Further to our musings on energy this week, I’d like to introduce you to one of our editors who thinks crunch time is approaching for the Gulf oil powers.
Eoin Treacy is of the opinion that Saudi Arabia in particular, is doomed to enter a period of “total turmoil” thanks to its massive fiscal promises it’s made to its citizens in a world which is looking to free itself from oil.
Before he publishes his research in full, I thought today I’d explore some of his broader thinking on energy in an interview format.
Good morning Eoin. First off – what’s going on in the energy market?
Oil has been trending higher for the last four months and is right now testing a key area of support. This is a pivotal level. If it can bounce from here, we are quite likely to see the $80 handle on the price before the end of the summer. If it fails then we are moving into a much more volatile period.
Natural gas is cheap. It’s one of the only commodities to have completely unwound its bull market advance and that is because of the prolific sources of new supply that have been unlocked. Every time we see a rally even more supply comes to market so we are going to be in an evolving base formation for years to come.
What do you make of the fracking boom and the arrival of US “energy dominance”?
Two big things.
The first is the US is energy independent and the International Energy Agency expects 4 million barrels per day of additional supply to come out of Texas by 2025. That is a huge amount and turns the US into the global swing producer. That means it now has a vested interest in keeping prices high, not too high but definitely nowhere below $40. That suggests we are going to see a range evolve for oil between about $40 and $85 that could last for a decade.
That is already changing the global geopolitical landscape. It is making Russia more aggressive; it’s shifting Middle Eastern focus eastward since that is who is buying their products. It is incentivising the US to try and get Europe to buy more of its oil and gas.
That ties into the second thing. The UK has just gone a week without using coal. That doesn’t address the intermittency problem but it’s a major achievement nonetheless. When the grid needs to support base load, it is going to increasingly rely on natural gas.
Until now, the global gas market has been balkanised because it relied on pipelines. Now, we are moving much closer to a global pricing mechanism because LNG (liquefied natural gas) infrastructure is online or nearing completion in the number of countries. That’s an example of new use cases evolving because of the price environment.
It’s Economics 101. When prices decline people figure out how to use more of the product. Since shale gas hit the market, thermal coal has been decimated, hydrogen fuel cell vehicles are on the road and agricultural production has been booming. That’s all facilitated by cheap gas.
Why do you think the oil powers are now under threat?
They are literally fighting for survival. The Gulf states have the cheapest sources of supply in the world so they are going to be making money from oil for the foreseeable future. But the problem is their populations are still young and growing at a fast rate, domestic consumption of oil and gas is trending higher and funding the nanny-like social structure is getting more expensive.
Meanwhile the massive young populations are reaching working age and are demanding the same kind of benefits their parents enjoyed. Trying to figure out how to keep everyone happy while also holding on to the power is behind the Khashoggi affair, the internment of Saudi princes in the Ritz, the proposed IPO of Saudi Aramco and the subsequent buyout of Shell’s share in SASREF (the Saudi Aramco Shell refinery).
This latter move is the one that makes most sense. Turning crude oil into useful products is a more profitable business and it creates jobs both of which the country needs. The bigger challenge is going to be keeping everyone happy.
That’s challenging today. But it will be a real problem the next time we have a recession.
Investors, politicians, and pundits have been banging on about renewables replacing fossil fuels for decades. Why do you think it’s happening now?
Renewables are already displacing coal and coal is the world’s biggest electricity generator. The challenge will to get the technology and infrastructure built in places like India and Africa because that is where all of the demand growth for coal is happening.
Replacing oil is all about batteries and natural gas. 8:1:1 batteries are already in the market with Tesla. The next doubling of energy density is likely to come from solid-state batteries and that is between three and five years away. At that point range anxiety disappears.
Tesla is already designing cars with an estimated life of 1,000,000 miles. The cars of the future will drive themselves, be cheaper to run and refuel and at that point we will be using oil for lots of other things like plastics, fertiliser and other products to feed 11 billion people.
Climate change politics certainly seems to have cranked up several notches with the likes of a “Green New Deal” in the US and the Extinction Rebellion crowd here in the UK, while at the same time the attitudes towards loose fiscal policy is on the rise. Is a massive government investment in green energy on the way? I’ve seen some people celebrate the arrival of Modern Monetary Theory (MMT) as though it’s a saviour, which will fix climate change as it will allow the government to print as much money as is required to “solve the problem”.
I’d love to see us have a rational conversation about te cost of mitigating the impact of climate change rather than trying to reverse it. No one knows for sure whether that objective is even possible.
However, we do know what happens to the environment as living standards improve. The single best thing we can do for the planet is promote economic growth. Greater efficiency leads to more efficient use of energy, lower emissions, cleaner cities and healthier populations.
Economic growth creates an awareness of the environment and when people don’t have to worry where their next meal is coming from, they start to think about how to enjoy life and appreciate nature. That has happened in almost every country that has developed economically. That can also be achieved without the growth killing taxes that are being proposed in the so-called “Green New Deal”.
Unfortunately, the most common-sense answer seldom gets adopted by politicians. It’s always easier to make big promises and spend other people’s money. The chances of a green new deal being implemented very much depend on whether latter day communists win elections. I rate that at about a 40% chance right now.
The bigger question we should be asking is why aren’t more politicians promoting the idea of global growth rather than carbon regulation and taxation? I can think of two reasons. The first is taxes pay for the promises of social benefits made over the last few decades now, while future economic growth can’t be spent today. The second is do we really want impoverished nations to become more prosperous? They tend to be more assertive when they get money and that creates geopolitical tensions like we are seeing with China today.
That aside, I think the introduction of MMT is all but inevitable. Interest rates are close to zero in Japan and Europe already. In the next recession the US will go there too. The only way to get the kind of momentum in the economy that is required for recovery at that points is massive fiscal spending. The real question is the form in which it takes. If it is a green infrastructure build, we’ll be on top of it. If it’s about roads, airports, ports, houses, schools, etc, we’ll be on top of that too.
You reckon there could be bubble in green energy stocks if that occurs?
We are at a very important point right now. The velocity of money is just picking up. It’s been trending downwards since 1998 and the dawn of the internet. As soon as velocity picked the Federal Reserve started reducing the size of its balance sheet. That is why there is so little inflation right now.
If they end the quantitative tightening programme as scheduled in September and velocity of money keeps rising, we are going see inflation come back with a bang and we could a bubble in the technology sector way before we see a bubble in green stocks. One way of the other, you buy the bubble until there is evidence of it ending.
On a similar, but slightly different tack, what are your thoughts on the creation of the uber-synthetic carbon credit market, which allows companies to trade CO2 emissions? Are there more government created, green-driven pseudo markets on the way?
This is just one of a host of market altering strategies implemented over the last 15 years which are aimed at raising tax revenue and retarding the use of proven growth-oriented strategies. I’m reminded of the old Kit Kat ad from the 1980s. “You can’t sing, can’t dance and you look awful… you’ll go a long way.”
Eoin will be publishing his research soon on exactly how dangerous the waters will become for Saudi Arabia shortly – keep an eye out.
Until tomorrow,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates