ESG Shock Arrives: Oil Market Needs Half A Trillion Dollar Injection To Avoid Supply Collapse, Price Surge

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by Tyler Durden
Thursday, Oct 07, 2021 - 05:20 PM

Back in June, when we asked if "ESG will trigger energy hyperinflation" we observed that the growing pressure from virtue-signaling investor groups on oil companies to reduce oil and gas exploration and adapt their business models to some ridiculously unprofitable "green" ideal has increased significantly in the past year. This, as DB showed, was reflected most clearly in crude rig counts that had lagged the recovery in oil prices and stand at 1/3rd of the 2014 peak.

We quoted DB strategist Francis Yared who said that "ESG is a negative supply shock that internalizes the climate cost of the production of goods and services." This negative supply shock will be inflationary until technological progress absorbs these costs. That could take years. 

DB's credit strategist Jim Reid also chimed in, writing that "maybe in the fullness of time this surge in mining between 2010-2015 will be the exception rather than the norm and that, in a rapidly changing and ever more ESG sensitive world, it will be  harder to get oil out of the ground. Pricing climate-change externalities more generally could make things more expensive over time. Are we on the verge of another change in inflation expectations due to oil and energy, one that is in large part due to ESG."

Now that the direct effects of this catastrophic policy are becoming all too apparent, and nowhere more so than in Europe where gas prices have exploded to staggering levels...

... more are starting to lament the rise of the "green" cult, and overnight Bloomberg's John Authers, in seeking to explain the reasons behind Europe's energy hyperinflation - because that's what it is - writes that amid the attempt to “de-carbonize” and move from fossil fuels to renewable energy sources, "the problem is to make sure that sufficient carbon-rich energy remains available until renewables are able to pick up the load. That hasn’t happened."

He is right, of course, but what is worse is that while more capital is flowing to renewables, less capital is going to existing fossil fuel sources, which while perhaps on the way out (over the next 4-5 decades) still need hundreds of billions to maintain a baseline production capex, even as the virtue-signaling Blackrocks of the world seek to starve them of all growth capex.

Putting it all together, overnight Moody’s Investors Service published a report which found that oil explorers need to raise drilling budgets by 54% to more than half a trillion dollars to forestall a significant supply deficit in the next few years.

Crude and natural gas drillers - chastened by last year’s unprecedented collapse in demand and prices, as well as the ongoing capital stigma associated with anything that is "not green" - haven’t responded to the recent market rebound as the industry typically does by expanding the search for untapped fields. While international crude and U.S. gas have risen more than 50% and 120% this year, respectively, drilling outlays are only forecast to increase by 8% globally, Moody’s analysts Sajjad Alam wrote.

Needless to say, that's too little to replace what those companies will pump from the ground in 2022, setting the stage for even tighter supply scenarios. Any such squeeze would come atop the current crises afflicting Asian and European economies scrambling to shore up fuel stockpiles as winter approaches and prices seemingly break records on an almost-daily basis. It would also mean sharply higher oil prices.

"The industry will need to spend significantly more, especially if oil and gas demand keeps climbing beyond pre-pandemic levels through 2025," the Moody’s analysts wrote.

Oil and gas companies are expected to spend $352 billion on drilling and related activities this year, Moody’s said, citing estimates from the International Energy Agency. If they raised to to the credit-rating firm’s recommended $542 billion, that would be the highest worldwide since 2015. Alas, with investors terrified of looking like uncouth cavemen to the powerful ESG lobby, there is no chance they will get a number even remotely close.