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By David Yager
As 2022 winds down, looking back through the lens of energy reveals a significant dichotomy.
There’s the wild ride that has been forced upon the global energy complex by Russia’s invasion of Ukraine, the exposed shortcomings of wind and solar, years of underinvestment in fossil fuels, and rising inflation and interest rates.
After 40 years, energy security of supply is again a major issue.
This is well understood and affects everyone.
Then there’s the stubborn chorus of voices that see this as temporary – that the world will be back on the path of decarbonization as soon as possible.
Given recent events and what ordinary people really need, this is difficult to comprehend.
Oil prices, gas prices, production volumes, revenue, cash flow, profits, drilling, employment, investment, spending, taxes, dividends and production royalties all rose sharply in 2022.
It was a remarkable comeback after seven years in the dumpster.
But this isn’t good news for everybody. That’s because the oilpatch and the rest of the world don’t seem to do well at the same time.
Rising energy prices have become a major driver of inflation which is causing governments to raise interest rates. Higher borrowing costs and energy prices increase the cost of everything for buyers and reduce the value of almost everything for owners.
In response, consumers, industries and governments are doing the most unusual things.
Coal consumption is rising because coal meets the cost and availability requirements of a global economy experiencing tough times. On December 16, the International Energy Agency reported “The world’s coal consumption is set to reach a new high in 2022 as the energy crisis shakes markets.”
It added, “…the world’s coal consumption will remain at similar levels in the following years in the absence of stronger efforts to accelerate the transition to clean energy.”
Later in the IEA article there is the usual report of how renewables are at record levels. But with total energy demand rising because of a population that exceeded 8 billion in 2022, all energy consumption is growing.
But as Goldman Sach’s Jeff Currie observed in October, there’s ample opportunity for renewables to set records for many years. Currie wrote that in 2011 fossil fuels accounted for 82% of primary energy. After the investment of US$3.8 trillion dollars in lower-carbon alternatives, in 2021 fossil fuels were only down 1% to 81%.
Then there’s government mandated price caps and “windfall profit” taxes.
Because markets are wrong. Politicians are right.
The UK took the lead on profit taxes, and is now seeing investment slowing in what should be invigorated activity in the North Sea. Similar moves have been proposed by the left in the US and Canada.
Price caps are another tool to ostensibly protect consumers. Australia announced on December 16 that it would be putting a ceiling on natural gas prices even though it is one of the world’s top LNG exporters. Australia makes a bundle on LNG, but apparently the winners don’t vote for the government.
Irreverent investor subscription service Doomberg wrote on Twitter, “Discouraging long-term energy production for short-term revenues is tantamount to sacrificing the future prospects of your economy for a quick populist win.”
In August when fuel prices and diesel supplies were running short, US President Joe Biden – who won the 2020 election campaigning against fossil fuels – wrote to refiners stating, “I am writing today to request your immediate attention, engagement, and support in addressing the historically lower inventory levels of gasoline and diesel in parts of the country…It is our hope that companies will proactively address this need. If that is not the case, the Administration will have to consider further Federal requirements or other emergency measures.”
Doomberg’s response on Twitter was, “When led by clowns, you get a circus.”
Politicians in Germany, UK, France, Japan, South Korea, Spain, Sweden, Australia and even Quebec are advising their citizens how to live with less fuel. The advice ranges from wearing turtleneck sweaters to retain body heat, turning down hot water heaters and learning to enjoy colder water, not illuminating monuments and other public structures at night, reducing the temperature in offices, schools and sports centres, using less electricity, and considering other “small behavioral changes.”
For consumers, behavioral changes are well underway because of rising inflation and interest rates. Like buying less food, spending less on recreational activities, or worrying about losing your home because the mortgage payments have become unaffordable.
The only long-term solution is lower energy prices. The incumbent, fossil fuels, could again save the day in a relatively short period of time.
But when it comes to the climate emergency, the energy transition and the replacement of coal, oil and natural gas, old habits die hard among the vested interests.
Here’s a few examples.
Famous teenage environmentalist Greta Thunberg has published a book to keep her profile up and crusade alive as the planet that she described as “on fire” struggles to keep warm.
Now 19, she released “The Climate Book” in November. An article in The Telegraph on November 2 was titled, “Greta Thunberg: It’s time to transform the West’s oppressive and racist capitalist system.”
It’s not just the fuel we consume, but who we are and how and why we do it. The article continued, “Calling for a ‘system-wide transformation’ at her book launch in London, she (Thunberg) claimed that the world’s current ‘normal’ – dictated by the people in power – has caused the climate breakdown.”
The young author said, “It is a system defined by colonialism, imperialism, oppression and genocide by the so-called global North to accumulate wealth that still shapes our current world order.”
If you suspect that climate change has been a front for socialism and global central planning, you’re right. Now that people are too busy staying alive to pay the appropriate amount of attention to the carbon content of the energy they need to survive, famous climate alarmists are talking about the real problem.
You.
As for the rich and powerful that Thunberg claims have created this mess, there is no better place to see who should be thinking what than Bloomberg Green, Michael Bloomberg’s climate and energy transition tout sheet.
This is a sister enterprise to Bloomberg New Energy Finance which was founded in 2004 to alert investors where and how to make money on the world’s impending fossil fuel free future.
To keep the climate crisis drive alive, activists have turned up the volume and resorted to vandalism to catch the attention of a world distracted by the pursuit of food, clothing, shelter and heat.
Early this fall an outfit called Just Stop Oil made headlines by damaging famous painting and gluing themselves to the walls in art galleries. This follows those who go around at night deflating tires on SUVs parked on the street.
Only Bloomberg Green would figure out how to make this a business story. On December 14, the headline read, “Should The Climate Movement Embrace Property Destruction?”
Expanding on vandalism as a tool to save the world, the reporter interviewed Swedish university professor Andras Malm who made his own headlines when he wrote his book in 2021 titled, “How to Blow up a Pipeline.”
Commenting on the art defacers and tire deflaters, Malm said this is the only the beginning of what is required. “The task for the climate movement is to make clear for people that building new pipelines, new gas terminals, opening new oil fields are acts of violence that need to be stopped – they kill people.”
Meanwhile, the giant money managers at the leading edge of the fossil fuel divestment and ESG movements are grappling with a different form of destruction – wealth through falling profits and investment returns.
A headline on Bloomberg Green December 15 read, “Sustainable Debt, ESG Markets Turn Frosty in 2022.” It opened, “In the past five years, the world’s sustainable finance markets have expanded from niche products a decade ago, to more than half a trillion dollars of bonds and loans last year. Investors have also allocated hundreds of billions of dollars to ESG-focused equity and debt exchange-traded funds. Sustainable finance is a growth market – or at least it was until this year.”
In 2022 global sustainable debt issues declined sharply for the first time, falling from US$1.5 trillion in 2021 to US$1.2 trillion. Part of this was driven by coronavirus related investments, which have dropped for obvious reasons. But ESG funds that attracted US$130 billion in 2021 are only expected to receive US$50 billion this year. This is less than in 2020.
Part of this was blamed on Elon Musk who called ESG investment a “scam” in May. But was also the fault of US activist investors and politicians and their determination to “stigmatize” ESG which has led to outright capital outflows from some funds.
In a separate article the same day, the Bloomberg Green headline read, “BlackRock and State Street Grilled by Texas Lawmakers in ESG Debate.” It began, “Texas lawmakers grilled finance industry executives they summoned…for a hearing, questioning their environmental, social and governance policies are hindering state pension investments.”
The article quoted studies that showed investments in firms that scored high in sustainability “typically failed to beat those with poor marks in that areas…Florida’s chief financial officer has urged state pension funds to remove BlackRock as an asset manager over ESG concerns, while Louisiana and Missouri have pulled a combined US$1.3 billion from the company this year.”
The problem with the ESG phenomenon for money managers is that this new investment thesis emerged in a period of low interest rates, low inflation, continued stimulative government fiscal support through quantitative easing, big subsidies for renewable energy, and rock bottom coal, oil and gas prices. These market conditions will not exist again soon, if ever.
It was easy to dump fossil fuels before 2021. They were dogs in terms of cash flow and returns.
Meanwhile, everything else was doing great in part because of the collapse of energy prices from 2015 to 2021. This reduced the cost of everything, increased disposable incomes, and helped stimulate the global economy.
This was reflected by capital markets and affected which stocks and sectors did well, and which did not.
Then everything changed in 2022. According to https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml here’s the performance for the past 12 months as of December 16 of 10 major US corporate sectors and the S&P 500 Index.
The challenges facing ESG investing are clearly not due to the utterings of Elon Musk or the obstreperous behavior of a few US states.
But the whole concept behind ESG and sustainable investment is that 21st century capitalism isn’t just about making money. It’s about social justice and doing the right thing.
Even though the sole purpose of BlackRock’s existence is profits for investors and its owners, CEO Larry Fink is under attack for “greenwashing” – claiming to be doing the greater good while not vigorously supporting ESG investment principles.
Fink is a great salesman, as is everybody in this business. But the pitch always changes with markets.
An article on fnlondon.com in September opened, “A former BlackRock executive has accused chief executive Larry Fink of ‘ducking the fight’ over ESG, following claims that the US asset manager and other fund industry behemoths are misleading investors over sustainable investing.”
Former BlackRock sustainable investing officer Tariq Fancy wrote a three-part essay trashing the behavior of his previous employer for following the money instead of following grand principles.
The article continued, “Fancy suggested that asset managers are duping the public on ESG with ‘lofty and misleading marketing messages,’ and that ploughing money into sustainable funds does little to address systemic issues such as climate change and social inequality – a ‘dangerous placebo that harms the public interest’.”
Everything about BlackRock involves making money. If BlackRock is guilty of anything, it is suggesting that morally advanced investment decisions can generate competitive returns regardless of volatile markets and geopolitical conditions.
But that’s what the investing public wanted to hear after woke economics seized the public narrative during the frothy years prior to 2022.
A major global capital markets player that remains firmly in the decarbonization camp is UK bank HSBC which announced on December 14 that it is done funding new fossil fuel supplies.
A story on Argus Media reported, “…HSBC announced today it will stop providing financing for new oil and gas fields and will subject prospective clients in the sector to criteria around exploration and production and the energy transition.”
Earlier this year, HSBC announced it was selling its Canadian operation. On November 29 RBC announced it was buying this unit for $13.5 billion.
That HSBC would stay on course despite everything else going on in the world is no surprise. It was among the first banks to announce it would no longer finance oil sands or coal.
However, based on how much new exploration and activity is expected in 2023 and beyond, the impact is hard to measure.
Historically, high commodity prices have caused E&P companies to ramp up spending thus requiring more capital. This would moderate high energy prices by increasing supply.
But the political signals continue that the climate crisis/energy transition crusade will not be abandoned just because of global energy shortages and unaffordable prices.
So the message that fossil fuels are doomed continues.
Not if, but when.
Trends and ways of thinking that take years to develop and involve trillions of dollars have tremendous momentum that won’t reverse themselves in the 43 weeks since Russian tanks rolled into Ukraine.
However, this winter will be a turning point. So far in 2022, getting Europe and other parts of the northern hemisphere through the winter of 22/23 has been ahead of us. A warm fall helped fill European gas storage.
Now winter is upon us. It has the potential of being really awful for tens of millions of people.
Real world events changed a lot of things in 2022. There’s no reason to think these changes are complete.
But the number of people and players that remain completely disconnected from the people they are supposedly protecting is surprising given the massive changes for energy in 2022.
David Yager is an oil service executive, oil and gas writer, energy policy analyst, and author of From Miracle to Menace – Alberta, A Carbon Story. Find the book at www.miracletomenace.ca. He is President and CEO of Winterhawk Casing Expansion which is commercializing a new technology for improving wellbore integrity.
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