My last conference summary to you was about rising prices. Energy costs contribute to the price of most everything. Whether its vacation travel, transportation of goods or raw materials, food, heating or cooling, or just staying plugged in!
Therefore, the debate (or ideological warfare) is worthy of your close attention because it encapsulates much of the broader economic, political, and cultural turmoil in the US. Finding solutions to cheap, secure, and clean energy is a tough balancing act between corporate profits, consumer lifestyle, and public opinion.
The two energy panels included analysts, commodity traders, and industry executives. Discussions centered on how we got to this crisis and ways to fix it. One panel focused on domestic oil and gas and its tension with green/climate change proponents. The other looked more broadly at ways to secure access to food, raw materials, and energy as both economic and national security concerns.
The panel discussions are condensed into three segments below. I hope you find the segmentation useful to inform your perspective. I am only the humble scribe trying to make sense of the data! I did insert a few questions and considerations. Not to choose sides, but to clarify the tradeoffs or hotspots in the debate.
The core takeaway came when one executive was bemoaning how the oil industry has been tarred and feathered in the media. To which another executive replied, “we have to quit whining about the court of public opinion.” He went on to say the race is not against renewables. It’s against emissions. The industry needs to step up its game and lead the inevitable transition to decarbonization or become extinct. He defined “sustainable” as follows:
Sustainable energy must be cheap, reliable, and carbon neutral
A simple fix would be to limit usage. But one panelist cracked: “Americans don’t like to sacrifice convenience. We want cheap, reliable, and always on so we can text while idling seven cars deep waiting for our vente latte with the air-con full blast.” Simple is seldom easy.
Investment wise, you don’t make money in the oil patch 80% of the time; 20% of the time, you can make a boatload. But timing the cycle is hard. Investment factors are global and unpredictable. Even if you get the timing right, the overall returns are as good or better and less risky with stock investing. Energy demand usually slows during recessions; prices and profits plunge as the stock market declines. Not a good portfolio diversifier when needed most.
The Trillion Dollar Question
Can the greens, oil and gas, and governments come to some kind of negotiated market share that ensures cheap, reliable, and clean (or cleaner) energy as the world transitions to carbon neutral?
The key competing and interrelated tensions:
1. Energy Need: supply and demand issues
2. Green vs. Greener: My way or the highway vs. a compromise?
3. Return on investment: shareholder vs. stakeholder capitalism (and its ESG cousin) vs. national oil companies.
Energy Need: Supply and Demand
1. Growth: over the past 10 years fossil fuels delivered 76-77% of energy needs; renewables increased from 6% to 17%. Eliminating oil won’t work because renewables can’t support baseload reliability.
2. Higher prices are not stimulating investment in supply that would lower prices like in prior cycles due to: recession fears; regulations; will Russian oil sanctions be permanent?
3. Poor planning in Europe. Shutting down coal and nuclear plants while increasing dependence on Russia was inconsistent with a secure supply. And left it with no Plan B.
4. Lack of reliable access to raw materials is hurting companies’ ability to deliver products.
5. Regulatory blockage is greater at the state level than at the federal level.
Takeaways: renewables cannot deliver base load supply (aka reliable supply). It wasn’t stated if renewables could eventually fully supply the market. Europe sacrificed reliable base load capacity (nuclear and coal) for cheap and dirty oil (from a supplier with bad motives). Nuclear is clean; coal is dirty. Now they have expensive, dirty, and need to find new supply. To an extent, the US has done the same, but our shale industry is our Plan B (which isn’t working well right now).
A Climate Compromise: Green or Greener?
1. Some capital providers will not fund the oil and gas industry because its bad (and no longer cheap).
2. “Sustainability” should not focus on renewable vs fossil fuels, but on lower emissions per kilowatt. Carbon capture, storage, recycling, and mining friendly policies need to be part of the solution. Natural gas can be reformed into hydrogen and decarbonized.
3. Electrification footprint: Electric vehicle factories still need electricity (from natural gas), copper, and batteries (lithium, cobalt). Mining is required for these vital raw materials.
4. Recycle example: Cobalt can be completely re-used after 7-8 years of battery usage. Still, recycling is not a near-term replacement for mining.
5. Liquid Natural gas (LNG) was granted ESG status; US LNG to Europe will take 5 years to build.
6. Thiel and Musk declare war on ESG or vice-versa? We could weigh the controversies but that would digress from our topic (ESG is a topic for another day).
Takeaways: Nuclear is clean but politically unpopular; coal is dirty and politically unpopular; oil is dirty and politically unpopular. Natural gas is cleaner, and LNG was recently granted ESG status (which should make it more palatable to the greens). New technologies offer promise but take time.
Questions/considerations that don’t appear to have black and white answers. Are 2050 Net Zero emissions goals absolutes? Are they real and achievable or just targets? How accurate are they? Given the state of global affairs, is there some room to compromise these targets and encourage oil and gas providers to increase supply? Or are you happy to pay higher prices for the next 5-10 years?
We have only talked about energy. But rising energy costs increase rising food costs and create shortages. Third world countries will feel most of the pain and this could lead to violent uprisings and who knows what other consequences.
Return on Investment
1. Oil per barrel is likely to stay in the $80-$130 (per barrel) – high prices like these should make for a good investment climate
2. The US shale boom/bust cycle resulted in six years of underinvestment, OPEC supply discipline, and US capital discipline (share buybacks, dividends, paying down debt and very little investment in new drilling capacity). Oil and gas industry boards are focused more on short-term profits and preservation in the face of pending or threatened obsolescence.
3. New drilling capacity requires a lot of capital. It’s extremely difficult to forecast global supply and demand. The ten largest oil companies in the world are national oil companies (with competing national security, political, and economic priorities). Decisions are not always based on our interests.
Energy providers are making a lot of money at today’s higher prices. They see recession risk ahead. Corporate boardrooms ask why should they invest capital if opposing forces want them out of business in 10 years? They have no incentive to invest in new supply. And few are. The US can’t fix this global supply situation alone because the top 10 oil companies in the world are national entities. Few of them are allies.
The Expert Panel’s Counsel: Mostly MIA
“Tell policy makers to do nothing.” “Let the market and supply and demand forces take shape.” He didn’t mention how to unstick the current problem (i.e., that higher prices are not creating new supply). “I am sitting on my hands and watching because this could go in several directions.” This lack of courage or conviction is the reason for the stalemate. The most sensible comment I thought was, “we need a portfolio of innovative solutions and thoughtful choices aimed at reducing emissions.”
Of course, that implies compromise. And when one side labels the other as an ‘overzealous religion or communistic,’ while the other side points a finger at ‘greedy profiteers raping mother earth.’ Not the best starting point for negotiations/solutions.
Any comment, question, or concerns, please don’t hesitate to contact me.
Jerry Matecun – Founder, President
Expert guidance to plan your future, preserve your lifestyle, and retire with confidence. For a confidential consult, contact me at jerry@compoundvalue.com.
