Middle East - 247 - Energy Price Bubble: A Wake-Up Call

2020 was a black swan of a year but its ripple effects may cost the global economy more than the year itself. 2020 commenced with oil prices crashing, stockpiles in abundance, reduced demand for discretionary products, and a global shutdown. While the lockdowns lasted for more than a minute, the period is still known as the shortest recession in history. The recession may not have lasted too long, however, the recovery to normal may take a while. Global demand bounced back much faster, and the supply lagged pace for several reasons. The globe must adopt a more proactive approach to bring back the pre-pandemic equilibrium between demand and supply. Else, price bubbles may become more common.

The entire globe was anticipating the COVID vaccine, but none planned for what will happen after the vaccine arrives. Today, cars are back on road and economies are enabling travel, but energy sources are a handful. 2021’s winter has brought an energy crunch, a supply chain fiasco, and green initiatives treaties all at once; aggravating prices.

In 2019, at par with the green initiative measure, the United States mined 706 million tons (MMst) of coal — the lowest total since 1978. Spurred by the pandemic in 2020, U.S. coal production totaled 535 MMst in 2020, a 24% decrease from the 706 MMst mined in 2019. While doors to conventional energy were shut swiftly, the world has not yet transitioned as promptly to sustainable energy sources. The unavailability of traditional raw materials and the unwillingness to switch right away to alternatives is the root cause of energy price fizz.

Europe has been bracing for a tough winter and the energy crisis is at the whimsy of the weather. Environmental policies have also pushed some countries to shut their coal and nuclear fleets, reducing the number of power plants that could serve as a backup in times of shortages. Additionally, China has jumped back into the LNG spot market, with one of its top importers releasing a large purchase tender for a strip of cargoes through March. Prices of raw materials are so high in Europe that two major fertilizer producers announced they were curtailing production in the region. Moreover, as Chinese utilities in Beijing tussle in bidding wars for fuel shipments, the price to produce electricity and heat homes has surged. The international spike in demand has caused increased energy cargoes from the US, creating an inflation bubble.

The depletion of upstream produce has caused turmoil in the downstream industry, adding to the supply chain mess. While governments have shut coal-based plants, no progress has been made to induce wind, solar or nuclear energy to support industries. EV companies have been around for years, but the production of lithium is falling short. Most of the global lithium supply exists in Chile, Argentina, and Bolivia only. Between strict controls and varying business policies, not enough mining of lithium exists to keep up with demand. There is a clear lack of consistency in production for the masses to have a smooth transition out of conventional energy commodities. If this continues, the next winter might be worse and natural gas may create new highs due to pricing power, impacting the industrial and material sector further.

Time is ticking on climate as well as renewable sources. Lithium batteries must be available for EV rollouts, wafer fabrication equipment must be available to ramp up the production of 5-nanometer semiconductor chips. The speed of activating modern sources must be at par with the speed of dismissing traditional industrials.

While it is true that EV makers are mostly privately-owned companies and can only roll out supplies at their level which may not be enough to match global needs; governments should provide some subsidies and incentives to jumpstart the shift towards sustainability. May it be increasing oil exploration or accommodating more finances to wind, solar and nuclear energy that can allow the globe to transition smoothly well within time.

As an investor witnessing the energy bubble, it is evident that to meet current demands both conventional and sustainable energy sources must be explored in equal importance. The question stands at WHEN will fossils and sustainability coexist. If the government does intervene to support the transition, maybe a conventional energy bubble may not reappear next year, but we may have one more gruesome winter to live in De Ja Vu.

To buoy through the volatility of the scenario, investors must choose to diversify their investments and root for both subsectors of energy, namely: conventional and renewable and this is a period of progression.

Around the world, there must be a shift from policies that have supported oil and gas production to policies that instead are starting to disincentivize fossil fuels, including carbon pricing and the European Union’s Emission Trading Scheme. Recently BP, one of the world’s largest oil companies, has been under increasing scrutiny for its historic role in producing, refining, and marketing fossil fuels that drive climate change. The company plans to cut oil and gas production by 40 percent over the next decade. Moreover, the Dutch court has ordered Royal Dutch to reduce global carbon emissions, and thus the company is considering investing $500 million in state-run Convergence Energy Services’ (CESL) decentralized solar business.

In the period of transition, investors can capitalize on the opportunity by placing their odds on companies that will be future booming energy giants. The list of companies can include the Renewable Mammoths, the current Fossil Titans, or groups that can strike a balance between the two sources. Namely: Enphase Energy, ExxonMobil, BP, First Solar, and Albemarle Corp.

However, a safer and broader approach to add stake in this scenario may be to venture through ETFs.

The winter of 2021 should be a reality check for the governments across borders, and investments to improve the costs and logistical barriers must be made on a federal level. Fossils and Renewables will have to coexist, to save the climate and to avoid commodity price bubbles.