Read tea leaves in energy markets

  • Republicans are unable to repeal the inflation-lowering act.
  • John Kerry’s carbon financing idea may be an opportunity.
  • Oil and gas companies will have difficulty competing with renewable resources that have fixed capital costs but no variable costs.


“Experts” and analysts of public opinion in the United States spoke ahead of last week’s elections. Then they expressed it. They explain what they did wrong. They get paid twice. Good job if you can get it. Well, if they can do it, why can’t we? Here’s how to read the tea leaves regarding energy and electricity policy based on recent events.

  1. Give up dreams that the Republicans will repeal the inflationary measure. They didn’t get the votes to do so, and by the time they might get the votes, the players in the energy sector will have become accustomed to all the benefits in the form of tax credits or other handouts. Whether it is an oil depletion allowance, an ethanol subsidy or simple farm subsidy payments for example – industries and groups are extremely reluctant to give up attractive economic benefits. And if you’re betting on the comeback of a politically revived Donald Trump chanting “Dig, baby, workout,” please note that the conservative news outlet’s owner, Rupert Murdoch, along with other politically prominent people seem to have lost interest in his candidacy, so don’t count on that either. .
  1. John Kerry’s carbon financing idea may be an opportunity. Kerry’s plan would require big companies to pay for carbon cuts in electric power grids abroad rather than cuts at home — the details are fuzzy. (This idea is very similar to the idea of ​​buying carbon offsets where an industrial pollutant, says Gary, IN, buys and preserves a rainforest in Indonesia to save it from logging and of course maintain strong carbon sequestration.) The idea is except that there are a lot of old fully depreciated coal-fired power plants that can be replaced economically with significant environmental benefits if the host country has the capital to do so. We see this as a serious attempt to achieve substantial reductions in carbon emissions through a trade or barter scheme that results in real emissions reductions, rather than planting slow-growing trees somewhere in a dying forest that may burn anyway due to climate change. This type of transboundary approach addresses the problem of what we might call pollution offsetting, whereby pollution-intensive industries simply move to places where pollution is relatively cheap. Wise thinking? Critics say the plan isn’t enough, but this is a start.
  1. PR can only replace substance for so long. The fossil fuel industry and its advocates mounted a massive public relations campaign centered on the United Nations climate conference in Egypt. They no longer deny the reality of climate change or the negative impact of fossil fuel use, but instead offer non-solutions. To us, this campaign at least indicates a certain level of concern for the company. Why invest in this intense public relations effort? But then they offer the usual remedies: planting trees, burning natural gas (although some of it is masquerading as hydrogen), and more carbon capture (which still looks like steam to us). Four Republican members of Congress attended the climate conference, presenting their conservative solutions to the global climate challenge. They argued that the problem was not the carbon fuel but its emissions, so they offered some complicated and expensive ways to reduce emissions. One would think that, as conservatives, they would devise a simple, low-cost, minimally invasive solution that would suggest avoiding burning fossil fuels in the first place. Admitting causation may be a strategic mistake.
  1. Real investment accountability is required. The net-zero investment and banking approach was denounced as “nonsense” in the world’s premier financial publication. Now, some of you may have come to this conclusion a while ago, and we may have been slow to get the message. But it appears that quite a few savvy bankers and consultants have found a way to cash in on climate change, appear utopian, and achieve nothing tangible at the same time. Why should we care about what might be described as low-level financial scams? Well, US securities regulators are tasked with ensuring that investors are not intentionally misled. Regulators may set standards, which could lead investors to reduce their investment in fossil fuel producers which could lead to an increase in the cost of capital. (How can investors not invest in a vital economic sector like energy? Easy, because oil and gas stocks only make up about 3% of the value of US stocks. That’s down from about 15% in 2008.)

Here is the basic problem for consumers. The Ukraine war and OPEC’s abuses have sent oil and gas prices soaring. These two events may give domestic fossil fuel production a boost, but only temporarily. why? Because in the long run, ever-rising energy prices make non-fossil energy (renewables, green hydrogen, even new nuclear energy) more competitive. There is an old adage on Wall Street, the solution to high prices is higher prices (that is, creators find cheaper alternatives). Once non-fossil energy resources exist, they will remain in use for decades. Oil and gas companies will have difficulty competing with renewable resources that have fixed capital costs but no variable costs. Once they lose market share for renewables, they will never regain it. From a business perspective, this battle is already existential for the fossil fuel industry.

Does a divided Congress mean a government unsympathetic or indifferent to energy interests? Are there potential breakthrough technologies in nuclear power and battery technology that could be game-changers for energy production and storage? It is hoped that one of the losing strategies, unconvincing PR campaign rather than objective environmental reform, will be retired. Even investor greenwashing is likely to come under further regulatory scrutiny — and that’s saying a lot because the same regulators have steadfastly ignored calls to regulate cryptocurrency exchanges that have caused investors to lose billions. As a result, we can say with confidence that tea leaves predict an uncertain future. That’s what the critics say.

By Leonard Hyman and William Tells for Oilprice.com

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