For what we need right now, there’s not a lot of ROI

Energy companies can’t see too much ROI in new fossil fuel projects, given the energy transition narrative.

And while oil, coal and gas will dominate until way more green comes online, more is still being burned and carbon allowance prices continue to go up.

Green energy demand for solar and wind (and more sunrise technologies) is increasing faster than it’s being supplied. But ROI is also lower than preferred given construction material and labour difficulties.

Green energy demand started for decarbonisation reasons, but demand is increasing because wind and solar are renewable/non-depleting sources which are not controlled by authoritarian despots, nor are they prone to supply shocks like oil is. But we still need scale.

Until then, natural gas is the transitional energy source of choice, and prices are still mooning (and feeding into chemicals and fertilisers and ultimately food) particularly in Europe and certain emerging/developing countries with weak currencies.

Due to Russian pipelines and war, this is most likely going to push Europe into a material economic contraction.

And if Madame Lagarde continues with her interest rate hike guidance, austerity will well and truly return to Europe with energy and food shortages as well as financial repression.

But where’s the panic?

Has oil increased to $150 barrel? Not yet.

Has the U.S. banned oil exports, like India just banned wheat exports? Not yet.

Has Europe as a whole (aside from some small landlocked territories) capitulated to take energy from Russia, but not enough to fund its war on Ukraine/indirect war on NATO countries? Not yet.

Has the price of mandatory carbon allowances in the EU gone up sufficiently for there to be sufficient panic from emitters? Not yet.

Has the Uranium price doubled? Not yet.

Despite the lack of recent investment in fossil fuels, the low ROI for new fossil projects, and the time it takes to deploy renewables (and at preferred ROIs while construction materials are up 30% plus) – it appears there’s still not enough panic on the global dancefloor to avoid an energy crisis.

This lazy slow dancing is still the case even despite COVID and supply chain shocks, Russia’s shooting war and China’s impeding awakening from lockdowns; and the intended demand destruction that will come as central banks plot and communicate their liquidity removal strategies.

It seems that is not enough.

It seems the cure is going to have to be even higher energy and commodity prices, until sufficient demand is destroyed.

With that as a likely backdrop, here are a couple scenarios:

1. (High price cure for high prices) Intentional demand destruction with energy rationing and fiscal/helicopter money provided to households and firms to tie them over, particularly if there is a complete embargo on Russian commodities; or

2. (Substitutes) Adoption of nuclear and advances in new technology (nuclear and hydrogen) to avoid the very long lead time for commodity project development.

Firstly, neither of these solve for food security.

But from an energy perspective, it’s the first scenario that’s more likely to occur (a well trodden path, nothing new) and cause enough panic to solve the problem as long as there is not too much largesse too soon, which will just encourage slow dancing.

I don’t know how the second off-ramp plays out in the short to medium term with so many governments and firms backing a huge range of alternatives. In doing so, they are spreading the global transitioning dollar way too thin and betting on some projects that may benefit a few, but not the many.

In the meantime, high prices may not lead to lower demand and a reduction in prices. Nor will the world be able to rely on China lockdowns to stifle demand once China moves out of lockdown (potentially soon) and if lower mortgage rates do anything for demand.

If that’s correct, it’s likely we will need to see even higher energy, mineral and food commodity prices before the panic does its trick - and that’s certainly what the equities and bond markets are saying in the price action.

Mike