What Does “Energy Pragmatism” Mean for Climate & Sustainability?

The Rise of The Energy Pragmatism Era

There has been a lot of talk—maybe too much talk—about energy pragmatism, realism, and balance returning to the energy discussion. For us, the shift in narrative has signified that the wider world is recognizing that an aggressive energy transition defined as out of fossil fuels and only into renewables over a short time frame (by energy industry standards) was neither advisable nor possible.

A line of questions that has since arisen is what does being pragmatic actually mean? Is this just anti-woke virtue signaling that fits the current political moment? What happens when political winds inevitably blow back in a different direction? What does any of this mean for previous climate and sustainability objectives and wide-spread “net zero” frameworks, promises, and aspirations for countries and corporates? What examples exist of actual pragmatic actions being taken by countries? How should corporates think about navigating the uncertainty?

We recognize that there is a contingent of Super-Spiked subscribers that view all discussion of climate, decarbonization, and sustainability as pure nonsense. There is also a subset that believes we are in a “climate crisis,” where the risks of continued growth in carbon emissions means that significantly stronger “climate action” is in fact at least as important, if not more so, as energy for development and general economic growth. We value all of our subscribers and feel some sense of pride that we attract an ideological bell curve of readership, but we do not ourselves fall into either extreme.

As a reminder and perhaps a warning of what follows, the theme is pragmatism! And as usual, we apply an equity research analyst’s mindset to the topic, which means our primary goal is to objectively analyze the energy sector and make a call on where we believe the world is headed. We try our best to distinguish when we are expressing personal views on what we think should happen versus what our analysis indicates is actually likely to occur. As always, feedback, pushback, and praise are all welcomed.

How do we define energy pragmatism?

Pragmatism to us means acceptance of the reality that all people in all countries at all times prioritize availability and reliability followed by affordability over any other aspect of energy (Exhibit 1). It is primarily governments that recognize the relevance of energy being geopolitically secure, though governments also appreciate that ensuring energy is reliable and affordable trumps geopolitical security during periods of energy price spikes (e.g., start of Russia-Ukraine conflict, etc.). It is only when all these basic considerations are met that the world turns to luxury topics like reducing the carbon intensity of economic growth and other environmental considerations.

For the past 4-5 years, the rich western world attempted to invert the hierarchy of needs or pretended that people would give equal weighting—the so-called “energy trilemma”—to carbon reductions, reliability, and geopolitical security. The trilemma language was no more accurate or helpful than “urgent energy transition” pleas. Both reflect a fundamental mis-understanding of human behavior and revealed preferences.

When Germany lost access to Russian gas, German citizens spent no time celebrating reduced carbon emissions or giving equal thought to pondering the carbon impact of replacement fuels versus reliability and geopolitical security. They did whatever they could to replace Russian gas with other energy sources as quickly as possible, in this case by importing expensive LNG (liquefied natural gas) that was otherwise heading to less rich developing countries and by burning coal. German citizens are not alone in making these kinds of choices. Everyone on Earth acts the same way.

Exhibit 1: Energy’s natural hierarchy of needs

Source: Veriten.

So pragmatism means environmental goals either don’t matter or take a back seat to economic gains?

Nope. Clean air and clean water we see as 100% correlated with societal wealth—it’s not even a close call. Women’s rights also go hand-in-hand with economic gains. Pro energy abundance, pro-growth policies are pro women.

But what about climate concerns? How does that factor into a “pragmatic” world view?

We see no evidence that anyone anywhere is willing to sacrifice availability, reliability, affordability, or geopolitical security to save on carbon emissions. Is there even a single example of such a choice being made? Being pragmatic recognizes that until you solve for everyone on Earth some day becoming energy rich, you are not going to achieve any other objective. No amount of fear mongering—justified or not—about how much worse Earth’s climate might become based on various degrees of additional warming will change the fact that every person on Earth will choose adaptation over the alternative of lower-income lifestyles. This is not a personal viewpoint. It is an observation of reality.

Our personal view is that we would be willing to ban SUVs (sport utility vehicles) as a means to meaningfully improving the multiplier of economic growth to gasoline demand via significant improvements in realized fuel economy. We also support putting a price on carbon in exchange perhaps for lower income tax rates. We have many similar examples of polices we support. Neither of these two examples seems likely to occur. As an analyst, we conclude (oversimplifying here to avoid making this section unnecessarily long) that bending the curve on oil demand is really hard and neither citizens nor governments want to make the choices that might drive a more meaningful moderation in oil consumption, as an example.

If the world is trending toward everyone gaining western-equivalent lifestyles, how much warming are self-declared pragmatists OK with?

We really enjoyed listening to a recent Columbia Energy Exchange podcast hosted by my friend and colleague Jason Bordoff, founder of the Center on Global Energy Policy (CGEP) at Columbia University, that featured David Turk, who was Deputy Secretary for Energy during the Biden Administration (here). We had the great pleasure of meeting Mr. Turk during CERAWeek and look forward to interacting with him at CGEP. On the podcast, the former Deputy Secretary posed a provocative question to all of us pleading for greater energy pragmatism (paraphrasing): “How much warming are you OK with if you don’t believe climate should be the priority?”

This will likely be an unsatisfying answer to those that are sincerely concerned about the potential negative implications of further warming, but it is not going to be up to us as Lucky 1 Billioners to decide how much additional warming is acceptable. We frankly simply do not know how much carbon emission-driven additional warming will occur over the next 50-100 years. While we are skeptical that peak oil, natural gas, or coal demand is on-track to occur any time soon, which we will define as before 2040, we also do not know the timing and pace of technological breakthroughs in non-fossil fuel energy sources, the pace at which developing world economies will advance, and a host of other assumptions that will determine the ultimate path of carbon emissions.

We hold a counter-intuitive view that the faster the developing world advances economically, the stronger will be the pressure to commercialize alternatives to traditional energy. Our long-standing example is Indian oil demand. In a future world where India is western-world rich, we see little appetite for it to grow its oil demand from the current 6 million b/d (~1.5 barrels per person per year) to something approaching 45 million b/d (~10 barrels per person per year). Somewhere along the path from 6 to 45 India will figure out viable transportation fuel alternatives. As a first step, we would suggest that the Indian government consider vehicle weight restrictions so that the country does not follow the USA down the SUV-ification path, as one policy that can ensure it maximizes its GDP to energy usage ratio.

China is an example of a country that is making significant efforts to bend the curve on its crude oil imports at a time it has only achieved middle income status. China seems unexcited to be the world’s largest oil importer.

All developing world countries WILL prioritize economic growth over carbon emissions if faced with the choice. The Colonial Era officially ended with World War II. There is no leader or person in the rich, western world that will be able force developing world countries to make different choices that some of you think would be best. Therefore, we do not view it as a relevant question “as a self-declared pragmatist, how much warming are we OK with?” It’s not up to us as affluent Americans (or Western Europeans or Canadians) to decide!

So being pragmatic means giving up on the idea of global decarbonization?

No, it doesn’t mean that. It means that there is no logic in pretending the world’s hierarchy of needs is anything other than what human behavior and revealed preferences shows at all times. Within a framework that recognizes that everyone aspires to be energy rich, there are two natural motivations that will drive reductions in the carbon intensity of economic growth.

• First, it is in every country’s interest to increase its multiplier of economic output relative to energy input.

• Second, it is in every country’s interest to improve geopolitical security and affordability of energy, even while prioritizing availability and reliability.

For countries that are short (i.e., have insufficient domestic quantities of) crude oil and/or natural gas, especially those that are billion-person scale, there will be a natural motivation to crack the code on alternative sources of energy. We already see evidence of this view in China.

What are some examples of pragmatic versus non-pragmatic policies?

Pragmatic: Maximizing optimal, long-term oil and natural gas production from your own country.

Unpragmatic: “Keep it in the ground” policies or de facto policies (e.g., pipeline obstructionism) within your own country. The idea that a country should show climate leadership by disadvantaging the development of their own oil or natural gas resource was a fatal flaw in the policies that were pursued by many western leaders over the past 4-5 years.

Pragmatic: Recognizing that sensible energy policies includes strength in traditional oil and natural gas, but also new energy sources like solar, wind, batteries, nuclear, and geothermal.

Unpragmatic: Favoring either traditional energy over alternative energy or vice versa. The fact that there are partisan tilts (in the USA) to energy sources is nonsensical.

Pragmatic: Important industry trade groups self-regulate the domestic oil and natural gas industry (upstream, midstream, downstream) to achieve near zero methane emissions by 2030.

Unpragmatic: Pretending the political party you favor will have a permanent majority for the rest of time and that all you need to do now is overturn all the stuff the previous administration did.

Pragmatic: Recognizing that everyone on Earth aspires to attain the lifestyles we take for granted in Lucky 1 Billion countries (USA, Canada, Western Europe, Japan, Australia, and New Zealand).

Unpragmatic: Lecturing the developing world to “leapfrog” into higher cost, less reliable energy sources for all future energy needs, or, worse, suggesting that it simply isn’t possible for everyone to some day gain our lifestyles.

Pragmatic: Recognizing that natural gas is an important future fuel.

Unpragmatic: Pretending that natural gas is always the lowest cost alternative in all areas; in some areas coal will be preferred and in others solar plus batteries. There is no one-size-fits-all-countries energy source.

Pragmatic: Recognizing that alternative energy has some major advantages over traditional energy when it comes to geopolitical security and capital flows (zero variable cost) even if it is not necessarily the least expensive form of energy (location dependent).

Unpragmatic: Claiming that renewables (plus perhaps batteries) are the answer in all locations. That is obviously not the case.

Pragmatic: Favoring solar plus batteries in countries like India that have high solar radiation throughout the year.

Unpragmatic: Prematurely retiring nuclear plants in order to install solar and wind in a northern latitude where a specific word, dunkelflaute, is needed for the apparently frequent occasions when there is neither sun nor wind.

Is “Net Zero by 2050” dead or deferred?

Net Zero by 2050 never made sense to us as a defining societal objective or as a target individual, mostly western, companies should have. At the risk of repeating some of our prior points:

• No person or country prioritizes carbon reductions over other energy objectives. Net Zero by 2050 was always an unnatural inversion of our hierarchy of needs.

• We do not know the time frame by which a range of new technologies will commercially ramp, making specific dates and the pretense of deterministic energy pathways problematic.

• For non-energy companies, we would guess corporate net zero promises or aspirations reflected a lack of understanding of the energy sector and the viability of making such promises. We credit large technology companies for having improved their understanding of energy systems and economics in recent years. We suspect many industrial companies have also come up the learning curve on energy.

• Only a handful of traditional energy companies promised to achieve “net zero by 2050” on the basis of Scope 1 +2 + 3 emissions. All of those companies are in the process of back tracking on those goals.

• We have seen leading commercial banks recognize the folly of joining ill-conceived, carbon control clubs like the Glasgow Financial Alliance for Net Zero (GFANZ). That effort has mercifully been de-fanged.

• When circa 80% of the world’s primary energy is still coming from crude oil, natural gas, and coal—a share that has barely budged over the last 20 years—we believe no company (or certainly very few) can credibly claim to be on-track for net zero carbon emissions using Scope 1 + 2 +3. All corporate promises ought to fade away.

• We believe companies that do still have such promises will first start by extending the time period by which they will “achieve” the goal; and they will then stop talking about it, as it will be well beyond the tenure of current leadership.

• The fact that we do not favor net zero frameworks should not be confused with our view that companies should look to improve energy efficiency (decrease carbon intensity of energy usage) and address solvable issues such as methane emissions.

⚡️On A Personal Note: Maybe a return to office isn’t so bad?

When I originally stopped working full-time in 2014, I rejoiced at the realization that I no longer needed to go into Manhattan every day. No one likes their commute into the city. It is simply how many degrees of misery and pain can you endure and for how long.

Well before Zoom was a thing, I was a great work-from-home person. I first noticed when my oldest was born in the early 2000s that if I could log on and get work done while traveling around the world, surely the same would be true from my home. So I simply started working from home on summer Fridays without asking anyone for permission. The very notion of a work-from-home policy did not exist in 2006.

I loved having a break from the New York City commute and doing nursery school drop offs and pickups. I had made managing director by this point and my view was that so long as I was a top ranked analyst (by Goldman metrics), why should it matter where I worked. Summer Fridays turned into year-round Fridays, until I became co-Director of Research in 2012, which was definitely a 5-days-a-week in person kind of job. No wonder I eventually rejected the role!

During my 8-year post-Goldman, pre-Veriten stretch, I fully embraced remote board and advisory work. I think I was as prepared as anyone for COVID-driven stay at home. I have welcomed the advent of Zoom and Teams and the broader societal embrace of virtual meetings.

Since February I have had a couple of extended stretches in Houston where I was in the Veriten office for a week at a time and in town over the weekend. I have to say, the idea of being back in an office is growing on me. Credit to Maynard and everyone on Veriteam for what is a great office environment. And I am remembering that I used to love being in the Goldman offices, visiting sales and trading, and being amongst the broader research team. It was the daily commute that I despised.

Logistically, East Coast to Houston is of course a worse commute than the suburbs to New York City. But with the kids now out of the house, we just need a solid travel logistics plan for our golden doodle and going south, at least during the winter months, for an extended stretch of time seems like a reasonably good idea. We prefer Texas to Florida anyways and I do love the Veriten offices.

It needs some more decorating but I am a fan of my Veriten office

Source: Veriten.

⚖️ 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.