What an enjoyable read! Thank you Arjun and team. I personally like the energy sector a lot but in these times of great volatility my inner conviction is tested. The information you provide and the manner it is presented supports the confidence I need to remain committed to the conventional energy thesis. Go O & G.
Excellent summary. I’m nodding my head in agreement across the board, especially in regard to our $33+ trillion and growing national debt. You may have seen the just reported yesterday $1.7 trillion deficit for fiscal 2023. Ouch. That amount plus any borrowings currently maturing are now being financed at much higher rates. It’s somewhat of a possible scary geometric progression.
Meanwhile, yesterday China announces graphite export restrictions. Which EV enthusiasts had that potential risk correctly modeled? Shouts of more subsidies to be expected because.....”the transition”.
Always the first thing I read on Saturday mornings! Throwing some thoughts out to the comment section:
If I could summarize the alternative view, not directly opposing a super-vol framework, but a sort of longer-term bearish framework (basically Citibank's view), it seems to be this:
(1) O&G gas demand has peaked, or will soon peak, due to EV's/transition/etc. (you've addressed this at length already);
(2) China's large SPR reserves put a cap on oil prices somewhere around $100 every time we get near $100 in the cycle;
(3) there is significant spare capacity in OPEC of 5M+/barrels/day;
(4) that US shale still has a lot of production left and keeps surprising to the upside.
This view sees plenty of supply available to meet price spikes every time we get one, so the spikes will be smoother and shorter, more like the last cycle than a new super-vol one. Personally I don't understand how that view can so easily discount the constrained CAPEX and two major hot-war conflicts in this cycle, but they don't see it as a significant supply problem.
Regarding unsustainable wealth country spending and debt levels, particularly post-GFC: "That said, it will matter when it matters, and we cannot rule out that it could be within the coming decade." Ray Dalio's work on this is great, he's my go-to for macro debt and spending, I would highly recommend to anyone Principles for Navigating Big Debt Crises available for free as a download https://www.bridgewater.com/big-debt-crises/principles-for-navigating-big-debt-crises-by-ray-dalio.pdf.
People only do the first order thinking, two years ago, believed that the raise of the O&G price would increase the competency of solar, wind and EV. However, they did not realize that increase of the O&G price will also increase the material cost of the renewables and EV. More importantly, they failed to realize that high O&G price will drive up inflation and thus the discount rate of assets across the board. The renewables and EV all incur big front cost and are supposed to recover the benefits slowly over the entire lifetimes of their use. The rising of discount rate is a killer of the valuation of these (high P/E) long duration assets. The Bloomberg column described the problems really well. https://archive.ph/0oPFk
One risk is that the Western government double down their green energy transition and impose windfall tax on traditional energy companies (when these governments are desperate for the money) .
It's certainly revealing the fact that the economics of renewables is nowhere near as straightforward as climate hawks would lead you to believe. Some of this is healthy correction that impacts all sectors. Some of it is recognition that all this stuff is much harder than most realize.
As always, excellent. The good news on Canada is that on October 13 the Supreme Court ruled that "keep it in the ground, don't invest in Canada" federal environmental policies violate Canada's federalism. This is a big win for the powerful, resource-rich provinces (especially Alberta) whose leaders are far more conversant with energy realities than the federal environmental minister, a former Greenpeace activist whose clique also sought to eliminate nuclear from policy supports: https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/101623-canada-to-amend-environmental-law-in-line-with-supreme-court-ruling-ministers
What an enjoyable read! Thank you Arjun and team. I personally like the energy sector a lot but in these times of great volatility my inner conviction is tested. The information you provide and the manner it is presented supports the confidence I need to remain committed to the conventional energy thesis. Go O & G.
thank you Tim!
Excellent post. Again. Thanks.
thank you derek!
Excellent summary. I’m nodding my head in agreement across the board, especially in regard to our $33+ trillion and growing national debt. You may have seen the just reported yesterday $1.7 trillion deficit for fiscal 2023. Ouch. That amount plus any borrowings currently maturing are now being financed at much higher rates. It’s somewhat of a possible scary geometric progression.
Meanwhile, yesterday China announces graphite export restrictions. Which EV enthusiasts had that potential risk correctly modeled? Shouts of more subsidies to be expected because.....”the transition”.
Missed that China news...thx for mentioning.
I harken back to the words of a long time ago, grumpy, Scot former boss. "Nothing matters, until it matters, and then its too late." WISDOM.
100%
Always the first thing I read on Saturday mornings! Throwing some thoughts out to the comment section:
If I could summarize the alternative view, not directly opposing a super-vol framework, but a sort of longer-term bearish framework (basically Citibank's view), it seems to be this:
(1) O&G gas demand has peaked, or will soon peak, due to EV's/transition/etc. (you've addressed this at length already);
(2) China's large SPR reserves put a cap on oil prices somewhere around $100 every time we get near $100 in the cycle;
(3) there is significant spare capacity in OPEC of 5M+/barrels/day;
(4) that US shale still has a lot of production left and keeps surprising to the upside.
This view sees plenty of supply available to meet price spikes every time we get one, so the spikes will be smoother and shorter, more like the last cycle than a new super-vol one. Personally I don't understand how that view can so easily discount the constrained CAPEX and two major hot-war conflicts in this cycle, but they don't see it as a significant supply problem.
Regarding unsustainable wealth country spending and debt levels, particularly post-GFC: "That said, it will matter when it matters, and we cannot rule out that it could be within the coming decade." Ray Dalio's work on this is great, he's my go-to for macro debt and spending, I would highly recommend to anyone Principles for Navigating Big Debt Crises available for free as a download https://www.bridgewater.com/big-debt-crises/principles-for-navigating-big-debt-crises-by-ray-dalio.pdf.
Investor, I think you have captured well the opposing ("Super Calm"?) view. As you will appreciate, on those points my views are:
(1) Disagree strongly.
(2) Agree that China has built inventories and wouldn't disagree this could matter in coming quarters.
(3) Disagree with magnitude. Saudi has 1.5-2.0...some spare in UAE. not sure much anywhere else and now Iran has already brought a bunch back on.
(4) This is worthy of debate and I'd agree would be the main item that would push out a super-cycle in particular.
Haha, "Super Calm", that's a good description. I think I'll use that from now on.
People only do the first order thinking, two years ago, believed that the raise of the O&G price would increase the competency of solar, wind and EV. However, they did not realize that increase of the O&G price will also increase the material cost of the renewables and EV. More importantly, they failed to realize that high O&G price will drive up inflation and thus the discount rate of assets across the board. The renewables and EV all incur big front cost and are supposed to recover the benefits slowly over the entire lifetimes of their use. The rising of discount rate is a killer of the valuation of these (high P/E) long duration assets. The Bloomberg column described the problems really well. https://archive.ph/0oPFk
One risk is that the Western government double down their green energy transition and impose windfall tax on traditional energy companies (when these governments are desperate for the money) .
Spot on. High inflation and high interest rates (partly due to high energy prices) are making many renewables projects uneconomical.
It's certainly revealing the fact that the economics of renewables is nowhere near as straightforward as climate hawks would lead you to believe. Some of this is healthy correction that impacts all sectors. Some of it is recognition that all this stuff is much harder than most realize.
Thank you Arjun!
Excellent!!!!
Thank you Angel!