Rishi’s petrol pivot and Rosebank

Last week, UK Prime Mininster Rishi Sunak made a significant decision.

You can read about it here, but in simple terms the UK government has decided to change a crucial commitment related to environmental issues by extending the deadline for selling new petrol and diesel cars and the phase-out of gas boilers - and pushing it out 5 years, from the year 2030 to 2035.

Although we haven’t made a similar commitment here in Australia, several other countries and states have pledged to ban the sale of petrol cars in developed countries by 2035 and in developing nations by 2040, with one or two earlier and one later.

Norway’s commitment is the earliest, being 2025 (less than 2 years away now) followed by Belgium by 2029; and then we have countries like Portugal, Italy, Greece, Germany and some others by 2030. Then in 2035 comes the U.S. Government (in relation to all government vehicle purchases), the State of California and now the UK.

Whereas most countries that have made a pledge (at least 28 of them) have committed to a full phase out by 2040; and Malaysia has said that it won’t do away with the gearbox and tailpipe until 2050.

Question: Will Sunak be the first or the last leader to pivot on his country’s petrol and diesel car bans/environmental commitments?

And prolonging the petrol/diesel car phase out is not the only recent recalibration of the UK’s climate plans. Yesterday, the controversial Rosebank offshore oil and gas field (UK’s largest untapped oil/gas field, some 80 miles north of Shetland) was granted development approval.

While they’re busy pivoting on commitments in the UK, here are a few perspectives for you to consider.

First, here’s a ‘so what?’

Extending the deadline by 5 years to 2035 (consistent with some other countries) may not sound like much, but it carries more weight than you might think.

Rishi’s petrol pivot sends some important signals.

Firstly, it reminds us that the shift toward a greener environment is tied to politics. It's not just about saving the planet; it's a political move.

Secondly, it raises questions about whether the goals of achieving "net zero" emissions are overly ambitious.

Thirdly, dealing with rising prices and ensuring a stable energy supply are increasingly moving higher on governments' priority lists, and above that of combatting climate change, as I discussed in last week's blog.

Finally, this change opens the door for other countries to reconsider their plans in relation to the timing of their environmental commitments.

And by making this announcement ahead of the Global Stocktake in November, the UK is giving other countries a heads-up and avoiding embarrassment as everyone will have already heard about the deadline extension.

And now there’s Rosebank as well (more on that later), but oh well, nothing like getting all the bad news out well before COP28.

What does this mean for the future?

• Temporal implications

It’s evident that the pursuit of stable prices and energy security in a geopolitically unstable world has become more important for governments than environmental concerns, as discussed above.

Call me a cynic but given where we are with inflation and interest rates and the real necessity to heat, cool, power and grow food, it’s hardly surprising.

It means that the transition to a greener world (via renewable energy and batteries) will take more time than initially committed to by various governments.

In the meantime, this and similar moves could, as noted in last week’s blog act as a sort of ‘higher for longer’ thermal wind for fossil fuel and uranium (demand and prices) and in turn ‘crowd out’ investment in some of the future facing minerals and technologies - at least until monetary policy is relaxed and geo-political commodities whack-amole slows down.

That is to say that it might slow down the demand/price trajectories for materials like lithium, graphite, and rare earth minerals (for BEV batteries/permanent magnets, wind turbines) and which are predominantly under Chinese ownership.

Perhaps not significantly just yet, but pricing includes more than a couple of scoops of psychology and sentiment.

• Financial implications

And what about the cost to get to net zero, if that’s even possible during your and my investment horizon?

Well, whether its $75 trillion or $150 trillion to achieve net zero, the main ‘enabling’ expenses will fall on governments because asking consumers to directly foot the bill is improbable.

If that’s correct, then we as business owners and households will indirectly foot the bill.

In short, there’s currently not enough productivity, taxes and bond issuance (that’s going to be attractive enough at low yields) to afford it all.

That. and the massive underinvestment in commodities and resulting supply deficits means we can’t fund/have it all - and governments will have to consistently reevaluate how they prioritise the S, G and E.

And on that, the UK has failed to impress on yet another environmental front with the controversial approval of Rosebank.

Yesterday, in what was labelled by British MP Caroline Lucas as the greatest act of “environmental vandalism” in her lifetime, the North Sea Transition Authority approved development of the Rosebank Field.

Rosebank’s sponsors have estimated peak daily production of 69,000 barrels of oil and ~44 million cubic feet of gas per day, in its first 10 years - and that it could be up and running by 2026 and supply 8% of the UK’s needs.

So, what's the answer to today's question?

My guess is that Sunak won’t be the last to pivot on his country’s petrol and diesel car bans/environmental commitments, and the UK won’t be the last Paris Agreement signatory to approve new oil and gas developments.

These rollbacks are indicative of broader trends in how governments are approaching social and governance issues over the environment and may prove to be the first of a number of high-profile commitments which need to be reevaluated, given the following macro forces:

1. Still high and sticky inflation in major consumer economies.

2. Slowing China growth leading to lower global growth and tax base.

3. High food and energy prices in a post-COVID/Russia world.

4. Changing geo-political trade flows and trade-warring.

5. The much higher cost of capital today versus when the commitments were made.

6. The expected higher cost of (deficit funding) capital, via treasury and bond markets.

If so, we will see a series of demand increases for a range of under-supplied transitional commodities (expressed in higher fossil fuels, uranium prices) and over-supplied financial assets (expressed in higher bond yields) given the next multi-trillions required to fund current deficits as well as environmental targets.

In the meantime, see you on those higher for longer price thermals, but watch out for the air pockets on the way up - it could get bumpy.

Mike