The Truth About The Global Energy Transition

It’s Not Easy Being Green

It's not just the sad mantra of Kermit the Frog. The Biden Administration has found itself stuck between its ambitious green agenda and the harsh realities of high oil and gasoline prices. For investors, it opens up a lot of risks and a lot of new opportunities. 

The energy transition is a double-edged sword. Just ask Europe. 

Regardless of the predictable banality of American partisan politics, there will be a price to pay for the transition. There’s always a price. The trick is in balancing it out and getting the timing right. It will require brains that can process a multitude of variables simultaneously, and they likely don’t exist in the corridors of power (past or present), consumed as they are with obtaining and maintaining… power. 

That means we are in for a rather wild energy ride, in case you haven't noticed yet.  

Europe has now found out the hard way that renewables aren’t quite where they need to be to fill in the gap during a natural gas shortage and a price spike. They’re too intermittent, and Europe, which relies on an impressive amount of wind power, suffered a rather windless summer, so there wasn’t enough in storage when the natural gas crisis hit. This isn’t all about Russia refusing to pipe more in, though that surely will be a geopolitical chip that Moscow cashes in at some point. 

The provinces in China’s sprawling industrial heartland are suffering from severe energy shortages that are leading to factory shutdowns and prompting provincial governors to sound the alarm bells and even plead for more coal imports. Nearly half of China’s industrial output is being impacted and that will drive its GDP growth forecasts down significantly. As in Europe, this isn’t just about a global contagion of soaring natural gas prices. Beijing has implemented carbon reduction targets that are stringent and force provincial governments to impose power cuts to stay on track. Those carbon reduction targets are non-negotiable. 

In the U.S. - where stringent carbon-reduction targets are more of something on the wishlist, and where the market has a more solid seat on the throne - similar consequences are starting to loom; at least in theory. For America, it’s more about the low-hanging fruit. 

While the White House is working to derail oil and gas pipelines and (so far, unsuccessfully) suspend oil and gas leasing on federal lands, it also has become desperate to bring down high gasoline prices threatening to undermine economic recovery. So in this desperation, suddenly we see a resurrection of America’s geopolitically strategic plan of becoming one of the world’s biggest LNG exporters. Key players in the LNG export arena are now eyeing big new builds to take advantage of global shortages. An LNG boost also serves Washington’s needs to ensure there is enough supply for the coming ‘transition’ years. Ensuring supply to Europe (as a hedge against Russian gas games) will help avoid a global market blowout and a severe global supply crunch. This game is, after all, global (a notion many tend to overlook).

American LNG is the big compromise. 

Pleas to OPEC to control prices will go heeded only when it suits OPEC. In the meantime, oil and gas are getting more expensive by the day, and a number of scenarios will drive them higher, including seemingly smaller developments such as a move to get China to stop funding coal projects abroad and Washington’s potential crackdown on oil and gas methane emissions further afield. 

The end result means that the “transition” away from fossil fuels will be a bonanza for oil and gas investors in the medium-term - but only if economic recovery isn’t the driveby victim in a scenario in which oil and gas prices rise so high that industry can’t function and demand dives to a point that not even a pandemic could take it. That's the real risk facing America right now.