The Unavoidable Fossil Fuel Boom (Yes… It’s Coming)

This may sound crazy, but hear me out… 

It could be time to start looking into gas and oil stocks.

I know, I know. I’ve been writing about how the Biden administration has put us on a burn the ships path to green energy while putting the fossil fuel industry out of business. 

And that gas and oil companies, without a friendly commitment of at least 10 years, will be more than happy to NOT invest in more production and simply sell their reserves and pay their shareholders dividends.

How their gigantic investment in renewable energy via the inflation reduction act has not only threatened to pour more gas on the inflation fires but has also cemented their commitment to going green. 

All true. But we’re facing another reality that I believe is ultimately going to win out. Let me explain.

The Other Cause of Inflation

Rising prices have been killing consumers for almost the past two years. But rising prices today aren’t necessarily from “inflation.” 

While most people think of inflation as higher prices, inflation is actually a monetary phenomenon.  Prices are where supply and demand meet. Supply is created by a whole host of contributing factors. Demand is created and fueled by disposable capital. More disposable capital without an accompanying increase in supply pushes prices higher. 

These days most increases in disposable capital come in the form of fiat. Most recently “stimmy checks” but in years past it was just cheap money… artificially low interest rates that allow for more spending than one could ordinarily afford. 

Because of that history, when prices go soaring, everyone wants to blame “too much money.”

But rising prices can happen in another way; if supply decouples from the supply chain — i.e. can’t keep up with usual demand. Supply breakdowns are usually fairly minor. The global supply chain today has grown pretty resilient. So when a shortage crops up somewhere usually the price rise is not too significant as the chain fills in the gaps. (Unless it happens in an area that impacts EVERYTHING, which I’ll get to in a second.)

It’s a great thing when the world lets it work.  But it doesn’t work when you shut down global economies for two years. 

I’m not sure there’s an economic textbook that covers the subject — “Chapter 6: The Pricing  Pressures of Shutting Down Global Economies” — because the idea is simply too ridiculous to think about. 

You might say it’s an idea of the galactically stupid

But as the COVID pandemic took hold of the public’s imagination, some person or persons aligned with the government who couldn’t see beyond the next fundraising cycle decided it would be a good idea. And as usual, unintendedly plunged us into the consequences we’re dealing with now. 

Today everyone has heard of the supply chain — and knows there’s no price limit on that last 12-pack of toilet paper on the shelf…

The driving force behind Inflation today isn’t simply too much money — today it’s a supply phenomenon. And specifically, the supply of something that impacts everything — energy.

As Usual, the Government’s Solution is Not a Solution

The green energy movement began as (and still is) the plan to save the world from global warming climate change. 

And for those leading the movement, this tsunami of energy-driven inflation couldn’t have come at a better time. It has become the new rationale for “let’s do it now!” It almost seems to be a strategy. Cause enough pain where fossil fuels go and the transition will be a foregone conclusion. Things like this have come out of the administration…

Secretary of Transportation “Mayor Pete” Buttigieg has said that the pain caused by high fossil fuel prices will accelerate our transition to “clean” energy. To wit…

Buttigieg testified before the House Transportation and Infrastructure Committee on the transition to “domestic clean energy production” by the Biden administration, which launched an initiative to ensure 50% of all auto sales are electric vehicles by 2030.

In which he said…

“The more pain we are all experiencing from the high price of gas, the more benefit there is for those who can access electric vehicle.”

So the tighter you’re squeezed now, the sooner you’ll have to capitulate. I’m sure on some white board somewhere this makes some kind of perverse sense…

But as if to prove — on cue — that unintended consequences are the only things the government can deliver, news out of Europe has appeared to shine a light on the spectacular flaws of even this extremely flawed logic. From alternative transportation site Electrek…

The article explained…

One of the biggest advantages of electric vehicles remains that their cost of operations is much lower than vehicles with internal combustion engines, thanks to electricity generally being much cheaper than gas.

However, the cost of both gas and electricity has been skyrocketing over the last year, especially in Europe due to the war in Ukraine and restrictions on Russian oil and gas.

It used to be difficult to pay more than $5 or $10 for a full charge at a Tesla Supercharger.

After several price increases throughout the last year, now many Supercharger stations are charging $0.50 per kWh, which can result in a cost of $30 to charge 60 kWh.

In the email, Tesla blamed the price increase on an increase in “energy prices” in Europe.

Go figure that!

When it comes to the economic reality of forcing change in a market… things never end well. And I believe fossil fuels will have their revenge.

The Great “Backtrack” has Already Begun

Europe’s energy landscape is now in serious disarray. (I’ve written about it before, but if you want to see what’s waiting for us in the next year or two if we keep on this track, just look at what’s coming down the pipe for Europe and the UK this winter.)

Sanctions on Russian gas are proving to potentially be the final nail in their energy coffin…

The government has already started to encourage people to cut back and save energy in anticipation of energy shortages. In the face of the stark realities, some Germans are even turning to stockpiling wood, regressing from a modern energy infrastructure to seriously planning on engaging in the preindustrial practice of burning wood for warmth this winter. This is no trivial blow to the standard of living in one of the most developed countries in the world.

And when this happens, people don’t just freeze. Industries shut down. Supply chains continue to fail. They can’t run their economies on green energy alone. And governments within the EU are beginning to understand this.

From Oilprice.com in April…

Europe depends on Russia for close to half of its coal and natural gas imports and about a quarter of its crude oil imports. And the EU just decided to ban Russian coal imports in an attempt to hurt the Russian economy as punishment for Russia’s actions in Ukraine.

Here’s what happened after the announcement of the ban, which has yet to be approved, by the way. Indonesia hiked its own coal prices by 42 percent, Australian coal miners reported they have limited ability to replace Russian coal, and Asian coal prices soared amid reports that European buyers were hunting for replacement coal.

What’s happening in coal is pretty much what will be happening in oil and gas.  

Euronews in June…

Austria is preparing to reopen a coal-fired power station that closed in 2020, over fears of Russian gas supplies being cut due to the war in Ukraine.

Oilprice.com in July…

For years, new oil and gas field development and pipeline construction projects across Africa have suffered setbacks because of Western banks and governments’ unwillingness to fund new hydrocarbon projects as the crusade on carbon emissions gathered ace.

Now, suddenly, the tables have turned with a deafening crash. The G7 is suddenly all for new oil and gas investments abroad after committing to suspend these just last November at the COP26. And Europe, that same Europe that has been advising African countries to focus on renewable energy and keep the oil and gas in the ground, is now asking for gas.

And ZeroHedge in July…

Yes, contrary to the intentions of Green fanatics everywhere, their push to accelerate away from “dirty” fossil fuel has not only backfired spectacularly, but also exposed the hypocrisy and empty promises of so many virtue-signalers, as “from the U.S. to Europe to China, many of the world’s largest economies are increasing short-term coal purchases to ensure sufficient supplies of electricity, despite prior pledges by many countries to reduce their coal consumption to combat climate change.”

And now, no matter how and when peace comes to the region, the relationship between Europe and its Russian gas suppliers has been damaged forever. Whatever elements of trust there was between these two countries will for the foreseeable future be strained. 

The People That Know… Know Better 

For all the hand wringing, fear mongering and virtue signaling about the need for an accelerated push toward green energy, investment in fossil fuels has quietly continued. In February Oilprice.com reported that banks have funded the dirty, filthy, carbon-belching coal industry to the tune of $1.5 trillion over the past three years…

“Banks and investors have channeled massive sums of money to support the coal industry in recent years,” CNBC recently reported, thereby “propping up the world’s dirtiest fossil fuel at a time when humanity is facing a climate emergency.”

Between January 2019 and November of last year, commercial banks funneled a jaw-dropping $1.5 trillion into the coal industry alone. The analysis also shows that a tiny number of financial institutions are playing a remarkably outsized role in supporting coal and directing global energy markets in a way that some would call short-sighted, and others would call criminally negligent. Financial firms from just six countries – the United States, China, Japan, India, Canada, and the United Kingdom – are responsible for more than 80% of coal financing and investment.

BlackRock, Larry Fink’s $10 trillion investment fund, which has been lecturing its corporate holdings on the importance of their ESG scores, apparently hasn’t been playing by its own rules. NYC Comptroller Brad Lander, who oversees the city’s $43 billion in pension funds, wrote a letter to Fink calling him out on it (my emphasis)…

BlackRock now abdicates responsibility for driving net zero alignment in its own portfolio by saying that it does not ask companies to set specific emissions targets, and that its participation in NZAMI (Net Zero Asset Managers Initiative) does not mean BlackRock is setting or meeting any net zero targets. BlackRock even goes so far as to tout its continued investment in fossil fuels—without specific net zero targets or commitments or any plan for a phased transition away from the very investments that increase carbon emissions—as somehow a necessary part of a transition to a green economy. A net zero goal that is not backed by a firm commitment to follow through is at odds with the path our economy must take to limit global temperature rise below 1.5°, or even 2.0°C.

“The fundamental contradiction between BlackRock’s statements and actions is alarming. BlackRock cannot simultaneously declare that climate risk is a systemic financial risk and argue that BlackRock has no role in mitigating the risks that climate change poses to its investments by supporting decarbonization in the real economy.

Whoops.

And Private Equity knows a good thing when it sees it has been coming to the rescue too…

According to the nonprofit groups, the PE firms, which include Apollo Global Management, Blackstone Group, Brookfield Asset Management, Carlyle Group, KKR and Warbug Pincus, collectively oversee $216 billion worth of fossil-fuel assets–on par with the amount of money that big banks put into fossil fuels last year.

Another surprising find: the 10 largest private equity funds have 80% of their energy investments in fossil fuels.

In addition to all that, four U.S. banks — JPMorgan Chase, Citi, Wells Fargo, and Bank of America — have together accounted for a quarter of all fossil fuel financing over the last six years.

And finally, some folks in real power have started to state the obvious out loud…

Sure, they’re all the bad guys now…  but the US will likely be thanking them sooner rather than later.

The Real Future of Green Energy

The truth is the real green revolution — and by green revolution, I mean a time when renewable/green energy can power more than just a fraction of our energy needs — is probably 30 to 50 years out.

I’ve said it before, I’m not against green energy. But I am against forcing it onto a market that it cannot support, to solve a problem that won’t impact the globe like its proponents would have us believe. 

Here’s the bottom line… We’re going to continue to burn fossil fuels at a substantial rate for the foreseeable future. And because of that, we’re going to need to start producing again. President Biden and his team can say we’re doing it to save our friends in Europe — they’re going to be needing oil and gas for years after the Russia fallout. (If they’re smart, they’ll do it before Europe’s fate hits the US shores.)

Based on that, I believe there’s going to be a super-spike in fossil fuel-based energy stocks over the next three to five years. 

Right now, WTI crude is trading around $85 per barrel. I’d look for continued weakness here. But NOT because green energy is putting oil out of business. It’s only under pressure now because of recession expectations. The bottom for crude will probably come in at $65-75. And once recession fears become more of a reality, prices should start to rebound.

This isn’t a political argument for “energy independence” or “energy security” it’s simply an argument that our country should do what it is able to do — produce a lot of reliable energy to fuel the world.

If the US government is serious about solving the “inflation” problem, they need to dial back the green agenda and start producing oil and gas… Period. 

Make the trend your friend,

Bob Byrne
Editor, Streetlight Confidential