We the People . . . Will Pay for the Energy Crisis
November 5, 2021
“The road to hell is paved with good intentions.”
The aphorism struck me as apropos after reading these two tweets by Javier Blas, Chief Energy Correspondent at Bloomberg News.
For us, this doesn’t come as a surprise because we’ve anticipated a pivot by politicians as the energy crisis unfolds. As global crude stocks continue their unrelenting drawdown, politicians will begin to see the energy crisis unfold and be forced to address rising prices.
Governments are always slow to react, so as prices increase, consumers will become increasingly vocal, but not before changing their behavior. First, consumers will substitute the fossil fuels they use wherever/whenever possible. We witnessed this in China, where a coal shortage led to natural gas and diesel substitution. Higher NG demand forced global LNG and NG prices higher, spiking prices in Europe and exacerbating the energy crisis there. As shortages develop, they will rotate/ricochet from one fossil fuel to another, driving prices higher for the next. It’s effectively a multi-helix of spiraling prices as consumers substitute one energy source for another, only to find the price reprieve short-lived. Scalded, they’ll rinse and repeat.
Second, consumers will begin to look to the government. Take action to lower prices and/or pay for my higher prices. Subsidies, lower gas taxes, price caps, banning imports or exports, changing regulations to target certain producers, etc., all become viable options for governments. Everything and anything will be considered, and some even adopted.
Governments will try a mix of measures, from capping energy prices . . .
To subsidizing the consumers . . .
To calling for increased production . . .
To doubling-down on renewables and clean energy despite the fact that these misguided transition plans paved the way to our energy crisis today . . .
. . . but all of these things will fail. They’ll fail because they attempt to fix or mitigate the symptoms of the issue (i.e., the price increase) instead of the core issue, the hostile economic/regulatory backdrop for fossil fuels that’s resulted in inadequate investment and a dearth of supplies.
As prices rise though and favorability ratings fall, politicians will lash out. Interestingly, this only creates more instability and higher prices in the marketplace as more risk and more volatility = a need for a higher return to compensate = higher prices and/or further constraints on capital.
Already battered by ESG mandates and years of poor returns, investors in the fossil fuel space are few and far between. As we advance further into an energy crisis, many producers/investors will sit on their hands, thinking the green lines could simply disappear like a mirage. Add to that the increasingly heated rhetoric, the blame shifting, and many producers are simply maintaining a wait and see approach, when in fact that’s the last thing we need them to do to supply the world. After all, all of this . . .
can trace its roots to this . . .
. . . and producers and investors are really the only ones who can solve that.
As the energy crisis unfolds, we’re now at the point where the bill is due. Pleading with OPEC+ to increase supplies, subsidizing taxpayers for their energy bills, reducing gasoline taxes, releasing reserves, etc. can essentially be summed up as asking “who will pay?” Prices are increasing, so . . . who’s picking up the check?
Who Will Subsidize Our Energy Costs?
Not Us Said the Cartel
. . . as OPEC+ prioritizes refilling their own government coffers before your gas tank. Supply more oil now only to suppress the price of the very thing we sell?Inconceivable.
Not Us Said Shareholders
. . . as investors of publicly traded oil companies have also refused to fund anymore wasteful and unprofitable growth. The message has been clearly received by E&P management teams, grow and die. Restrain growth, let profits flow, and return excess capital to shareholders.
So who will fund the capex for energy security today and capex for a greener tomorrow? Who will pay for our collective “insouciance” that we so recklessly and needlessly played out because of our energy ignorance and inability to tackle and make difficult choices? We will of course . . . whether directly, or indirectly through our governments. In the end . . . we will pay.
We the People
We the people will bear the brunt of this energy crisis, whether directly in our wallets or indirectly as our governments “subsidize” prices in a futile attempt to cap them. Yes, those fully laden, fully indebted Western governments with historic amounts of debt.
First though, we’ll grudgingly pay more out of our wallets, but when the discontent boils over, we’ll force our governments to pay more. In turn, politicians, in an attempt to thread the needle between constituents worried about climate change and those worried about gas prices will double-down. Fund green energy projects and fund subsidies for the poor. All of this means funding more expensive sources of energy for tomorrow while suppressing and distorting market prices today. It’s okay because their political survival depends on it, and there’s still enough power to run the printing presses. What of the notion that energy costs will simply rise because of these actions and spur even more inflation? We’ll worry about that later, and if we lose the election then it’s the other guy’s issue. .
Besides, we the people demand it, and we demand it now. One day the repercussions of this botched energy transition could become large enough that it leads to political change (“Let It Burn”), but that is not today. For now, we persevere. We the people have an appetite of 100M bpd of oil, an appetite that’s recovered from our post-COVID sickness.
“On oil price itself, I think we’ve got a constructive outlook on oil price. Demand’s up above 100M (barrels) a day.” - Murray Auchincloss, British Petroleum CFO
An appetite that must be fed, and it’s up to our government (and us) to beg, borrow, steal, or print out way to satiety.
So it’s time to eat . . . who’s paying the tab?