After recent attendance at the Federal Reserve Bank annual energy conference, with the Dallas and Kansas City Feds as hosts, I discuss highlights and high-level takeaways. This year is particularly intense because of the geopolitics at play and the AI build-out. The energy story is also a large player in the macroeconomy.
I offer a video analysis overview of the U.S. AI infrastructure buildout with detail about expected gigawatts from a couple of sources, including my own recently published work. Stay tuned for that…
Below are select summary points:
Macroeconomic growth
Real GDP grew 3.4% annualized in Q3
A Morgan Stanley analyst expects growth to continue in 2027, supported by high-income consumption and (hyperscale-plus) CapEx.
Consumer spending is held up largely by wealthier households, partly on earlier stock market gains, with confidence in overall spending being sustained.
Real equipment investment rose 14% year-over-year in Q3. Data center categories (computers, peripherals, communications equipment) account for 80% of that growth.
Investment is broadening across the AI supply chain: semiconductor manufacturing equipment, behind-the-meter gas turbines, and transmission and distribution apparatus. Manufacturers and defense contractors are also ramping up.
Inflation and energy prices
PCE inflation was 3.6% for the 12 months through September, and inflation has been above the 2% target for six years.
Inflation to stay higher for longer because of Middle East effects on oil and refined products.
Services (healthcare, for example) are adding price pressure beyond wartime energy disruptions.
Crude is up 50% over the year, and wholesale diesel doubled at one point before retracing.
European natural gas is more than double its price a year ago, but US Henry Hub has fallen as supply surged.
US LNG has again filled supply gaps for other countries, though more overall export capacity is limited in the near term.
Geopolitics and energy security
Supply chains have shifted from low-cost efficiency, the driver of globalization, toward energy security and resiliency.
The Russian invasion of Ukraine and the Strait of Hormuz disruption added to that shift, and many countries have passed measures in that direction.
China, India and others are using more coal.
The US has acted as a swing supplier of refined products and LNG, adding about a million barrels a day despite refining constraints.
Keeping trading partnerships in good standing matters for sustaining investment.
Investment implications
Real assets (infrastructure, oil and gas, power) are a key portfolio component, and fixed income is becoming important again.
Domestic gas is affordable, reliable and cleaner than coal, and is favored for data center power. Experts see a reasonable price range for decades.
Oil and gas production should skew up unless prices fall to $50 to $60 a barrel, which is not expected to last.