The way some analysts have talked recently, you’d think energy markets followed some version of the butterfly effect, where the flapping of the wings would determine the tornado’s formation weeks later. Call it the BlackRock effect: Larry Fink only needs to whisper the words “ESG” and the natural gas and coal markets will explode 21 months into the future. “Europe’s anti-carbon policies have created fossil fuel shortages,” the Wall Street Journal said in an editorial last month, arguing that climate policy was to blame for the current turmoil in energy markets. , which has increased the prices of gas and coal. “Political and regulatory resistance has darkened the future of fossil fuels,” Ruchir Sharma, chief global strategist at Morgan Stanley, wrote in the Financial Times in August. Even as oil prices rise, investments by large hydrocarbon companies and countries continue to decline. Is. “
If you are given for magical thinking, it is tempting to assume that the most important thing that has happened to the world economy since the start of 2020 is the increasing frequency of CEOs saying “ESG” on conference calls. . Still, better explanation because what is happening is staring at us all. It’s almost embarrassing to say this, but quite dramatic events are happening. Thanks to the covid pandemic, in 2020 the global economy suffered its deepest recession since World War II. , and is currently experiencing its strongest rally since the same date. West Texas Intermediate crude changed hands last April to minus $40.32 a barrel. That same month, a tenth of the US labor force lost their jobs. In December, the debt piled up business on negative returns above $18 trillion.
No doubt climate activists would love it if strongly worded investor letters and annual general assembly speeches had the power that skeptics have attributed to them. What we are really seeing, however, are the mundane dislocations of an economy that has suffered such dramatic changes.
Energy is hardly the only sector that has been affected. The global auto industry is losing an estimated $210 billion in sales this year due to semiconductor shortages. The cost of moving a shipping container from Shanghai to Rotterdam has increased from $1,142 in 2019 to $14,807. The price of used vehicles in the US rose by almost a third in August from a year earlier. Passenger air traffic remains at less than half its 2019 level. Economies that have shut down productive capacity during the passage of the pandemic are reawakening, and the ride is anything but smooth. No one would suggest those trends, however, have nothing to do with the number of times officials use the phrase “net zero.”
In energy, the changes have been particularly dramatic. This began last year in a debate between Saudi Arabia and Russia over how to dismantle the US shale industry, before joining a rush of unrestricted supplies, followed by sharp production cuts. Currently, the OPEC+ group alone is recording an additional 9 million daily barrels of additional production capacity from the market, equivalent to about a tenth of the entire oil market.
If you’re asking why capital investment in the petroleum industry has declined sharply and is only creeping back, your explanation is: oil majors and American independents, which traditionally account for more than a third of the oil sector’s spending. are shutting down for fear that OPEC could open spigots with crude from its low-cost oil wells and crush its projects again.
The additional capacity within OPEC+ would be enough to keep the world supplying well until the middle of this decade, with the International Energy Agency (IEA) writing in March: “Against this background, it is hardly surprising that upstream investment and expansion will continue to grow.” The plans have been scaled back.”
Meanwhile, national oil companies with access to cheap reserves are showing little reluctance to build. Qatar signed the largest LNG project in history in February. Saudi Aramco is increasing its capital expenditure by nearly 30% to $35 billion this year, in line with the highest levels ever.
This is clearly inconsistent with analysis such as the IEA, arguing that there is no need to invest in additional fossil fuel supplies to achieve the goal of net zero emissions in 2050. If investors are becoming more reluctant to finance fossil fuels, it’s not because they want to put the green cover on their next annual report, but they believe the business case for hydrocarbon investments is becoming less and less. .
Surely the world is facing an energy shortage, but the technology that will benefit from that shortage is the one that can fill it most cheaply. In most cases, this is renewable energy. Don’t blame the rhetoric for the current crisis in the fossil fuel industry. Blame the economics.
David Fickling is a Bloomberg Opinion columnist covering commodities as well as industrial and consumer companies.
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