Energy transition Q&A and clarifications

A celebration of 3 months of Super-Spiked

I have officially reached the 1/4 of a year mark since Super-Spiked was launched on November 17, 2021. I am very appreciative of the overwhelming positive feedback and encouragement I have received from so many of you. It is humbling and motivating. But as the great Dave Mustaine so eloquently stated: so far, so good...so what. My Goldman career was always focused on looking forward and neither basking in past successes or wallowing in failures. Based on the growing flow of incoming calls, entertaining Twitter debates, and a clear need for me to clarify some views, my three month anniversary seemed like a good time for a first ever Q&A post.

What do you mean when you say "energy transition"?

When I talk about entering a messy "energy transition" era, I am referring to the idea that the world is now trying to solve for the near impossible task of how to fuel economic growth, alleviate remaining world poverty, while doing so with less and ultimately net zero CO2 emissions. That goal is what I mean by the phrase "energy transition". By using the term, I am not explicitly or implicitly ascribing a likelihood of success on any particular outcome or time frame. Rather it is now the commonly used term to describe this era we have entered. And yes, it is possible, if not likely, that renewables, EVs, and other transition technologies will merely be additive in absolute terms to legacy energy systems, as we have seen throughout history. Even if that is the case, I believe energy transition is a perfectly acceptable term to use.

And as a reminder, I write Super-Spiked as an energy analyst, not an advocate or activist. It's not about what I want or wish would happen, it's about a framework for what I think will happen and how different choices can potentially lead to a healthier transition era.

How long will the energy transition take?

I don't know. Forever is probably as good a guess as any. It should be pretty to clear to anyone looking objectively at energy market developments to recognize that the approach championed by global elites to "electrify everything" while simultaneously maximizing intermittent energy and reducing/eliminating dependable energy is already failing. I am an optimist; pragmatism will ultimately prevail.

To be clear, I support growth in solar and wind power as we need all forms of new energy supply. In some instances, it is the low-cost generation option and a perfectly fine source of power. But it is not today, nor will it likely be anytime soon, a base-load power generation source for the mass market. I do not see any evidence anywhere—though I will keep looking and would welcome examples—where the addition of substantial renewables generation at scale has improved energy security, reliability, or affordability, without simultaneous and ongoing investments in traditional forms of power like natural gas, nuclear, or coal.

I also don't know how quickly the world will ramp nuclear power or the time frame by which future technologies such as nuclear fusion, hydrogen, solid state batteries, whatever comes after solid state batteries, etc., will take to commercialize. Collectively, some mixture of nuclear and future tech is the key to decarbonization.

I do know that our current portfolio of new energy technlogies, on their present trajectory, do not seem anywhere near ready to displace fossil fuels beyond niche or supplementary uses. But technology leaps can happen suddenly and unexpectedly; I am ultimately a major optimist on the role technology will play if we ever are to make a significant move away from fossil fuel-driven primary energy.

I believe that the % of primarily fuels that come from fossil fuels will likely be little changed through 2030 and quite possibly 2040. I believe absolute fossil fuel usage will increase for at least the next 10 years and most likely at least 20 years.

What will be the key driver to a low(er) carbon world and progress on new energy technologies?

In my view, the key to a successful energy transition will be finding superior forms of energy supply or end use products that ultimately use less carbon. The obvious example is Tesla, which revealed that creating a car people actually want to buy based on the overall driving experience is more sensible than trying to create a "low CO2 ESG" car. Tesla is the biggest low carbon winner so far. We need 100 more Teslas.

We see this often in energy transition and ESG funds: A focus on societal outcomes like less CO2 as THE business driver. In my view, it is not the place to focus and is unlikely to be the path to success. For energy markets to truly transition, we need technologies and products that are superior to existing systems on the attributes consumers and business value. A product has to deliver superior performance or cost or both. Sustainability is and will be a key attribute society values and leading companies will figure that out. Sustainability is a component of a good product or business; it is not THE product.

In the case of Tesla, consumers have been willing to pay a premium as its aggregate mobility characteristics are superior to most ICE vehicles. In my view, beyond potentially a price on carbon, I am less excited about public-policy or ESG investor driven solutions (as a general statement).

I am highly skeptical the world can regulate or mandate its way to a low carbon future. The politicians and techno-elite beurocrat class do not know best (see Europe and parts of the US and Canada). However, a limited government approach is not advocacy for anarchy. A price on carbon would be an example of helpful public policy that I support.

What year do you expect global oil demand to peak? And at what level?

My detailed oil supply/demand models run through 2030 and I do not see a peak or plateau prior to that year. My current global oil demand estimate for 2030 is 110 mn b/d, which I would characterize as the mid-point of a 107-113 mn b/d band of reasonable outcomes. I will aim to provide occasional updates on my 2030 oil demand view in future posts. This is not an oil macro newsletter and there are many Street analysts and macro shops that do excellent work on this topic. Rather I present my 2030 oil demand forecast as a point of accountability on my sector framework and views.

What sign posts are you looking for to believe the transition is happening faster or slower?

For oil markets, the key metric I look at is the relationship between global oil demand growth and global GDP growth (simplifying). Global GDP has been growing faster than oil demand for many decades; there is a year-in year-out efficiency gain that happens. This is one of the key benefits of using crude oil; we can meet the world's energy needs with a rising multiplier of economic output per unit of consumed energy each year. But I do not see any evidence that there is a step change weakening of oil demand growth relative to global GDP growth, which is the key to believing oil demand will peak/plateau soon.

Why are some more optimistic that crude oil demand will peak/plateau this decade?

I suspect some (many?) are double-counting the EV penetration ramp and ICE vehicle fuel economy gains. It is certainly reasonable to debate how quickly EVs will ramp. Where I find there to be far less room for discussion is the fact that there is overwhelming evidence that we have missed 80%-90% of expected/promised ICE vehicle efficiency gains via the shift to SUVs, the difference between real world and lab driving, and decreasing efficiency as vehicles age. It has to be at or near the top of the list of the biggest climate and public policy failures. I have not seen anyone adequately explain what evidence exists that the ICE vehicle fleet will magically start realizing even 50% of promised fuel economy improvements let alone the seeming 100% embedded in peak demand by 2025-ish forecasts.

From the perspective of oil demand, as EVs increase their share of miles driven, we should see a weakening of global oil demand growth relative to global GDP growth. It's really just a question of how long will that take. I am an EV bull, but would expect the current 1.2-1.3 billion car and light trucks that exist in the world will take many decades to fully replace, especially since the ICE vehicle fleet is still likely to grow in coming years. The impact of EVs on oil demand in the 2020s is unlikely to be noticed given lead times, etc. I would expect a more noticeable impact to start revealing in the 2030s.

I have also seen no one explain the mobility solution for the 3-5 billion energy poor. That is BILLION with a B. It would be awesome to give the whole world a Tesla or perhaps even a Hyundai IONIQ (Sandy Munro seems to be a fan of the IONIQ)! It just doesn't seem practical. When the developing world lacks reliable electricity, EVs don't seem super practical. The only remaining explanation is some global elites don't expect the developing world to develop further. But you'd have to ask them.

What lessons can crude oil markets learn from the collapse of coal?

This of course is a trick question. Global coal demand has not definitively peaked, though there may be some chance it is closer to being on a long-term plateau. Keep in mind, for all practical purposes, coal is overwhelmingly now used for power generation, and there are numerous alternatives, including renewables, natural gas/LNG, nuclear, diesel fuel, and residual fuel oil. Yet despite so many economically viable alternatives, many of which are environmentally superior, the world has never ever used more coal than it does today.

Why is that? In a nutshell, it is inexpensive, is a major sources of investment and jobs, and both China and India enjoy large domestic stockpiles they intend to utilize to help lift literally billions of previously poor Chinese and Indians out of poverty. Poverty reduction will always be and should always be the key objective of governments. It is the moral case for the use of coal. Thanks to the miracle of fossil fuels, we are living at a time when the lowest percentage of the Earth's population still lives in poverty. Poverty reduction has come with the negative externality of too much CO2. But make no mistake, poverty reduction should remain the #1 goal of governments the world over, ideally with as small of an environmental and climate footprint as possible.

What about natural gas?

While I expect crude oil demand will grow at least through 2030, I would concur with many that global natural gas demand is likely to experience faster growth through 2030 and has a higher chance to keep growing beyond 2040. If the world is ever going to move off of coal, of which there is almost no evidence even that is on-track to occur, a combination of natural gas and nuclear will have to be the solution. The idea that renewables can serve as baseload power generation is a bad joke being perpetrated on the masses and is among the key sources of misinformation coming from the climate crowd. It's not a close call.

So, it sounds like you are not an optimistic that we are on-track for meaningful CO2 reductions?

I haven't said that. What I am saying is that I believe it is a fundamental human right that we all have abundant, affordable, reliable, and secure energy. That is the primary consideration. Aggressively ramping renewables at the expense of reliable and affordable forms of energy, is leading to unaffordable energy, increasing geopolitical risks, and ultimately worse environmental outcomes. Why does anyone think this is a good idea?

The easiest way to de-link oil demand growth from global GDP growth is to ban SUVs, as light cars are significantly more fuel efficient. It would seem reasonable to ban electric SUVs while we are at it, if it is less CO2 that we want. Do enviros want to de-carbonize or de-hydrocarbonize? We could be dramatically increasing nuclear power, which could allow an "electrify everting" approach to have a fighting chance. But for some reason, perhaps dating back to the age of rival nuclear super powers (USA vs Soviet Union), the climate crowd that claims we have a "climate crisis" is at best wishy-washy if not outright hostile to nuclear power. The hippies are now in charge so I suppose nuclear skepticism is not unexpected.

The world is making efforts to study and evaluate CCUS/DAC projects, which will be critically needed to offset inevitable CO2 emissions from crude oil, natural gas, and coal. I agree that today it seems improbable that we could have CCUS or DAC that covered 100-110 mn b/d of oil demand. This is why we will need an "all of the above" technology and policy approach.

Finally, addressing the methane issue within oil and gas is an area of climate concern that is within reach. In my view, this is the most important climate opportunity the oil and gas sector has. So far, it is slow-footing its response. Even as I recognize that identifying, quantifying, verifying, and allocating methane emissions is a complex issue, it is not clear to me why there isn't a greater sense of urgency on taking more meaningful steps to address methane.

What in your view is the least effective climate effort or public policy?

The broad-based disdain for Canadian oil I find completely inexplicable. The free world (or what should be and once was the free world) is better off with a healthy and growing Canadian oil industry. From the narrow perspective of this American writer and energy analyst, we should be looking to maximize flows of Canadian oil to (or through) the USA in order to minimize flows of oil from geopolitically and environmentally less friendly countries. How is it that there are so many opposed to Canadian oil? I just don't get it.

Where are you most optimistic?

It's going to seem odd given my constructive view of crude oil demand, but EVs are awesome and clearly a superior product to many ICE vehicles. I am an EV growth bull. The issue is they are for rich people in rich countries. Thanks to highly developed credit markets, the mass affluent and even some in the middle class will find EVs accessible in coming years. But the idea that large swaths of India, the rest of southeast Asia, or Africa will be driving Teslas, Rivians, etc., anytime soon is a complete joke. You don't go from burning biomass to distributed solar grids with EVs. It is not anywhere near the same thing as skipping landlines for mobile phones. No way, no how.

What is the easiest step that could be taken to improve the outlook for a favorable mix of energy poverty reduction with less CO2?

Ban SUVs — both ICE and EV SUVs.

What is the second most important step?

Massively ramp nuclear power around the world. It might take 30-50 years to really do this, but that will then be 30-50 years sooner than the decarbonization track we are presently on.

What is the best thing oil and gas companies can do?

Provide the the oil and gas the world critically needs and takes for granted that allows us to live longer and live enjoyable lives to our fullest potential. We all owe a big thank you to the oil and gas workers of the world.

What is the worst thing oil and gas companies do?

The industry has not come up with a solution—be it basin, regional, country, or some other grouping—to address orphaned wells and other visible blights. I will guess (though don't know for sure and someone with greater facts can feel free to correct me) that the overwhelming bulk of these problem wells are from companies that no longer exist. How about industry self-police itself and clean up the mess created by the dearly departed. Where are the regulators on this?

Is there really no such thing as too strong of a balance sheet?

I was perhaps most surprised that while there was certainly a large pocket of support for my "fortress balance sheet" perspectives, there was a non-trivial amount of pushback from some of the smartest investors I know. It is worthy of a future stand alone follow-up note.

I will say that my writing does default to mega cap companies capable of being S&P 500 leaders with a multi-decade view of how to be a high performing going concern company. For small-caps and other niches, my core strategic recommendations may indeed not be the best strategy going forward. As I try to make clear but apparently haven't, I do not believe in a "one size fits all" approach to corporate development.

My personal default is how can today's generation of energy companies replicate the staying dominance that ExxonMobil and Royal Dutch/Shell demonstrated from 1910-2010. I think even my fantastic Super-Spiked subscriber base that appears to be mostly non-haters of the oil & gas industry do not believe there is much more than 1 major upcycle left before we permanently transition away from oil & gas.

I am much more optimistic. We know the world's thirst for abundant, affordable, reliable, secure energy is not going to end anytime soon. I believe it is entirely possible, in fact, necessary for at least a handful of today's oil and gas leaders to become the $ trillion companies that will help fuel tomorrow's growth. The future has the potential to be bright.

⚡️On a personal note...

Why is a retired Goldman partner otherwise writing seriously about the messy energy transition era publishing an energy transition playlist?

The Super-Spiked Energy Transition playlist is my artistic attempt to highlight the absurdity and ridiculousness of the approach being taken by certain global elites toward climate and energy policy. We are currently on-track for a worst of all worlds outcome (from the perspective of global citizens) of high and volatile energy prices with no meaningful change to our CO2 trajectory thanks to some really bad ideas regarding energy and climate policy.

In contrast and to end on an optimistic note, I am highly supportive of those that want to be part of the solution, which includes (1) ESG investors and environmentalists that are proactively engaging with traditional energy companies; (2) fossil fuel companies working in good faith toward addressing the industry's methane and orphaned wells issues, while profitability producing the oil and gas the world clearly still depends on; and (3) businesses and investors focused on new energy technologies that have superior attributes to traditional products or energy systems and are part of the path to a future of energy abundance, affordability, security, and reliability, ideally with as small of a environmental and carbon footprint as possible.

⚖️ 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.

Regards,

Arjun

💿 Super-Spiked Energy Transition playlist update 📼

There should be at least a handful of Super-Spiked subscribers that could make an educated guess on the ninth addition to the energy transition playlist. From the 1988 classic So Far, So Good...So What?, Megadeth's cover of the Sex Pistol's Anarchy in the UK is as obvious of an energy transition playlist song as any. Bedlam in Belgium spoke to European energy & climate policy failures. Anarchy in the UK is the unfortunate reality that regular people face as a result of those poor policy choices and representative of their right and need to peacefully protest government actions that are not in their long-term interests.

To acknowledge the all-important 3 month anniversary of Super-Spiked, the 10th addition to the energy transition playlist is Led Zeppelin's Celebration Day.

You can subscribe to the full Energy Transition playlist on Spotify or YouTube.

1. Concert for 2 Cellos in G Minor, RV 531: I. Allegro Moderato. Given Germany is at the center of energy transition policy madness, it seemed appropriate to use this song from Wolf Hoffman, lead guitarist of Germany's Accept, as the intro/outro for Super-Spiked Videopods.

2. Anesthesia (Pulling Teeth)/Whiplash. Energy transition is driving a new era of commodity price volatility.

3. Amazonia. All of us here at Super-Spiked (i.e., me) are on board with saving the Amazon Rain Forest and being more respectful of Indigenous Peoples.

4. Creeping Death. Signifies the risk of decreasing capital market access for companies that ignore substantive ESG principles.

5. I Can't Drive 55. A step change in fuel economy is the key for oil demand moderation this decade, but doesn't seem on-track to happen. Apparently no one outside of Europe and perhaps Japan can drive 55.

6. Bedlam in Belgium. In honor of the insanity otherwise known as European energy and climate policy.

7. The Mob Rules. A song ahead of its time in anticipating the apocalyptic climate change religiosity and cancel culture silencing that has come to dominate the early 2020s.

8. Sugar Magnolia. The rare cross over song that clearly pokes fun at the “sunshine and daydreams” attitude that 100% renewables represents a remotely sensible policy path or that oil & gas upcycles are only up and to the right.

9. Anarchy in the UK. Whereas Bedlam In Belgium represented the questionable energy & climate policy choices made by the EU and individual countries/regions within Europe, Anarchy in the UK acknowledges the pain and suffering of the regular people that suffer from the bad choices made by global elites and their right and need for peaceful protest against such policies.

10. Celebration Day. Celebrating the 3 month anniversary of Super-Spiked.