What Is Causing The Energy Crisis?
Sustainable Investing
Europe’s Energy Crisis Leaves Almost All Of Pakistan Without Power
1 This is what demand destruction in energy looks like: not a teenager with 23 pairs of Nike and Adidas who forgoes the 24th. It is a country of 240mm people losing power – airports, train stations, traffic lights.
2 Since energy is priced in USD, movements in USD affect affordability. This explains the world’s willingness to absorb US deficits until Pelosi’s pandemic math broke down. The money became needed to grease global growth; outstanding private debt is around 65 trillion. The idea that there will be a PetroYuan tomorrow is a fantasy. The balance sheets do not exist to buy Yuan or Euro.
Infrastructure?
3 Elsewhere, Germany relied on coal for 30% of its electricity in 2022. If anyone thinks we are transitioning energy, the German electorate is not willing to become Pakistan and will bulldoze whatever activists stand in the way. Trade energy otherwise at your peril.
4 This implies, for decades to come, all forms of hydrocarbon will *grow*. Whatever GDP increases take place in Asia and Africa will incrementally go towards full time electricity supply and better nutrition.
5 As inflation has re-emerged, higher rates will persist. And there will be a rebalance between downstream tech and upstream energy / materials / heavy industry. This remains an asset recession! Moreover, consumption (and western employment) will grind out a positive sign. While luxury and tech asset returns will suffer as balance sheet becomes needed to provide energy rather than buy waterfront condos.
6 The trade of the century remains: Sell condos, Buy natural gas pipelines. The world needs 20mm miles of gas pipeline and has 20mm too many apartments and offices (at current prices and urban locations.) Very rarely is the reality of the world so cleanly visible.
As a human-interest matter, the west needs to drop its dogmas and treat this reality for what it is.
The hallucination of cutting off 11 time zones of energy and materials, also known as Russia, has a real cost – the world’s marginal population suffers. Badly. The reality of India next door to Pakistan is even though the financial situation is better, the physical supply of oil to meet growth demands is not visible. As a result, they need 3mm more barrels a day in the next few years. Their supplies of coal are usually measured in weeks if not days.
Back to work: The futures markets are broken, because Europe refuses to hedge, and along with the US, build infrastructure for its hydrocarbon needs accurately. And, as a result producers do not have any incentive to increase production materially in the US. Lastly, energy will remain 2-3x as expensive as it needs to be even when Europe accepts Russian exports to support growth until infrastructure becomes sorted out.
What Is Causing The Energy Crisis? Written by Manish Aurora, Managing Partner, Rational Investing LLC
