Return of Rational Energy

The upcoming COP meetings will be hosted by one of the greatest beneficiaries of fossil fuel usage. Is the recent shift in carbon neutrality setting us up for a newly rational approach?

The past two weeks have seen a refreshing call for recognition that causing people to freeze today for inability to pay heating bills is not a positive solution for climate change. Leaders of the UK, Germany and even Sweden seem to understand that their societies are becoming more fragile because the economic stress of greener, more costly energy is causing inflation and potential physical harm to the working classes.

The timing is interesting as it is a little over a month until COP28. The global convention of climate change will converge on a capital that has benefitted more from fossil fuel development than perhaps any other in the world. The jet capacity to the Dubai hub should make Davos blush. Of course, all will be supported by carbon offsets (an audit of which might make the Pentagon feel competent).

It is clear we are approaching a point in time when tides are shifting. The increased cost of capital means that it is less feasible to pay for fuel up front as batteries, sun and wind require. Nuclear is rounding the turn as something of greater acceptance. Perhaps some wealthy, influential people have finally made big bets there also.

There is a problem looming on the horizon that may also be a cause for the shift.

With the demonization of all things fossil, there has been a gross underinvestment for the past several years. It has gone unnoticed as economies have been slower than expected to recover from Covid. If global economies had returned to normal, it is questionable whether we would have had enough energy to feed them and that time is now on the horizon.

This is the impact of expectations. The ESG agenda on top of zero interest rates made it very difficult for fossil fuel projects to compete for capital. Even large-scale successes like Exxon’s Guyana were seeded more than a decade ago. Now we are more dependent on steep decline curves in shale gas and crude oil to dilute a portion of the energy power consolidating in the UAE and KSA.

Energy for the economy is rising as a concern and causing capitals to change their realpolitik equations. It is apparent that this is nibbling on the heals of the US administration as they look for ways to leak more Venezuelan and Iranian crude on to the market (or at least in to the market’s psyche).

This will not be enough and is likely too late for 2025. There will not be an energy shortage, per se. The market will clear, only at higher prices. If I see $200 oil, I would sell, for all the reasons previously enunciated, but expensive will put a crimp on global economies trying to recover from record rate increases.

It all has a very ‘70s feel about it.