“I’m not in the transitory-inflation crowd. The private sector is allocating all the money to the fast-growing software, eating-the-world companies. It’s not allocating money to companies that actually make things and provide other kinds of services that people find less exciting, meaning there are shortages of these things now.”
These comments from Greenlight Capital’s founder David Einhorn in a recent RealVision interview, while addressing the broader "transitory vs permanent" inflation debate, are especially apt in describing the transformation taking place in the energy sector where the recent ESG mania has deprived legacy fossil-fuel companies of much needed capital (not just growth capex but also maintenance) which has instead flown to "virtue-signaling" green projects.
We discussed this dynamic back in June when we rhetorically asked "Will ESG Trigger Energy Hyperinflation" and explained 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." And, as Deutsche Bank's credit analyst Jim Reid added, "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."
Well, for those living in Europe, the answer has been a resounding yes - with 10Y breakevens surging higher - and it took just a few months to get there as the chart below shows; and since we still have a potentially very cold winter ahead of us, absent a flood of Russian gas (via the NS2 of course) it's about to get much worse.
But the biggest irony is that in seeking to deprive fossil fuels of much needed growth capital to shrink fossil fuel output, the virtue-signaling assault by the green lobby spearheaded by hapless puppet Greta Thunberg, has achieved just the opposite.
As Bloomberg writes, the ongoing global energy crisis, the coming winter weather and the release of pent-up pandemic demand have sent nations scrambling to stockpile fossil fuels, a move that portends a surge in global carbon dioxide emissions this year which is set to make new all time highs!
The trajectory poses a new threat to the feel-good Paris Agreement goal of limiting global temperature increases to 1.5° Celsius as China, India and other developing economies are driving the demand for coal, but even the U.S. is poised to increase its consumption of the dirtiest fossil fuel in almost a decade, according to a forecast from the International Energy Agency.
Here is Bloomberg's Javier Blas with more:
Across the world, fossil fuels are making a remarkable comeback as a super-charged recovery from the pandemic boosts demand. For all the green energy promises and plans, that transition is in its infancy, and the world still leans heavily on fossils. It’s an addiction built up over two and a half centuries, and it runs deep.
In Europe, where electric vehicles are becoming ever more popular, gasoline sales are booming, reaching a 10-year high in some countries. In the developing world, from Brazil to China, natural gas consumption is stronger than ever. The global hunger for energy has collided with constrained supply, itself the result of a tangle of factors, sending power prices surging in many countries.
Adding it all up, fossil fuel demand is already flirting with pre-pandemic levels, which means emissions are on the rise too. On current trends, the combined consumption of coal, natural gas and oil is likely to hit an all-time high by mid-2022.
“This is the revenge of the fossil fuels,” said Thierry Bros, an energy expert and professor at Sciences Po in Paris.
Some history: global CO2 emissions peaked just prior to the onset of the Covid-19 pandemic, but then in 2020 registered the biggest annual decrease since at least 1965, according to BP Plc. However, since every action leads to a much more expensive reaction, releases of the greenhouse gas this year through August are already just 1% less compared with the same period in 2019, according to Carbon Monitor, an emissions monitoring group. And they are about to soar.
Needless to say, this is a huge embarrassment for the green lobby, which to this day is simply using ESG as a smokescreen to demand trillions in taxpayer-funded government spending, of which a substantial portion quietly goes into the bank accounts of a select handful of the most vocal virtue-signalers, never to be seen again. As Bloomberg notes, the forecast for record emissions is a poor backdrop to the COP26 climate talks that will take place in Glasgow, Scotland in November. Hilarious, the United Nations is urging countries to submit more ambitious emissions plans by the time the discussions get underway, and officials from almost 200 nations are expected to gather for the fortnight of negotiations. Instead, many countries will be fighting populist anger and protests about energy hyperinflation. Some, like China, are already seeing a sharp hit to their economy as a result of widespread blackouts which have crippled industrial production.
And so, we have gotten to the point where not only are emissions not dropping but the question of just how big the spike will be, will depend on how cold it gets: "Whether emissions reach new highs will probably depend on the weather", said Steven J. Davis, a professor at University of California, Irvine, and co-lead at Carbon Monitor. “Fossil fuels used to heat buildings could make up that 1% quickly if it’s cold.”
Now if only someone had predicted this all too obvious outcome ahead of the push to defund the legacy fossil fuel infrastructure decades before alternative energy sources were ready to become the new energy leaders.
The energy crisis has been concentrated in the power generation sector. Shortages of natural gas and electricity have been especially acute in China and the U.K. Emissions from electricity producers were already up 2.2% globally between January and August versus the same period in 2019, driven by increases in China, India and Brazil, Carbon Monitor data shows.
To be sure, not everyone is set for new CO2 output records: emissions in the European Union and the U.K. during the first eight months of this year are down 4.7% compared with the same period in 2019, according to the group, which bases their estimates off on power generation, industrial activity, ground transport, domestic and international aviation and residential demand. In the U.S., they’re down 3.5%. Of course, the reason for that is that both the EU and UK are currently facing unprecedented supply bottlenecks which are preventing them from burning more fossil fuels. And considering that the trade off is energy hyperinflation, we are confident the local residents would be delighted at the trade off of much higher emissions if it means prices drop to historical levels. Incidentally, that's exactly what will happen once Putin finally starts sending nat gas to Europe via Nord Stream 2.
What is striking is how long it took for the experts to realize what was patently obvious to most long ago:
“I’m concerned hydrocarbon demand is not falling fast enough to match the potential under investment in fossil fuels,” said Jason Bordoff, dean of the Columbia Climate School and a former senior energy official in the Obama administration.
Coal is paradigmatic. For nearly a decade, it appeared in terminal decline as investors shunned miners and European countries shut down coal-fired power plants.
And yet, the world’s dirtiest fossil fuel won’t go away. Global consumption peaked in 2014, but rather than fall rapidly, as many expected, it stabilized in a gentle plateau. And now, just as the fight against climate change intensifies, it’s growing again, with the resurgence largely driven by China.
Oil is another case where hopes of an early peak in demand are quickly fading. In 2020, Bernard Looney, the head of British oil giant BP Plc, said it was possible that Covid marked the moment of peak oil. That view has since shifted, with BP predicting in August that demand will reach pre-Covid levels in the second half of 2022.
All of this means carbon dioxide emissions are rising too. The IEA estimates that they’ll post their second largest annual increase ever this year, reversing most of the decline during the lockdowns of 2020. On current trends, emissions will hit a fresh record in 2022 despite all government pledges bring them down, and quickly.
Hilariously, none other than the de facto leader of the ESG movement, Bloomberg whose billionaire founder has emerged as the patron saint of climate change propaganda as he criss-crosses the world in his private jet, concedes that maybe it had it all wrong and writes that "another factor that could spur emissions growth is new skepticism over renewables in the face of the energy crisis. Disruptions the past few weeks have sparked debate about the impact of the world’s transition to cleaner power. While some see evidence of the intermittency of wind and solar power, others see equivalent if not greater vulnerability from extreme price swings and volatility triggered by disruptions in fossil fuel supply chains and dependency on petrostates like Russia."
"My worry is there is a growing incorrect perception that the current energy crisis is caused because of renewables, or policies favoring renewables," said BloombergNEF analyst Ali Izadi-Najafabadi. The problem is that that perception is not incorrect - it is precisely the rabid push for "green" that is behind the energy crisis and price explosion, as we warned back in June.
Remarkably, and showing how out of touch with reality the Green crusaders truly are, Bloomberg's analyst then said that “the rational response to higher fossil fuel commodity prices as well as higher emissions would be to accelerate the shift to renewables.” Actually no, that ridiculous statement encapsulates precisely the wrong response and all that is wrong with "green thinking" where the solution to a crisis is to make the crisis even bigger. In fact, that argument only makes sense in a world of infinite government spending that can be used to plug household funding holes such as those that have emerged now that we have energy hyperinflation.
What should happen is that fossil fuels should receive appropriate capital for the next 3-4 decades until such time as alternative energy is competitive enough and widespread enough to be able to replace fossil fuels in their entirety. That won't happen until the 2040s. As such any push to outsource all fossil fuels today with a green sector that is unable to pick up the baseload energy generation will lead to catastrophe.
Incidentally, none other than iconic Enron energy trader John Arnold put it best: "In the US, a (growing) majority of voters support efforts to address climate change. A majority also express reluctance to pay for these policies. If voters believe climate policy is causing a spike in energy prices, support for those actions will fall."
In the US, a (growing) majority of voters support efforts to address climate change. A majority also express reluctance to pay for these policies. If voters believe climate policy is causing a spike in energy prices, support for those actions will fall. 4/— John Arnold (@JohnArnoldFndtn) September 24, 2021
And unlike the Bloomberg crusaders, Arnold's conclusion is spot on:
Like it or not, oil and gas will be widely used by Americans, and the world, this decade. The transition to clean energy will be eased if it's smooth: oil and gas prices stay at reasonable levels. Attempts to kill the industry are counterproductive to the broader effort.
As for what happens next, the covid divide that split the world in two for the past year yet which is now fading away along with the pandemic, may soon shift to climate change as the most polarizing topic in the world:
As political leaders prepare for COP26, the energy price spike has polarized views about the green transition, already an enormous challenge that involves rewiring the whole global economy. Climate change deniers and fossil fuel industry lobbyist have seized on it to campaign against green energy. On the other side, some climate activists say it shows the need to go even faster.
“Inevitably, it wasn’t going to be a transition without tension,” said Morgan Bazilian, an energy expert and professor of public policy at the Colorado School of Mines. “The balancing act politically is becoming a lot harder.”
And so we wait for the inevitable political turmoil that will follow as years of "green dream" waves crash into the rocks of a brutally hard - and very expensive - reality. Meanwhile for all those virtue-signalers listening and complying with Greta's endless platitudes (which bizarrely continue to omit China as the primary source of emissions), we hope you enjoy your next energy bill.