Learning from History: Pandemics and Energy Transitions
One of Bill Gates’ favorite authors and teachers is Vaclav Smil, Distinguished Professor Emeritus in the Faculty of Environment at the University of Manitoba in Winnipeg, Manitoba, Canada. He’s written 41 books and a polymath on many subjects, especially the areas of science involving energy and the environment.
In a year when we have both a pandemic and major fluctuations in the oil market, I’ve gone back and reviewed some of Smil’s writings and interviews. In that process, I’ve come to appreciate—even more than I did previously—both the importance of studying history, and the role uncertainty and probability play in how history unfolds.
As one example, reading an excerpt from a book Smil published last year helped me realize that, while there are differences in the details, much of how the virus that causes COVID-19 spreads and the ways to combat it have been known for a long time. The human and government responses, on the other hand, have possibly been less predictable.
The importance of learning from history in regards to pandemics and our response is being challenged today. Will we now build the infrastructure needed to help combat future, and possibly more severe, viruses going forward? Or will we remain unprepared for the next, inevitable pandemic that eventually makes its way around the world? As Smil wrote this year, in an intro to a book excerpt from 2008 about the topic:
In that book I concluded that another viral pandemic in the near future was certain and that we would be unprepared for it. Of course, I could not have guessed just how unprepared the U.S., so often called the only superpower, would be. In the excerpt featured below, I look at pandemics that ravaged the world.
Are we going to learn? We had many opportunities to do so, but as we’re all finding out, we did not take any major steps after the pandemics of 1958-1959, 1968, and 2009. Could it be different this time? Eliminating the risk is impossible but making adequate provisions for the next pandemic is not, and it is a far less costly alternative to scrambling after a crisis arrives. Is it too much to hope that companies would put the security of supply ahead of profits, that people will not insist on ceaseless flying and cruising, and that people accustomed to eating all kinds of wild animals will stop that practice and hence reduce the chances of a new animal virus jumping to people? We will see in a matter of months and years.
On the subject of energy transitions, Smil notes that the move to the greener forms of energy like wind and solar is nothing new. Whether it was the harnessing of animal power (like oxen), coal, oil, or gas, our species has a history of transitioning to new energy sources, and it usually takes a considerable period of time for a major transition to unfold.
Interestingly, the pace of our current energy transition is one area where Smil and Gates seem to disagree. In an interview last year, Smil mentioned that while both he and Gates basically agree on the past and present, Gates believes that we are more innovative as a society today and that innovation will drive this transition to occur more quickly than in the past. Smil mentioned that these differences might have something to do with Gates being more of the optimist than he is, which may partly be a result of the countries in which they were born, and the environments in which they grew up.
As I was digesting all of this, and trying to apply it to my investing framework, I kept thinking about a quote from Seth Klarman: “We work really hard never to get confused with what we know from what we think or hope or wish.”
History matters. It can serve as a guide to what is possible, but we need to remember that among the many things that are possible, only one will happen. And often, many of the ones that do not happen may have been more likely.
People and the environments in which they live also matter. And innovation—born from the people of environments of the time—also matters.
And when it comes to investing, price matters. It is the one thing we know at a given time. Whether or not it is the correct price can be a matter of wide-ranging opinion.
In the short term, markets can get euphoric and seem to unhinge from the fundamental drivers of business performance. But in the long run, the cash flow produced by a business, and the price one pays to acquire an interest in that cash flow, eventually determine the returns one gets from being a long-term owner of that business.