J.P. Morgan Asset Management and is one of our most renowned and provocative speakers.  For more information, please subscribe to the eye on the market by contacting your J.P. Morgan representative.  If you’d like to hear more, please explore episodes on iTunes or on our website.

This podcast is intended for informational purposes only and is a communication on behalf of J.P. Morgan Institutional Investments Incorporated.  Views may not be suitable for all investors and are not intended as personal investment advice or a solicitation or recommendation.  Outlooks and past performance are never guarantees of future results.  This is not investment research.  Please read other important information which can be found at www.JPMorgan.com/disclaimer-EOTM.

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[START RECORDING]

FEMALE VOICE:  This podcast has been prepared exclusively for institutional, wholesale professional clients and qualified investors only as defined by local laws and regulations.  Please read other important information, which can be found on the link at the end of the podcast episode. 

MR. MICHAEL CEMBALEST:  Good afternoon, everybody.  This is Michael Cembalest with the J.P. Morgan Eye on the Market podcast.  This particular podcast is the second of four podcasts that we’re doing on our annual energy paper.  This one is on the issue of electrification and specifically the issues of transmission and electric vehicles.  The next podcast will be on electrification of home heating through heat pumps, and then the last one will be on our deep dive look into the hydrogen economy or the lack thereof.

So let’s get started on this concept of electrification.  Why is everybody so focused on this as a deep decarbonization agenda item?  Well, it has to do with the fact that if you can electrify something such as converting from an internal combustion engine car to an electric vehicle, and then you follow up by decarbonizing the grid by adding wind, solar, hydro storage, possibly nuclear or even, as some people argue, national gas with carbon capture, which we’re very skeptical of, you can then decarbonize that energy use.  So just to be clear, first you electrify it, then you decarbonize the grid, and then you’ve decarbonized your energy use.  Sounds very simple.  Of course, it is nothing, it is not simple at all. 

Over the last 20 years, the share of electricity as a percentage of total energy use has risen by just 2 to 3% in most countries, which is a very slow rate of change.  We have a chart in here showing the most large and midsized countries use electricity for something like 15 to 20% of their overall primary energy consumption, and that those numbers have only risen by 2 to 3% in the last 20 years.  And the only countries that are higher than that are places like Iceland and Norway and Sweden and Switzerland, places that have abundant hydro and geothermal power, or they’re very small countries that rely on the outside world.  So remember, a lot of what you read from energy futurists is about this electrified world as a blueprint for a world that doesn’t really have a proof of concept yet.  

So let’s get started on this transmission issue.  We’ve been writing about it for a few years.  The bottom line is that there is an enormous gap in between the amount of transmission that we have, transmission capacity measured as gigawatt miles, and what a lot of the deep decarbonization plans require.  And it’s just very hard to build new transmission.  Transmission grid in the United States has grown at 2% a year since 1978, and only 1% a year over the last five years.  And that’s nowhere near the robustness of a grid that you would need to increase the level of electrification of energy use.

And in last year’s paper, we covered the saga of this project that was supposed to bring hydropower from Quebec to Massachusetts, that was blocked first by New Hampshire and then by Maine.  And if the most progressive region of the country can’t figure out how to swap natural gas combustion for cheaper and cleaner Canadian hydropower, that’s a huge problem.

And when I speak to net zero and Green New Deal advocates, a lot of them stare off into space on this topic rather than confronting the state’s rights and eminent domain issues head on.  And unfortunately, in my opinion, it tells me that they’re not really that serious about addressing the real world obstacles, real world obstacles to deeper decarbonization, ‘cause that’s one of the real world issues that has to be confronted.

That project, called Northern Pass, from Quebec to Massachusetts, which has now been permanently scraped, is not the exception.  Transmission projects are being blocked all across the country by landowners and even by conservation groups that are that are objecting to the very electrification that they intensely lobby for when they get interviewed and when they write academic papers.  I read this paper from lawyers at the Illinois Environmental Law and Policy Center explaining why they were litigating to block a wind transmission project. And it was the equivalent of looking at somebody contort themselves into a pretzel.  

So Iowa has blocked projects to bring wind to Illinois and Wisconsin.  Arkansas blocked the project from Oklahoma to the Southeastern US.  Missouri blocked projects from Kansas to Indiana.  Colorado has blocked projects.  Oddly enough, in Florida, Governor DeSantis and the state legislature are one of the few places that passed laws preventing local entities from blocking solar projects and some other renewable projects.  How ironic is that?

Now some Republicans blame Democrats for this, and there’s a quote in here we have from Pete Stauber, who is a Republican congressman in Minnesota, saying look, Democrats may not realize that allowing environmental groups to sue over every infrastructure project they didn’t like might not have been the best idea.

Just as a bit of background, if you look around you, you are benefitting from the application and widespread use of something called federal eminent domain, which is when the federal government says look, I understand there may be local objections to this, but this is needed for the greater good and it’s going to happen.  That’s why we have railroads, that’s why we have national parks, that’s why we have national gas pipelines, airports, Naval stations, the interstate highway system that Eisenhower built, fiber-optic cables.  Eminent domain was used broadly over the last 100 years to create all of those things. 

But it’s not being used today broadly by the federal government on the transmission issue, and there’s a variety of legal reasons why that’s the case.  We describe them here, but the bottom line is Congress tried to pass the energy, they passed the Energy Policy Act of 2005, which was supposed to give the federal government more siting authority for these projects, but it got challenged in courts and has been stymied ever since.

The other challenge facing the grid is that even when the local communities and environmental groups aren’t blocking it, they then have to get connected to the grid itself.  And there’s a thing called the interconnection queue, queue meaning Q-U-E-U-E, where you have to line up and apply to be added to the grid itself.  And that used to be a pretty simple process when generators were adding large nuclear and natural gas plants.  But now hundreds of small renewable projects, solar, solar and storage, wind are all swarming the queue at the same time.  A lot of these government and local agencies are understaffed. It’s a very inefficient process.  It can take you up to four years to finally be told yes, we’re going to approve you and here’s where you’re going to slot into and how you’re going to connect to the grid and how much it’s going to cost you. And we have some data in here showing that something like only 20 to 30% of projects in the interconnection queues reached commercial operation from over the last decade.  And the numbers were even a little bit lower for wind and solar.

So that’s the other challenge, is that even when people are not objecting to these projects, it’s very complicated with the United States grid and the process used to improve projects to get these things added.  The amount of solar and wind capacity in the queues in aggregate across the country are many multiples of existing wind and solar capacity.  What subset of those will eventually be put into commercial operation, nobody really knows because they have to run the gauntlet of local landowner and environmental objections, and then they have to go through this interconnection process, which is extremely inefficient.

And that’s the challenge about this whole electrification concept, which is a lot of people express support for it because it’s a pathway to decarbonization, but then are not willing to sit down and, or sorry, stand up for the things that would be needed to make that happen, which is going to require some combination of consensus-building at a national level, some cabinet-level policies, and some Congressional policies to make sure that these transmission projects can get built.

The gap between the status quo and the idealized version of the transmission grid is almost as wide as the idealized perception of carbon sequestration and what’s actually happening on the ground now, which is .1% of US and European emissions are sequestered every year.  I mean, that’s the biggest gap between perception and reality, but the issues with transmission are pretty close behind.

So where does that leave Massachusetts now that Maine and New Hampshire killed their access to low-cost Canadian hydropower?  Well, right now they’re having to import electricity from neighboring states, most of which is not very green because it’s coming from places where it’s based on natural gas.  And if they’re thinking about offshore wind, which is what Massachusetts appears to be doing, that looks like it’s going to be expensive.  Average wholesale electricity prices in Massachusetts last year were $50 a megawatt hour, and the recent bids for offshore wind in Massachusetts were $70 to $100, so almost double.  And it looks like Massachusetts has a long-term plan for offshore wind adding up to 50% of the state’s electricity consumption.  We’ll see if that happens.

But across the Eastern seaboard, people are giving up on some of these Canadian hydropower projects and looking to offshore wind itself, which is going to be a pretty expensive way to do it.  So the bottom line is a lot of work is going to have to get done on this transmission issue, which we consider to be maybe the single largest roadblock in the entire renewable energy transition.

I want to spend just a few minutes closing this podcast with discussions about electric vehicles.  So the EV sales are gathering steam.  Last year they were almost 9% of total vehicle sales.  That’s a big jump from the prior year, where it’s like 4, 4.5%.  Now to be clear, that’s the percentage of that year’s sales.  EVs still represent just 1 to 2% of the fleet on the road.  And remember today’s cars last on average 12 years, which is double the average life of a car let’s say a long time ago when I was in college.  So that just means that it’s going to take a long time for vehicle sales, electric vehicle sales, to end up having a big impact on the percentage of EVs and the total fleet.

Anyway, the US trailed a lot of countries.  The US was just 4.5% last year EVs.  And lower mileage trucks, light trucks and SUVs are by far the most popular cars in the United States.  The Ford F-Series, Ram pickup trucks, Chevy Silverado, Jeep Grand Cherokee, cars like GMC Sierra, the Toyota Tacoma, those are some of the highest selling vehicles in the United States.  Most of them have mileage numbers somewhere around 20, 21 miles a gallon.

And so one of the topics we get into this year is what should the United States do to try to convince some of these people to switch to electric vehicles, assuming that you can try to overcome whatever range anxiety people may have, particularly if they use those cars for work.  I mean, if you use your car for work, there’s an extra burden because you can’t simply forget to charge it.  Like I can forget to charge my car and I can find other ways of getting to work or doing the things I want to do.  But if you use your car for work, it’s much harder to do that. 

And the US has a population of intense gasoline super-users that they’re called. In other words, the top 10% of all the drivers in the United States burn a third of all the gasoline, and more than the gasoline burned by the bottom 60% of all drivers.  So you’ve got a bunch of people that own cars that don’t use them very much, and then one-sixth of those people by number burning a third of all the gasoline.  Obviously they’re more likely to drive pickups and SUVs, they live in rural areas, and they drive a lot.  They drive three times more miles than the average driver.

And of course, the challenge is how do you get those people to switch?  Some people will say well, let’s just have higher gasoline taxes, but that’s very unlikely for political reasons.  Even before the Build Back Better bill ran into trouble with resistance in the Senate, polling showed that US voters are not really in favor of gasoline taxes when paying for infrastructure or for other renewable energy objectives, and a carbon tax I think is even further away.  And not only that, at least in Europe, a carbon tax is typically applied to power generation, manufacturing, and aviation, but not to road or maritime transport.

So the issue that we look at, and this is really just a thought exercise more than anything else, is let’s assume that there’s an elderly couple living in Seattle.  They own an energy-efficient 2015 Honda Accord, gets 30 miles a gallon.  They get $ 7,500 to switch to a new EV.  Somebody driving a 20-mile-a-gallon Toyota Tacoma, who drives eight times as much per year in terms of mileage than that couple in Seattle, they get the same $7,500.  

So one of the things we walk through is maybe it would be better, I mean think about what a gasoline tax would do.  A gasoline tax will pose a tax on you to convince you to switch.  Well, why not have a structure, an incentive structure that incents you to switch?  In other words, pay people per gallon of displaced gasoline rather than per vehicle.  ‘Cause right now the way the current structure works, that couple in Seattle is getting something like 70 to $75 a gallon for every gallon of gasoline that is displaced, whereas the Toyota Tacoma driver is only getting $6 a gallon.  So obviously this $7,500 per vehicle is something that is I don’t think maximized in terms of incentivizing switching by the people that the United States apparently has the greatest incentive to convince to switch with the people that are consuming the most of the gasoline.  So anyway, we’ll see if anything happens there.  

The last quick topic for today is you may have seen that metals prices are going up a lot.  And there are some implications here for battery costs for electric vehicles, and specifically batteries that use cobalt, nickel, and aluminum, ‘cause those are the ones where their prices have surged as inventory levels of collapsed relative to demand. 

It turns out not every lithium ion battery in an EV is the same.  There’s three main different types.  Some of them use a decent amount of nickel and cobalt, and some of them, particularly some of the Teslas and some of the Chinese ones don’t use them and are simply reliant on lithium, copper, steel, and iron. Those battery costs haven’t been affected as much, maybe by 4 or $500.  But the other electric battery costs based on our estimates have gone up anywhere between $1,500 and $2,000 since the beginning of 2020.  And there may be some sticker shock coming for the EVs that are reliant on nickel and cobalt. Now you can offset part of that by the fact that if the current gap between gasoline and electricity costs is sustained, your payback period will benefit so you can offset part of that price increase through fuel savings.  

But there are some issues here.  And basically the EV battery supply chain in the long run, we could see shortages that look and feel like the current semiconductor shortage.  90% of the battery supply chain that people are forecasting for 2030 doesn’t really exist yet.  And so the path to higher EV shares may not be that easy, and the path to higher EVs over the next three to five years may not be as quick as the one we’ve seen over the last two, when there were fewer of these metals supply chain issues getting in the way.  So that’s enough for this week.  Tune in next week, and we’ll have a discussion about how people heat their homes.  Thank you very much, bye.

FEMALE VOICE:  Michael Cembalest’s Eye on the Market offers a unique perspective on the economy, current events, markets, and investment portfolios, and is a production of J.P. Morgan Asset and Wealth Management.  Michael Cembalest is the Chairman of Market and Investment Strategy for J.P. Morgan Asset Management and is one of our most renowned and provocative speakers.  For more information, please subscribe to the Eye on the Market by contacting your J.P. Morgan representative.  If you’d like to hear more, please explore episodes on iTunes or on our website.

This podcast is intended for informational purposes only and is a communication on behalf of J.P. Morgan Institutional Investments Incorporated.  Views may not be suitable for all investors and are not intended as personal investment advice or a solicitation or recommendation.  Outlooks and past performance are never guarantees of future results.  This is not investment research.  Please read other important information which can be found at www.JPMorgan.com/disclaimer-EOTM.

[END RECORDING]

[START RECORDING]

FEMALE VOICE:  This podcast has been prepared exclusively for institutional wholesale professional clients and qualified investors only, as defined by local laws and regulations.  Please read other important information which can be found on the link at the end of the podcast episode.

[Music]

MR. MICHAEL CEMBALEST:  Greetings.  Welcome to another Eye on the Market Energy podcast.  This is the third in a series of four.  We did the first two already and this one is on electrification of home heating, specifically the issue of residential heat pumps and what can be accomplished. 

You may not have heard much about them but residential heat pumps are a pretty big deal these days.  They represent a very large share of how commercial buildings and homes are heated in new construction in the US and Europe.  And Europe has recommended uptake in electrification of home heating as one of the ways to reduce reliance on Russian energy.  So this is increasingly becoming a big deal and as evidence of that there is a bunch of places that have banned combustion of fossil fuels in new residences started in some future year, San Francisco, San Jose, Denver, Seattle.

New York City is one example.  In New York City last December the city council banned gas powered heat and stove appliances in newly constructed buildings.  This ban will take effect at the end of 2023 for buildings six stories and below, and by 2027 it will apply to all new construction irrespective of size. 

So what’s going on here and what are the risks associated with this?  Because they’re important to talk about.  Well, the goal is to electrify residential heating, presumably with the notion that the more you decarbonize the grid, you’re decarbonizing home heating if it’s done through electricity instead of onsite combustion of gas, propane, or fuel oil. 

And, now, a lot of you will be familiar with home heating through what’s called baseboard or resistance heating.  That happens to be incredibly inefficient and that’s not really what’s being recommended her by people that are focused on it.  What people are focused on here is, for example, an electric heat pump that’s called and air-to-air heat pump.  Now, there’s lots of different kinds of heat pumps but let’s just think about air-to-air heat pumps because they’re the most commonly used ones. 

And let me first spend a couple of minutes on what this thing is.  As strange as it may seem, there’s actually heat in the air when the temperature outside is freezing.  There’s some heat in the air.  So if you have a refrigerant that’s as cold as, let’s say, minus 60 degrees Fahrenheit, that flows through a coil outside your house, it can extract some of the heat that’s in the air, even though the air outside is freezing.  And that refrigerant absorbs that heat and it gets turned into a low temperature vapor.  That warm refrigerant then gets circulated with a compressor that increases its pressure and temperature, and then it heats the interior of your house.

The important thing here is that the compressor is the main electricity using component.  So all you’re doing is using electricity for heat transfer, which is a lot less energy than resistance heating.  One of the ways to think about heat pumps is they have something called a coefficient of performance, which is the amount of heat that you get per unit of electricity consumed.  And heat pumps can have coefficients of performance of two, three, as high as four.  In other words, much greater units of heat provided per unit of electricity consumed. 

So that’s the good news.  The bad news is electricity is a lot more expensive than natural gas, for example.   So even in simple terms, if I have a heat pump that has a coefficient of performance of three and a half but electricity prices are three and a half times the cost of natural gas per unit of energy, then I’m just really breaking even.  Now, it’s potentially good from a climate perspective but from a cost perspective it’s break even.

So these heat pump coefficients of performance need to be very high in order for there to be both climate benefits and for there also to be economic benefits for people to adopt them.  And we have a chart in here showing that over the last three winters as an average residential electricity prices in the largest states ranged from two to five times higher per unit of energy than natural gas.  So this is definitely an issue that heat pump adoption is going to run into, again, which is the incremental cost of electricity compared to direct combustion of fuel oil.

The bigger issue that we have run into when thinking about widespread adoption of heat pumps is a project that we worked on with Michael Waite, who is a Professor of Mechanical Engineering at Columbia University.  And the issue is what happens to peak loads if everybody uses heat pumps for winter heating and gets rid of their backup thermal systems. 

In other words, I’m going to get rid of my natural gas system or I’m going to have new construction that has no backup thermal power.  The risk is on most days that would work out just fine, but on very, very, very cold days you could have a spike in electricity demand that overwhelms the existing grids. 

And one of things that Michael did on a special project that we worked with him on is to look at a census tract by census tract basis across the entire United States, temperature differentials, and all of the necessary data that you’d use to look at this.  And say, if everybody used an electric heat pump, what would happen to demand during those super, super cold winter days. 

And, as you might imagine, you have to build out the efficiency and capacity of your electricity grid not for average loads but for peak loads.  Right?  You have to always have more capacity than the highest load on any given day in terms of your transmission and distribution system. 

And what Michael found is that if all residences used heat pumps and had no backup thermal power, about two-thirds of the census tracts in the United States would see their peak loads increase.  And, more worrisome, the average peak load increase in those affected census tracts is about 100%.  In other words, the peak loads could double in two-thirds of the census tracts in the United States if they all used electric heat pumps. 

So, again, so the challenge here is that you can decarbonize home heating using electric heat pumps for sure.  Most of the time that will entail substantial climate benefits because of the gradual decarbonization of the grid, but your transmission and distribution requirements could be really substantial in ways I think that policy makers may not have fully grasped yet. 

One of Michael’s recommendations is to allow homes to have backup thermal power systems but that’s not what a lot of the new policies in the US and Europe entail.  The reason he recommends that, if you have backup thermal power onsite for those extremely cold days and you don’t rely on electricity, you can get 90 to 90% of the climate and economic benefits without any census tracts having any increases in peak load because for those very, very cold days you just use those temporary backup systems instead.

The challenge there is would it be economically viable for the natural gas and fuel oil and propane industry to maintain all of the infrastructure required for these backup systems if they were only being used a fraction of the time as remote backup.  That’s the part that’s unclear.  I don’t think so.  I don’t think that it is that economically viable for the natural gas industry to maintain all that infrastructure.  Could there be some other kind of backup power that’s nonelectrified on very cold days like residential fuel cells?  Well, maybe, but if that’s the case now we’re talking about even more structural change and additional all in costs for the solution. 

So the bottom line here at first glance when looking at these heat pumps is they--and, look, I have installed them in my home, a few of them, and so far so good.  The payback period is pretty decent because if you don’t use too much electricity on very cold days you’ll spend a lot less over time than you used to spend on fuel oil and propane for sure.  But the cost of electricity in certain parts of the country is still extremely high relative to natural gas, and that’s going to be one of the headwinds for faster adoption. 

Now, to be clear, there are places in the world where there are heat pumps more broadly used without any backup thermal power in place.  Scandinavia is a good example and they compete favorably with other kinds of heating systems.  They also use other kinds of heat pumps that extract heat from the ground or from ground water. 

Now, the issue to think about is in Scandinavia their homes are much more, generally more energy efficient than US homes, which means that they can make it through a winter on very cold days and not necessarily need the same amount of BTU’s of energy to heat those homes.  There was a study that came out from the EU Commission.  And what you can see here is that they use much lower energy consumption per dwelling in Scandinavia than the rest of Europe.  And the US uses twice the energy per home as Europe, and even more versus Scandinavia. 

So, again, just kind of like Norway and the whole electric car thing, sometimes Scandinavia is not necessarily the best proxy to use for what’s achievable in larger, denser countries.  And to get to where Norway is on heat pump adoption, they provided subsidies to people to switch.  They have fossil fuel taxes that are ten times higher per metric ton for fuel oil compared to the United States.  Their electricity prices are low, and they’ve actually banned oil boilers. 

Remember, Norway has five million people.  Its population density is 10% of Europe, and more than 90% of its electricity comes from very cheap hydropower.  The rest of the continent in Europe and the United States as well have to deal with more complicated challenges.  And that’s one of the reasons why only 6% of Europe’s 240 million residences have these heat pumps installed. 

So to wrap up, there can be some substantial benefits both economically and on a cost perspective to switch to heat pumps particularly in new homes given their greater energy efficiency and you don’t need to retrofit any ductwork or anything like that.  And there may be some places where heat pumps are cheaper than natural gas. 

But if we’re thinking about long-term decarbonization, if the transition involves heat pumps only being adopted mostly in new homes, that’s going to take a long time.  In the US and Europe, new home sales are only about 1% of less of the housing stock each year.  So one of the issues we mention the EV transition is the speed of the electric vehicle transition is slowed by the fact that people own cars for 10 to 15 years before switching.  Well, guess what?  Natural gas furnaces and oil burners can last 15 to 25 years.  So electrification of residential heating is likely to be an even slower process than electrification of transportation unless very generous subsidies are provided to promote switching.

So that’s what I wanted to share with you on this topic of residential heating because it’s become a big factor in a lot of net zero and deep decarbonization discussions.  But there are some economic challenges here and there are also some practical challenges here in terms of the life of existing fuel systems.  And then of course there’s also what I consider to be the biggest challenge of the three, which is what to do about the really cold says and how to avoid those grid surge requirements that would otherwise hit a spindly and underinvested transmission and distribution system in the US and also in parts of Europe. 

So that’s our discussion for this week.  The next week I think we’re going to do the hydrogen podcast which was the longest section in the paper this year and in some ways the most interesting.  I also think we have for obvious reason a market and economic discussion client webcast coming up, so keep a look out for an invitation to that.  Thank you very much for listening.  Bye. 

FEMALE VOICE:  Michael Cembalest, Eye on the Market, offers a unique perspective on the economy, current events, markets, and investment portfolios, and is a production of JPMorgan Asset and Wealth Management.  Michael Cembalest is the Chairman of Market and Investment Strategy for JPMorgan Asset Management and is one of our most renowned and provocative speakers. 

For more information, please subscribe to the Eye on the Market by contacting your JPMorgan representative.  If you’d like to hear more, please explore episodes on iTunes or on our website. 

This podcast is intended for informational purposes only and is a communication on behalf of JPMorgan Institutional Investments Incorporated.  Views may not be suitable for all investors and are not intended as personal investment advice or as solicitation or recommendation.  Outlooks and past performance are never guarantees of future results.  This is not investment research.  Please read other important information which can be found at www.jpmorgan.com/disclaimer-eotm. 

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FEMALE VOICE:  This podcast has been prepared exclusively for institutional, wholesale professional clients and qualified investors only, as defined by local laws and regulations.  Please read other important information which can be found on the link at the end of the podcast episode.

MR. MICHAEL CEMBALEST:  Good morning, everybody.  Welcome to the Eye on the Market podcast.  This is the fourth podcast in the series and last in the series that we're doing on this year's energy paper.  Obviously it's been a little bit delayed based on the work we've been doing around what's been going on with inflation, the Fed, and the evolving bear market.  We did a client webcast recently and a piece I wrote called Dearly Beloved that talked through how in most cycles, the markets price in the severe economic adjustments in advance by several months.  That appears to be playing out this time as well.  The economy's barely weakened and - - bear market.  I wrote at the time that I expected one more leg down this summer.  It looks like that leg's happening right now, and we will obviously be on the lookout for stabilization in the leading indicators, which historically in almost every cycle have been pretty good leading indicators of when it's a good time to start thinking about reinvesting.

Also have been working on a project for Jamie related to the bank itself, liquidity and supplementary capital ratios and liquidity ratios that may pose problems for liquidity and fixed income markets.  As all the fiscal monetary stimulus is withdrawn, we're going to make that piece available to people that happen to be interested in that topic.  It's highly technical, but I think it's very important.

So anyway, let's get started on this topic of hydrogen, which was the longest section in our paper this year.  There's a lot of excitement about hydrogen.  Before it all unraveled, hydrogen-linked stocks had quadrupled from 2019 to 2020, and a lot of giant hydrogen research reports have been written by Wall Street firms, J.P. Morgan Investment Bank included, talking about the long-awaited arrival of the hydrogen economy.  In Europe they've also talked about hydrogen as a critical option to reduce reliance on Russian energy.

So let's be clear about a few things, because I called this section Whydrogen [phonetic].  To be clear, the hydrogen economy as people refer to it, is in its complete infancy.  There are some legacy uses that are completely reliant on fossil fuels to create the hydrogen, and they're used to create a ammonia for fertilizer and also in oil refining to reduce the sulfur content of diesel fuel.  A very, very teeny-weeny amount is also used in steel production as a reducing agent for iron ore.

But the big picture is that almost no hydrogen, zero is used today in power, transport, home heating, shipping, rail, aviation, and all the other use cases.  And not only that, almost all hydrogen is created by steam reformation of fossil fuels, which is known as gray hydrogen.  And less than 1% is created by electrolysis, which is referred to, using renewable energy, which is called green hydrogen.  

And again, to clarify, hydrogen is not a native energy source; it's an energy carrier.  And since the year 2000, something like 2% of global primary energy has been converted into hydrogen each year, and that number really hasn't changed much.  

So the purpose of this section was to explore some of the theories of the hydrogen optimists and to take a closer look at whether or not they make any sense.  And the tagline is here that some of them do, but over a very long period of time.  A lot of them don't, and this whole thing is going to take an enormous amount of time to play out.

So I'm going to walk through on this podcast some of the highlights of the section that we had.  And so I'm going to go in order of the things that are mentioned to me by the hydrogen optimists.  One example is there's about 25,000 natural gas compressors that are used as part of the natural gas ecosystem.  And they actually consume about 2 to 3% of all natural gas to do the compression related to its extraction and transmission.  

And so midstream energy companies are now considering using hydrogen to power them instead.  Does this make sense?  Well, if they were to use today's gray hydrogen, which is produced again with fossil fuels by a steam ethane reformation, then it wouldn't make sense at all.  That would actually increase Co2 emissions compared to just using natural gas directly in the compressors, because of the roughly 30% losses involved in the conversion of natural gas to hydrogen.  So in other words, why convert natural gas to hydrogen when you can just directly use the natural gas and have less energy loss?  So as we'll explore, a lot of the use cases really rely on the emergence of competitive green hydrogen, which is not really anywhere in sight.

Another thing that you read about is midstream companies thinking about blending hydrogen into existing natural gas pipelines.  Again, that only makes sense if they used green hydrogen.  And there are limits as to how much green hydrogen you can blend in.  At blending rates over 10% or so, a lot of the equipment might have to be replaced.  There's something called embrittlement which refers to cracking and other pipeline degradation.  So out on Long Island where I am sequestered right now, they plan to blend up to 20% green hydrogen into the natural gas system, and they intend to expand it to other places in the Northeast.  We'll see what happens.  

A piece just came out from the International Renewable Energy Agency that's critical of pipeline blending, because they estimate that blending green hydrogen with natural gas achieves very limited Co2 reductions at a very high cost of about $500 ton.  And so that's what we have to say about hydrogen blending, which is kind of like an ethanol concept in gasoline.

Then the next thing people will bring up to me as well, what about blue hydrogen?  So gray hydrogen, as we've discussed, is hydrogen that's produced from steam methane reformation, fossil fuels.  Blue hydrogen is the same thing, except you're capturing the carbon emissions and storing them underground geologically.  And as many of you know who have read the energy paper over the last few years, carbon capture and storage may be the single most overhyped industrial process in the modern era, with thousands of academic papers written on it, and still today about 0.1% of global Co2 emissions are sequestered underground.

Europe's forging ahead with a bunch of new projects, so is the U.S., and by 2030 they will capture around 1% of their annual Co2 emissions.  It's a very long process. There are all sorts of legal and permitting complexities involved, and the infrastructure needs are frankly enormous, which is something that we've written about in the past. For carbon capture and storage to have a more substantial impact, the infrastructure that gets built to handle it might have to rival the size of the existing U.S. oil pipeline infrastructure, which has taken 100 years to build.

I won't go into too much detail, but on top of all that, Bob Howarth at Cornell wrote a paper recently criticizing blue hydrogen, saying that the total GHG impact of blue hydrogen is more than 20% higher than the GHG impact of just burning natural gas or cold directly.  And if you read the paper, we explain some of the reasons why he says that.  So anyway, not so optimistic on anything related to blue hydrogen or sequestration.

So then let's get back to this issue of green hydrogen costs, because if hydrogen could be produced via electrolysis powered by a renewable energy at low costs, then that would be something interesting to talk about. Goldman, for example, and many other firms are projecting very steep declines in electrolysis, green electrolysis over the next decade, based on learning curves that have been seen on wind and solar and batteries.

And to give you a sense, green hydrogen costs are somewhere, 'cause it's hard to say where they are because it doesn't even exist really, but it's somewhere between 5 and $8 a kilogram compared to 1 to 2, maybe $2.5 a kilogram for gray hydrogen.  

Then the question is, and this came up obviously early this year given Russia's invasion and the impact on European natural gas prices, isn't Europe much closer to parity between green and gray hydrogen, because it costs them so much more to create, to pay for natural gas at even the higher prices?

Maybe, but only if you believe that industrial companies are going to base 20-year or longer investment decisions on capital plants to do this kind of thing on wild gyrations in the spot market, which they generally don't.  And we have some charts in here that look at the details.  Here's one example of parity.  If gray hydrogen producers had to pay $20 of BTU for power for natural gas and $30 a megawatt hour for wind and solar power, then maybe you're closer to parity.  But again, this approach is only relevant if industrial companies think that today's wartime price levels are representative of the next 10 to 20 years. 

And obviously in Europe, a lot depends upon what happens to natural gas prices as Russian pipeline gas is gradually replaced by more imported LNG.  But for what it's worth, the forward curve for natural gas is already pricing in like a 33% decline by next year.  

And so I've seen some data, including from a J.P. Morgan sell side report, that talks about how green hydrogen costs are competitive across several end uses.  And in my opinion, it was just very misleading.  The chart was based on wartime, March 2022 spot prices for gas.  It didn't assume any increase in electricity costs, despite the fact that those costs have been rising.  It didn't incorporate capital costs for steel production, and it didn't make it clear that it was just for Europe in the first place.  So my sense is that some of the green hydrogen projects underway are taking place despite the fact that they're going to be more expensive and not because they've reached some kind of cost parity with gray hydrogen.

One last comment on this green hydrogen question.  So Europe plans on producing and importing it.  They've got about 1.5 gigawatts of electrolyzer capacity under construction.  If we add in all the projects that that have reached the final investment decision stage in Europe, they'd have around 40 gigawatts of electrolyzer capacity.  And if all the green hydrogen produced from it were used, for example, in oil refining, that would offset around 2.5% of EU emissions.  And if it were used for something related to transportation instead, like hydrogen trucks, the emissions offset would be lower because of the fuel cell conversion losses in vehicles.

So the green hydrogen projects in Europe seem to have been started, but they are definitely not transformational.  And the other big question I have, where is all the green electricity going to come from to run these electrolyzers, right?  I mean the plan here is let's create green electricity, but Europe, via wind and solar power, but Europe is trying to add more solar and wind onto the regular grid just to displace coal and natural gas.  Europe generates about 40% of its electricity from renewables, but almost half of that is hydropower.  And so one of their stated goals is to decarbonize the existing grid.  And so if Europe's wind and solar additions are used mostly to displace coal, gas, and also to decommission some nuclear power, I'm not sure where all the new hydrogen0dedicated wind and solar capacity is going to come from.

So shifting gears for a minute, there's a lot of discussion about the potential for hydrogen as a fuel for long-haul shipping.  That may make some sense.  Certainly, batteries are nonsense for shipping, given the cost and energy density issues.  And the challenge is how to store and transport it.  Hydrogen has a very low energy density by volume, and the size of these storage tanks on the ships might be very large, even if they use liquefied hydrogen, which has to be stored at a cryogenic temperature of like minus 250 centigrade.  

So there's a lot of work that still has to be done here.  And the bottom line is that most scientists that have looked at this say there's really not yet any hydrogen storage solution that combines a high energy density, low energy inputs to create, has easily available resources, is nontoxic, and is easy to handle and store.  

So Wärtsilä and MAN and a bunch of other companies have announced some green ammonia engine projects for the next few years.  We'll see how it goes.  Ammonia has the ability to carry hydrogen and can be liquefied at much higher temperatures than hydrogen.  It's got better hydrogen density than some of the other alternatives.  But all of these conversions carry energy penalties.  And so for example, if you're going to use, if you're going to create hydrogen through electrolysis and then convert the hydrogen into ammonia and then convert the ammonia back to hydrogen, the roundtrip efficiency might be just 11 to 19%.  So I'm anxious to see how the actual all-in costs of some of this stuff play out.

In the piece, we get into some of the more specific issues about liquid organic hydrogen carriers and dibenzyltoluene.  The bottom line is that all of these things are still on the drawing board, and I think it will take the better part of a decade to at least come up with a plan as to how to scope out the hydrogen economy.

Now let's talk now a little bit about steel production.  What about using hydrogen as a reducing agent for primary steel production?  There are some steelmakers in Europe that have announced demonstration plans to do this.  And green hydrogen can be used as a reducing agent. You take iron ore, you transform it into sponge iron, and then you convert that to steel in an electric arc furnace.  And most of the thing can be, most of the process is inherently electrified, only uses a small amount of carbon, and some estimates show decarbonization potential of around 70% from this kind of process.

The issue is the timeline and who is doing it.  Most of the estimates we've seen are 2030 to 2040, somewhere in that decade as to when this would become cash-competitive in the Nordics, which are at the cutting edge of this kind of research.  The other problem is the Nordic countries represent just half a percent of global steel production.  The elephant in the room is China, which produces more than 50% of the world's steel.  Their steel plants are younger and still are far from their mothball dates.  And so the timeline for adoption in China is really the issue that matters here.

Trucking, trucking looks interesting.  Certainly it's, given the faster refueling rates for hydrogen trucks compared to electric vehicles, that's interesting.  But you have to get into the details about the cost, supply chain, and operational differences between electric batteries and hydrogen fuel cells.  And so using hydrogen for long-haul trucking makes some sense if you compress the hydrogen, but let's see where it goes.  I mean, there are some companies working on this.  But their companies are in their infancy, and they have limited track records for cost, performance, maintenance, durable lives, warranties, and we'll have to see how it goes.  Commons Engine, for example, expects just 2 to 3% hydrogen shares in long-haul heavy-duty trucking by 2030. 

So we'll have to see whether or not these class eight hydrogen fuel cell trucks can be delivered.  And for those of you that remember the fuel cell truck company Nikola, which was a SPAC, that was kind of humorous. They ended up staging their hydrogen truck rollout, and federal prosecutors have indicted them for fraud and all sorts of other things.

What about hydrogen to power passenger and freight rail?  Well, obviously it makes no sense to use hydrogen on rail that's already electrified, because anything that's already electrified, you can use renewable energy directly.  So what about non-electrified passenger and freight rail?  We'll see.  There's some proof of concept here.  There's a handful of hydrogen trains in operation, so the proof of concept exists.  But first of all, rail itself only accounts for 1% of global transport Co2 emissions.  And one of the reasons for that is in terms of passenger rail, 70% of rail kilometers traveled were already electrified five years ago.

So the larger opportunity for hydrogen is to replace the diesel-powered freight.  But then in China, Russia, and India, large portions of freight rail are already electrified as well.  So the largest hydrogen opportunity in trains would be in the U.S., which has a very large freight rail system, but we don't really see any movement on this.  And there might also be competition from batteries.  I think there's a couple of hydrogen rail projects in the U.S.  One of them is a small passenger rail project in San Bernardino, California, so that doesn't seem like that's moving anywhere anytime fast.  And then in the paper we talk about backup power, the preposterous notion of hydrogen-powered aviation.  I'm willing to bet that in 20 years it's still nowhere, et cetera, et cetera, et cetera. 

So the big picture here is that a lot depends on how quickly the costs of green hydrogen decline, the time and cost required to build electrolyzer storage and distribution, and then don't forget that time it takes for all the world's machines and engines to be redesigned to use hydrogen instead.  So these energy transformations don't just require declining costs of production of the fuel.  You also need to have the time for the physical plant, for energy distribution, and the machines that consume the energy would have to change as well.

So the bottom line is over the next decade, this hydrogen economy may entail small pockets of modest demand for some natural gas pipeline, blending a little bit of shipping and trucking, some steel demonstration projects, and a couple of freight projects in the United States.  And if so, there may be a handful of opportunities for investors in specific hydrogen companies.  But it doesn't look to us like the future of hydrogen is anywhere near the explosive hockey stick forecast that you see in today's renewable energy research.  

And so that's the bottom line from our hydrogen piece.  Thank you to all of you that have listened to these energy podcasts.  I think it's a really important topic.  We spent a lot of time on this year's paper, and we're already starting to work on the energy paper for next year.  Thank you for listening.  We'll talk to you soon, bye.

FEMALE VOICE:  Michael Cembalest's Eye on the Market offers a unique perspective on the economy, current events, markets and investment portfolios, and is a production of J.P. Morgan Asset and Wealth Management.  Michael Cembalest is the Chairman of Market and Investment Strategy for J.P. Morgan Asset Management and is one of our most renowned and provocative speakers.  For more information, please subscribe to the Eye on the Market by contacting your J.P. Morgan representative.  If you'd like to hear more, please explore episodes on iTunes or on our website.

This podcast is intended for informational purposes only and is a communication on behalf of J.P. Morgan Institutional Investments Incorporated.  Views may not be suitable for all investors and are not intended as personal investment advice or a solicitation or recommendation.  Outlooks and past performance are never guarantees of future results.  This is not investment research.  Please read other important information, which can be found at www.JPMorgan.com/disclaimer-EOTM.

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