⚡️March 31, 2022 will mark my 30 year anniversary as an equity research analyst covering the energy sector. At some point in college it was clear to me that I loved markets and finance. But I am an accidental energy specialist. How lucky am I to have fallen into a such a great sector to spend a career following. This post is dedicated to Dr. Ron Rizzuto of the University of Denver who recommended that I apply for a junior research associate position at Petrie Parkman & Co.; to Tom Petrie for taking a chance on someone who took a circuitous route through college and hiring me to his firm; and to Paul Leibman, my first boss, who intensely trained and mentored me from Day 1, and continued to actively support me in subsequent career stops at JPMIM and Goldman.
This week's post focuses on the number one question I have been receiving: What does Russia-Ukraine mean for the energy transition era we are in? Based on the positive feedback from the energy transition Q&A and clarifications post I did a month ago (here), I will return to this format on a regular basis. In a nutshell, I believe the current crisis will, when all is said and done, increase the probabilities of emerging with a healthier energy transition than we were otherwise slated to have.
In a nutshell, the world is, again, reminded, that you need to solve for all facets of energy and climate, that energy is primary, and too much carbon is a negative externality of a critical input to human progress. It is paradoxical, but I believe a de-emphasis of Malthusian "climate only" ideology will raise the odds that we ultimately de-carbonize in a manner that does not threaten global economic growth and human prosperity.
Question 1: Does Russia-Ukraine mean energy security is now more important than energy transition and climate?
Answer: No. And I reject the premise of the question. A healthy energy transition is one that solves for all facets of energy and climate, including availability, affordability, reliability, and security, all, ideally, with as small of a carbon and environmental footprint as possible. Done correctly (as opposed to poorly), decarbonization will, by definition, improve energy security.
Q2: But surely climate objectives are getting pushed to the right as the world refocuses on security?
A: Again, I reject the premise of the question. Pre-Ukraine, a motivation for starting Super-Spiked was that the world appeared to be on-track for a messy energy transition era characterized by high and volatile commodity prices without any appreciable improvement in the world's carbon trajectory. Our previous policy path was not a good one; we were not moving in a direction that solved for the multitude of energy and climate considerations.
Q3: I'll try it one more time. Aren't climate policies now going to be delayed to make room for more oil, natural gas, and even coal?
A: Goodness gracious, what are you not getting? "Climate only" policies in Europe and parts of the USA and Canada that were (1) focused on limiting domestic sources of "fossil" energy (2) emphasizing technologies that were not ready for prime time and cannot satisfy the full quartet of requirements—availability AND affordability AND reliability AND security; and (3) pretending a growing reliance on bad actors wouldn't be calamitous is why we were where we were pre-Ukraine. President Vladimir Putin's tragic decision to invade Ukraine simply made the inevitable materialize in 2022 rather than a future year.
Q4: So ill-advised EU climate policies are a contributing factor to the tragedy in Ukraine?
A: Absolutely not. President Putin bares full responsibility for the tragedy. Rather, ill-advised "climate only" policies contributed to Europe being excessively vulnerable to president Putin's actions from an economic and humanitarian standpoint. I believe this is now widely understood.
Q5: Why do those most passionate about the climate target DOMESTIC oil and gas companies for sanction and not recognize the obvious implications that you simply end up with greater leverage held by bad actors like president Putin?
A: I have no idea. I suspect it stems from their view that blames oil suppliers for emissions rather than recognizing emissions as a negative externality of human progress fueled by carbon-based energy. In the past month I will say there has been some movement to recognizing the mistake, but the ingrained ideology runs deep and has been hard for some to shake.
Q6: If crude oil and natural gas prices are prone to boom/bust cycles and large quantities are controlled by bad actors, shouldn't we double down on the efforts to move toward future, cleaner technologies?
A: Yes, of course. But that presupposes you are actually taking the steps to limit oil demand growth without incurring recession by, for example, reforming CAFE standards in the USA to effectively limit SUVs and motivate a switch to more fuel economic vehicles. It assumes that future technologies are actually reliable and not intermittent or that solutions to intermittency such as storage are economic and abundant. The list goes on. If you cannot ensure availability, affordability, reliability, and security (in aggregate, potentially through multiple overlapping technologies), you end up with what we currently call EU energy & climate policy—the highest power prices in the world and an absurd level of dependence on Russia. No country or region should strive to emulate the policies of the European Union.
Q7: I'll try this one again. Why are you calling for more North America oil and gas production, including an objective of 10 mn b/d of net oil exports from USA + Canada by 2030 (from about break-even today), when the world otherwise wants to decarbonize and reduce its dependence on traditional energy?
A: Because I live in a reality that recognizes we have 100 mn b/d of oil demand, of which USA + Canada provide about 23 mn b/d of supply (see this post). Even under aggressive net zero conditions—which pre- or post-Ukraine I did not think had even the remotest chance of being achieved by 2050—the world will almost certainly be consuming over 30 mn b/d by 2050 (I do not formally forecast to 2050, but would characterize my expected range as 75-120 mn b/d of oil demand, order of magnitude). It is in the interests of the United States of America and its allies for American and Canadian oil to be the "last barrels" produced in the energy transition era. Putting in place policies that shift oil dependency to foreign actors that do not share American values is easily the most disturing aspect of the die-hard climate movement. 10 mn b/d of net exports from USA+Canada would about offset Russian and Iranian oil exports.
Q8: How quickly can the world, and in particular the EU, move off Russia oil and natural gas?
A: There are no quick fixes, with supply shortages and resulting forced demand destruction a major risk over the next several years. Obviously there is tremendous uncertainty on how the conflict evolves in coming months and years. The longer Russia oil and gas stays on the market, the greater the odds that a combination of higher supply from non Russian producers coupled with demand side adjustments can help reduce the blow of losing Russia. That said, we seem to be inching toward a more disruptive path for Russian oil and gas supply (see this post).
Q9: Back to energy transition: Aren't we on-track to use more fossil fuels by 2030 than we would have pre-Ukraine?
A: I don't think so. Pre-Ukraine there was a growing recognition that solar and wind on their own are a poor form of base-load power generation, with nuclear easily the best low carbon solution we know of today. Post-Ukraine, momentum around nuclear is building. I also believe that oil prices that regularly cycle above, and potentially well above, $100/bbl will motivate a return to Americans caring about fuel economy, last seen in the 1970s during the Arab Oil Embargo years. For emerging economies, fuel economy should also taken on greater urgency. Finally, investment flows into all kinds of future, low carbon technologies are likely to continue the previous sharp upward trajectory. It will be technology—not bureaucrats, politicians, or policy ideologues—that solves our energy and climate challenges.
The long-term impact on electric vehicle (EV) sales post-Ukraine I think is less clear cut. It has long been my view that any noticeable hit to global oil demand from EVs would be after 2030 at the earliest. Weighing the pros/cons of basic materials price inflation and a likely weaker economic outlook that keeps the high price of EVs out of reach for large swaths of the western world versus the desire to decrease gasoline price exposure I suspect may net to a small negative (i.e., lower EV sales) from my prior expectations. Perhaps it is simpler to conclude that my prior view that any impact from EVs on oil demand wouldn't really be noticeable until post-2030 still holds.
Q10: What is a public policy step the Biden Administration and Congress could take to improve our energy outlook?
A: First and foremost, how about one simple over-arching objective: take steps that can lead to a decrease in US oil demand AND an increase in US and Canadian oil and natural gas supply. I am sure this has zero chance of happening (apologies for the uncharacteristic pessimism and prejudgment), but carve out the sensible climate provisions in Build Back Better and combine it with an oil, gas, and LNG pipeline and infrastructure build-out plan that streamlines permitting and environmental reviews and limits the ability of extremists to stand in the way of American and global energy availability, affordability, reliability, and security.
While they are at it, how about eliminating the politicization of federal permitting of oil & gas leases, but, in exchange, figuring out a combination of rules, best practices, and possible regulation that ensures American (and Canadian) oil and gas move to being the lowest carbon barrels in the world on Scopes 1 and 2 inclusive of methane. More American and Canadian oil and natural gas supply coupled with less American oil demand is good for America, good for the world, good for the climate, and can lead to a healthier energy transition era.
⚡️On a personal note...
Q1: What has been the best part of covering the energy sector over the past 30 years?
A: It is a global sector and I have been able to travel, learn about, and meet people around the world.
Q2: But why stick with energy all these years which is not as popular or hot as say tech?
A: That's true and I personally love tech and the technology sector. But no one goes to war over iPhones or Office 365. The user base of technology is usually limited to a few billion people at most. EVERYONE on Earth wants to use energy. Unfortunately, there are perhaps 1 billion people that do not have access to modern energy and another 2 billion or so that are generally energy poor. Crude oil is perhaps the most important global economic sector, even if at times it is very out of favor. You can live without Netflix. Society deteriorates quickly when the power goes out. Mad Max was not a movie about a world without SAAS.
Q3: Would you support your children working in the oil & gas industry?
A: Yes. 100%. Oil & gas is an industry critical to human progress and one that would benefit from attracting more young people who don't live in the vicinity of where most companies operate (i.e., Texas and Oklahoma). To be sure, I would still focus on companies that were forward looking on how to generate competitive through-cycle returns on capital and free cash flow, with as small of a carbon and environmental footprint as possible. I think my kids would be pleasantly surprised at how much friendlier people in Texas are than the typical Tri-State Area person.
Q4: Worst media take on my Super-Spike call (2000s era)?
A: While we are going through career anniversary perspectives, March 30 marks the 17th anniversary of the “Super-Spike” report that garnered significant investor and media attention. I hated it at the time but it is now a source of pride: having Matt Taibbi include me in his famous Vampire Squid article about Goldman Sachs (here). He did not know me, we never spoke, and he appeared to splice a bunch of stuff together based on the small number of external media articles I had participated in (I was firmly anti-mainstream media in those days). I do not believe his take on Goldman Sachs, our commodity views, or our impact on commodity markets was correct then or now.
I still remember one of my all-time favorite junior analysts coming into my office and saying just a heads up that there is this dumb reporter from that lame Rolling Stone magazine who wrote some stupid article about Goldman and I think you may be in it...you're not going to want to even waste your time reading it. I'll keep him anonymous and simply refer to him as "Joseph" as many of my former juniors believe they were each the "best"—they were in fact almost all great, I was very lucky. Kudos to "Joseph" for keeping me in the loop.
As it turns out, I am now one of Matt Taibbi's biggest fans and a paying subscriber to his great Substack, TK News by Matt Taibbi. Everyone reading this should sign up for his paid subscription (here). You won't be disappointed. Perhaps he has matured or I have gone soft, but the work he does calling out the problems with the mainstream media is much needed and very well done. I will guess that he probably still doesn't like Goldman Sachs. But I do appreciate his calling out so many of the ills that plague current American mainstream media culture. And his in-your-face style is something I admire and, perhaps, have found some common ground with.
Q5: Best decision I made at Goldman?
A: Retiring as a partner in 2014 to spend more time with my family, including my then middle-school aged kids. It's not a close call on how great of a decision this was. No amount of foregone partner compensation could buyback the time I had (and still have) with them. I think men (traditional definition where sex assigned at birth, gender identity, and gender expression all still align) in particular usually get too wrapped in the identity of their careers. Guys, you are missing out. If you think being home means doing a bunch of chores and being bored, nothing could be further from the truth. Skip the chores, play golf, and get a home Bloomberg terminal!
⚖️ 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
Hi Arjun, nice to meet you in the substack zoom. I'm looking fwd to reading your posts :-)
"Mad Max was not a movie about a world without SAAS." Literally LOOOL 😆 Thanks Arjun, great post as usual!