Thread by @davidfickling

Have you noticed all the Takes doing the rounds about how the current spike in fossil fuel prices shows the energy transition won't work?

This is, IMO, absolute brain-wormed nonsense. I wrote on this topic today, here's a quick thread to explain:

bloomberg.com/opinion/articl…

There's plenty of examples of this genre around. We have a big climate meeting coming up, energy prices are going crazy, so it's a good opportunity to make some tendentious links:

Here's the WSJ's editorial page last month: "Europe’s anti-carbon policies have created a fossil-fuel shortage"

wsj.com/articles/europ…

Or Morgan Stanley chief global strategist Ruchir Sharma warning of "greenflation" in the Financial Times: despite ongoing demand for oil and gas and coal, "political and regulatory resistance has darkened the future of fossil fuels".

ft.com/content/49c19d…

Or Merryn Somerset Webb, also in the FT, saying stop "demonising fossil fuels" by "evangelising about ESG, following the trend to divest from shares in oil companies and kiboshing new projects with regulation, high financing costs ... and the like." ft.com/content/f9535e…

The underlying argument in all these pieces is the same: The only plausible reason for spikes in fossil fuel prices we're seeing right now is the fact that investors and governments are starting to take climate change more seriously.

It's like a version of the butterfly effect — call it the BlackRock Inc. Effect — where instead of an insect's wings causing tornadoes weeks later, Larry Fink need only utter the words "ESG" to crash energy markets 21 months in the future.

I'm going to let you into a little secret that only Professional Energy Experts know: The rising frequency of CEOs saying the acronym "ESG" on quarterly earnings calls is *not the most significant thing to happen in the world economy since 2019*.

insight.factset.com/record-high-nu…

*2020 saw the deepest global recession since World War II!

*2021 saw the fastest global expansion since World War II!

*Last April, WTI crude oil prices fell to minus $40 a barrel!

*The same month, a quarter of the U.S. workforce lost their jobs!

You will read this genre of "climate activism caused the energy crisis" take in vain looking for any acknowledgement that we are just coming out of the most consequential global pandemic in a century.

That's weird, right?

It's particularly striking because we have a whole load of global inflationary disruptions happening that no one would dream of attributing to climate policy.

*Automakers are set to lose $210 billion in sales because of a shortage of semiconductors

*East-West freight rates have gone from about $1,000 per container to $14,000
*Used car prices in the U.S. are up by nearly a third
*U.S. house prices are up 19%, almost twice the peak of the pre-2008 housing boom

No one would think of attributing this to climate policy because there's not an even superficially plausible link.

The difference with energy is that there *is* something *superficially* plausible: activists are preventing needed fossil fuel investments by scaring executives.

But you can see how little sense it makes when you spell out the purported causal relationship like that.

Fuel investments (~99% of which is fossil fuels) are up 14% this year to $710 billion, per the @IEA — rebounding from 2020's low base and below 2019, but not in decline.

Have these investments in supply fallen short of demand? Well, clearly: just look at the prices.

But the main reason for that is the battle going on between OPEC and the oil majors and U.S. shale independents, not the rising salience of climate among the Davos set.

OPEC+ spare capacity is around 9 million daily barrels of oil, ~10% of the entire oil market.

Is it Extinction Rebellion being mean that's causing non-OPEC producers to hold off investments?

Or is it the fact that OPEC could crush those investments with the turn of a spigot?

Don't take my word for it! Here's the IEA again: iea.blob.core.windows.net/assets/1fa4523…

This is particularly pronounced because western oil majors and shale players account for an outsized share of petroleum investment.

Half of the world's drill rigs are in the U.S.!

And those are the players worst hit by last year's negative crude prices.

Outside the west, investment seems to be doing just fine. Qatar in February signed off on the biggest LNG project in history: qp.com.qa/en/Pages/Banne…

Saudi Aramco is lifting capex this year to $35 billion, the equal-biggest spend in its recorded history and a 30% increase on 2020.

aramco.com/en/news-media/…

The decline in upstream oil and gas investment in 2020 hasn't even been as dramatic as the one in 2014, which no one, as far as I can see, attributed to climate policies because it was very obviously an OPEC/non-OPEC fight:

One thing that is correct is that, as with any product, prospects of declining fossil fuel demand will reduce willingness of producers and investors to make long-term investments.

That will sometimes result in price spikes when supply falls faster than demand.

Some of us have been saying this for years. This column is from 2016:

bloomberg.com/opinion/articl…

This extreme price volatility is not a point in fossil fuels' favour. It's easy to forget now, but back in the 1950s to the 1970s recessions in the U.S. were often seen as a more or less mathematical result of riisng oil prices.

It's hardly surprising that end-users of energy are preferring a product like renewables that's cheaper up-front almost everywhere on the plant, and where prices are set at the investment stage over a 20-year timeline rather than fluctuating on a daily or monthly basis.

One more point I'd like to make about reasoning from a price change. My impression is that when I read the bona fide commodity analysts at the likes of @WoodMackenzie and @RystadEnergy and bank commodity desks, I see a lot less of these "ESG caused the energy crisis" takes.

@WoodMackenzie @RystadEnergy It's much more common among commentators and equity/cross-asset strategists.

My theory of this is that a lot of people intuitively feel high commodity prices mean the same thing as high share prices, when in truth it's close to the opposite.

@WoodMackenzie @RystadEnergy Share prices can rise in perpetuity because they represent a portion of cashflows that can keep rising more or less endlessly due to inflation and growth into new markets.

Commodity prices, on the other hand, tend to fluctuate around a mid-point determined by production costs.

@WoodMackenzie @RystadEnergy When share prices rise a lot, it tends to be a very good sign for the underlying share: stock prices are a sort of guide for the direction of the underlying asset.

When crude prices had their most bullish decade in the 1970s, it led to a global *decline* in demand in the 1980s.

@WoodMackenzie @RystadEnergy Rising commodity prices are nice for producers because they result in increased profits, but they make the higher-cost players (ie most western oil producers) nervous because if people substitute other products, only the cheapest producers (ie OPEC) will survive.

It'll be interesting seeing what happens over the winter. European gas and Chinese coal markets are so tight right now that I suspect prices will stay high. If the weather is cold they may even rise, though if it's mild we may see a gradual decline.

But to the extent there are global factors underpinning these price spikes, it's the expected dislocations of an economy reawakening from a pandemic.

For all the febrile talk of "political and regulatory barriers", there are very few such barriers to fossil fuel investment anywhere in the world today, with the carbon markets in Europe and a few other places the only major exception.

Without more policy change, the decline that we will eventually see in fossil fuel investment over the next few years will be largely driven by economics: lower-cost technologies exist for energy production and they're edging out the older, higher-cost technologies. (ends)