Energy First: A Healthy Reprioritization of Our Priorities

Everyone Deserves To Be Energy Rich

Republicans have now officially gained control of all three branches of the US government and questions continue to pour in on the implications. As we have said many times before, we despise partisan politics. But we also appreciate that the decisiveness of the Republican sweep has raised the prospect for a greater impact on energy and environmental policy than many had anticipated had any combination of a divided government been the result instead.

Our core takeaway pre- and now post-election is that the world is heading back to re-prioritizing “energy” as its centering point, rather than the “climate only” focus of the past four years that was led by Western Europe, the left-of-center in the United States, and organizations like the International Energy Agency (IEA) and United Nations. We view the climate and environment as subsidiary considerations within energy, rather than the other way around.

We see little evidence that energy is anything other than a hierarchy of needs, where every person on Earth prioritizes having abundant energy 24/7/365 as their primary, and often only, goal. Yet, sadly, the other 7 (soon to be 9) billion people on Earth use a fraction of the energy that The Lucky 1 Billion of Us take for granted. Everyone on Earth deserves to be energy rich. Super-Spiked started as a commentary on what we dubbed the “messy energy transition era that had arrived.” That era is ending and decisively so in the United States. A new era is dawning that at its core appropriately prioritizes abundant, affordable, reliable, and geopolitically secure energy for all as its overarching objective. Counterintuitively, in doing so we believe environmental and climate goals have a greater chance of being achieved than has been the case under “climate only, net zero by round number year” frameworks.

We have but one plea in evaluating the energy outlook and that is the need to analyze the pathways, timeframes, energy sources, and technologies that can lift everyone on Earth’s living standard to rich-world status. When taking into account geopolitical security, trade balances, and affordability, we believe current and future new energies will eventually prove surprisingly competitive with traditional energy. It is just a matter of time. We see an overwhelming motivation for billion person-scale economies in China, India, and other regions (collectively) to figure out viable alternatives to burning hydrocarbons that they do not control, with capital flows, economic independence, and local pollution all being key motivating drivers.

This is the first post in what we expect to be an enduring theme of how to make everyone on Earth energy rich. It is our motivation to continue publishing Super-Spiked despite the “messy energy transition era” having ended. We focus this week on the implications of the recent US election and use the popular Q&A format to address questions we have been receiving. We have divided the ten questions into broader themes of energy scenarios, new energies, power, and oil.

ENERGY SCENARIOS

Question 1: What does a re-focus on “energy” over “climate only” mean for scenario analysis?

Answer: Scenarios that prioritize carbon emission trajectories over other energy attributes will fade in relevance.

We have long taken issue with so-called “net zero” scenarios that solve for carbon emissions as the primary objective and toggle, while ignoring the desire of everyone on Earth to some day become energy rich. While the IEA often takes the slings and arrows from energy pragmatists on this topic, the reality is that essentially all of the publicly-available scenarios provided by major oil companies mirror the IEA. Collectively, these reports are founded on the core assumption that the world is prioritizing carbon abatement over other objectives. We see no evidence that this is true, irrespective of whether you believe it should be true or not.

We do not believe there is any more than a handful of people on Earth (e.g., monks) that are willing to voluntarily live energy-poor lifestyles. We have long described energy as a hierarchy of needs that starts and ends with everyone wanting energy abundance and reliability 24/7/365 (Exhibit 1). Energy is then ideally affordable and from geopolitically friendly regions, but even those goals are secondary to abundance. There are very few people on Earth that agonize over the specific source or type of energy they use.

Exhibit 1: We see energy as a hierarchy of needs

Source: Veriten.

None of the high-profile scenarios from the IEA or major oil companies solve for how everyone on Earth will some day become energy rich. If you start with that, we would argue it will motivate countries that have insufficient crude oil, in particular, to find alternatives. Considerable capital and effort is being put into finding new sources of energy and alternatives to combusting crude oil.

We should point out that we support energy suppliers of all flavors being held to high labor and environmental standards, including in areas like health and safety for workers, NOX/SOX and other pollutants avoidance, methane emissions abatement, biodiversity impact, and related areas. Environmental goals go hand-in-hand with societal wealth. Resilience to adverse weather events is also improved with societal wealth, as has been indisputably proven since the Industrial Revolution.

Q2: Will we see pressure put on forecasting institutions to recenter their viewpoints to prioritize energy over climate?

A: We believe that is likely.

Out of all the major forecasting bodies, we credit OPEC Research with understanding that energy abundance is the primary objective. We hope OPEC Research will expand its offerings to include more analysis and commentary on non-oil energy sources. We see it as a potentially key institutional offering to the developing world that is distinct from European and American influence. We are also appreciative of the scenarios provided by Rob West of ThunderSaid Energy as being thoughtful and self-reflective of the direction the world is actually headed relative to various net zero pathways he has written about.

Let us be clear that a recentering on energy does NOT mean we support abdicating environmental and climate objectives. It has long been our view that increased societal wealth is positively correlated with clean air, clean water, and resilience to adverse weather events. We recognize that biodiversity and carbon emissions have historically been inversely correlated with economic and energy growth. It is our view that a substantial portion of the other 7 (soon to be 9) billion people on Earth are highly motivated to find non-combustible forms of energy, which we think will prove to be the viable pathway to abating carbon emissions. We are techno and engineering optimists and believe some day the world will discover scalable alternative energies.

There is a portion of the Super-Spiked subscriber base that views climate change as some mixture of a hoax, massively over-stated as a risk factor, or as a deep-rooted effort to replace capitalism with socialism (e.g., green new scam perspectives). We support your right to hold and express those views. There are also some of you that believe there is an urgent climate crisis, an unfolding climate catastrophe, and that the world must quickly transition off of fossil fuels irrespective of what it means for societal wealth as the alternative will be an unlivable planet within the lifetimes of today’s youth. We similarly support your right to hold and express those views. Personally, we do not fall into either end of the spectrum and feel comfortable holding and expressing our views. Free speech is a critical American right and we enjoy engaging with people at both ends of the spectrum and everyone in between. We believe it improves our understanding of the energy sector to engage with all viewpoints.

Q3: What happens to corporate “net zero by 2050” pledges?

A: We expect such pledges to fade away by the end of this decade, since we are unaware of any company in any sector on track to actually meet them.

We believe no company in any sector is on-track to meet “net zero by 2050” promises or aspirations when considering Scope 1, 2, and 3 (Scope 1 and 2 promises have a greater chance of being achieved by some companies). When oil, natural gas, and coal are circa 80% of our primary energy mix today and considering the massive unmet energy needs of the other 7 billion people on Earth, we do not believe “net zero” frameworks are the way to solve our energy and environmental challenges.

NEW ENERGIES

Q4: Will the Trump Administration recognize that “energy dominance” should extend to new energies?

A: Not sure.

As we regularly state, we support the United States (plus Canada plus Norway plus Australia) pursuing policies that maximize its long-term production of crude oil and natural gas. In his first term, president-elect former president Trump phrased his policy as “energy dominance.” We have come to appreciate the branding (we didn’t initially). Over the past decade under presidencies held by both major parties, the United States has indeed become a dominant producer of oil and LNG (liquefied natural gas). In our view, the United States should similarly look to dominate all forms of new energies, where China currently has a significant lead, especially when including under-appreciated areas such as critical minerals mining and refining/processing.

The United States is blessed not only with substantial oil, natural gas, and coal resources, but also a culture of leading innovation (e.g., Silicon Valley, Austin, Houston) and has the world’s preeminent capital markets (Wall Street from which we hail). The idea that specific energy sources or technologies are somehow partisan is bizarre. Recasting all traditional and new forms of energy as a geopolitical competitive advantage of the United States would be a welcomed direction for the incoming and all future administrations irrespective of party.

Q5: What do you see as the fate of the Inflation Reduction Act?

A: We would prefer reform and re-branding rather than repeal.

It should not be lost on anyone that the Affordable Care Act and the Inflation Reduction Act are both inaccurately named, with zero evidence that health care or energy inflation was reduced via these pieces of legislation (note: we are not health care experts but are 99% sure we are making an accurate statement about the ACA). We agree that all Americans should have access to affordable health care and energy, and we support policies that would actually achieve those ends.

Focusing on energy, we would like to see the IRA move away from de facto mandates and excessive subsidies for government-chosen technologies to instead figuring out how the overall new energies ecosystem, which would include topics like critical minerals mining and refining/processing, can be incentivized to grow in America or other friendly countries. We do not support the government picking technology winners, such as EVs (electric vehicles) over internal combustion engine (ICE) vehicles. We do support incentivizing research and development in new energies areas, ensuring required infrastructure can get built by reducing bottlenecks in the permitting and project approval process, and whatever else can be done to harness our strengths in innovation and capital markets to ensure America will be dominant in not only traditional but also new energies. Our re-branding suggestion for the IRA is the “America And Its Allies Energy Dominance Act” (AEDA).

POWER

Q6: Why is there so much focus on what the new administration could mean for domestic oil and gas drilling as opposed to power markets?

A: We do not know and believe more focus should be put on how the new administration can contribute to ensuring electricity prices are low.

We understand that “drill, baby, drill” is memorable and we cannot think of notable comments Mr. Trump has made specifically about power markets other than being against offshore windmills and pushing back in strong terms about the obsessive focus on renewables from those that prioritize climate as their biggest concern. In our view, how power markets evolve in coming years is arguably a much bigger issue for the incoming administration than oil and gas drilling trends. By all accounts, there is a major need for new investments in US power market infrastructure due to (1) an aging electric grid, (2) the challenges of having to deal with the intermittency that comes from a rising renewables share coupled with ongoing retirements of baseload coal power, and (3) a positive inflection in power demand turbocharged by data center growth.

We suspect the incoming administration will look to encourage natural gas and nuclear power generation, though somewhat similar to our US oil production comments, investment decisions will ultimately be made by private companies that also have to navigate a host of state and local regulations and rules. Long hoped for permitting reform and streamlining approval processes are areas to watch. If we are to be hopeful on this topic, it would be the fact that Big Technology companies are now at the forefront of demanding incremental power generation capacity to be built coupled with the large role tech luminaries like Elon Musk, David Sacks, and Peter Thiel played in the campaign.

Q7: Could electricity price inflation lead to a revival for US coal?

A: Probably not, but it’s worth keeping an eye on.

During Mr. Trump’s first term, he had expressed a desire to bring the US coal sector back to life. But the timing was not right then. We have regularly pointed out that the rest of world, most notably China but increasingly India as well, is driving ongoing gains in global coal demand, even as coal usage has declined in the United States and Europe (Exhibit 2). In the United States, we now have the prospect of really tight power markets, projections for significant future electricity demand growth, and the potential for significant electricity price inflation. It is a political fact of life that presidential approval ratings decrease when gasoline prices spike. This 2024 election showed that general consumer price inflation is similarly unpopular. Going forward, electricity prices we think have greater upside risk than gasoline prices.

Our base-case view is that renewables and shale gas-fired power generation will continue to undercut coal power in the United States. However, we did enjoy speaking with Michelle Manook, CEO of the FutureCoal Global Alliance (website) association, who offered a non-consensus view on the potential for sustainable coal on Veriten’s Close of Business Tuesday video podcast (link). To be clear, her comments were not country specific.

Exhibit 2: Despite two prior apparent plateaus, global coal demand is again making new highs

Source: Energy Institute, Veriten.

OIL

Q8: Will “drill, baby, drill” lead to a renewed surge in US oil production?

A: No.

As we have noted in prior posts and video podcasts, we believe US oil production is not observably impacted in any meaningful way by the party or person that is president of the United States. There is no change to that view based on the recent US election. Changes to oil prices, fiscal regimes, resource discovery and depletion, cost of supply, OPEC policy decisions, geopolitical turmoil, and a host of related factors will drive investment decisions around US oil production made by publicly-traded and privately-owned oil and gas companies.

Q9: So “drill, baby, drill” is a meaningless campaign slogan?

A: We did not say that.

It is our opinion that as a matter of sound energy and environmental policy the United States should be looking to maximize long-term production of its substantial oil and natural gas resources, which is how we interpret “drill, baby, drill.” “Maximize US oil and gas production over the long run” is undoubtedly less catchy. Fortunately, we are not in politics.

There is perhaps no industry that has done a better job of re-shoring than the oil and gas sector, generating significant domestic investment, jobs, and tax revenues to the benefit of all Americans. The US shale revolution has arguably been the most important and transformational development in any sector over the past 20 years. Similarly there is perhaps no more damaging a perspective to the interests of the United States and its allies than the “keep-it-in-the-ground” mindset found in the “climate only” agenda.

Q10: Is a new oil super-cycle more or less likely now?

A: Neither.

There is no change to our “Super Vol” rather than “super-cycle” energy commodity macro view. There are a host of conflicting signals around China’s economic outlook, the unknown impact of changing global trade policies (e.g., tariffs), geopolitical turmoil in major oil producing regions, and many other factors that collectively reinforce our Super Vol outlook.

⚡️On A Personal Note: “I love Arjun. He’s great. He’ll argue with people that disagree or even agree with him”

I can’t think of a nicer, more accurate sentiment that has been expressed about me in an energy conference setting than the comment made by Jamie Webster of Boston Consulting Group in response to a question posed by Ron Gusek of Liberty Energy at an energy conference co-hosted by the Federal Reserve Banka of Dallas and Kansas City on November 13 (YouTube replay of the full event which was outstanding is here). Mr. Gusek was pushing back on presentations made by the panel about the prospect for peak oil demand and cited our “lucky 1 billion versus the other 7 billion” framework for future energy demand growth. After a thoughtful response from Michael Cohen of BP, Jamie chimed in and said, “I love Arjun. He’s great. He will argue with people that disagree or even agree with him.”

That sentiment is 100% on the mark, especially the part about even arguing with those that agree with me. The goal of an equity research analyst is to make the right call for the benefit of your clients. That’s it. Nothing more. Nothing less. It does not matter what my personal views are about a topic. No one cares. All that matters is that if you recommend a stock or sector to go up, that it goes up, or vice versa. Profit or loss is black and white. You either made money or you lost money for your clients. How smart or thoughtful or charming I am was of no solace when I made the wrong call.

During my time at Goldman Sachs, the worst feeling when making what I thought would be an impact call was having everyone agree with me. It is a sinking sense you get as it means consensus is already there and that I was late to the call. Pushback, disagreement, and being told that I was a fool for my views were typically the better indicators of having made a great call. That is not always the case, but is true far more often than not. It is my experience with Super-Spiked as well.

I would note that Jamie and I know each other from our respective involvement at Columbia University’s Center on Global Energy Policy, where he has been a non-resident research fellow and I am on the advisory board (you can follow Jamie here and here). We have not worked closely together over the course of our careers and have met in person only a handful of times. Yet, he instinctively understands my world view and analytical approach. He is a fellow analyst. Thank you Jamie for understanding me. Thank you Ron for the kind words on our lucky 1 billion versus the other 7 billion framework. And thank you to the Dallas and Kansas City Federal Reserve Banks for hosting thoughtful conferences that provide a range of views on the outlook for energy and the environment.

⚖️ Disclaimer                                         

I certify that these are my personal, strongly held views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments. Some of my comments are made in jest for entertainment purposes; I sincerely mean no offense to anyone that takes issue.