The energy transition’s long overdue reassessment was already under way by the time Russian missiles began falling on Ukraine. Fear of stranded assets has been replaced by the sudden need for energy security.
At a recent JPMorgan energy conference, CEO Jamie Dimon repeated his call for a new “Marshall Plan” to ensure energy security for the US and our allies. Appropriately this took place during a “fireside chat” with Cheniere CEO Jack Fusco, who noted that his company provided 1/3rd of Europe’s natural gas imports during 1Q22. Many have noted that there can be no energy transition without energy security. Few companies are more important to Europe in avoiding natural gas rationing this winter.
In JPMorgan’s annual report, Dimon reminded that, “… using gas to diminish coal consumption is an actionable way to reduce CO2 emissions expeditiously.” Dimon is no climate change denier but is pragmatically identifying profitable business for the bank. Purists fret that building new infrastructure to support imports of Liquefied Natural Gas (LNG) means locking Europe in to burning fossil fuels for several decades, inconsistent with the UN zero by 50 mission. Meanwhile, German wholesale electricity prices one year out have breached €200 per MWh, up 4X over the past year.
Capital investment in future oil and gas production has been falling for years. The poor returns following the shale bust are the immediate cause, but the message from policymakers has been clear. Oil and gas look like a risky long term investment when governments are promising to stop using fossil fuels just as soon as they can. Now western leaders are acknowledging the public’s ephemeral concerns about climate change, which last until the costs are visible. Higher oil doesn’t seem to have caused a spike in windmill prices. St Augustine* might have said “Lord, give me renewables, but not yet.”
The problems of underinvestment aren’t limited to oil and gas. Goldman’s Jeff Currie expects oil prices to reach $140 per barrel during the summer. In a recent CNBC interview he said, “At the core of our bullish view of energy is the underinvestment thesis.” Currie noted that this month’s pullback in energy sector equity prices would exacerbate the problem by reflecting a withdrawal of capital from a sector that needs it in order to increase production.
The International Energy Agency (IEA) expects global crude oil demand to increase by 2% next year, taking it above pre-Covid levels to a new all-time high. US airline fares are up 38%. In spite of this, more people are flying around the world, with the aviation sector representing 5% of crude oil demand. International travel is growing the fastest.
Although global capex is up this year among the world’s biggest oil and gas companies, it’s still down by around a fifth from 2019. This downtrend dates back to pre-Covid, when policymakers were freely vilifying the energy industry. The collapse in prices in 2020 was a further incentive to impose financial discipline.
There’s an illuminating clip from the recent G7 meeting during which French President Macron tells President Biden that the United Arab Emirates is producing at maximum capacity while the Saudis have perhaps a small amount of extra capacity, for the next six months. One might think that Biden wouldn’t need a foreign leader to point this out to him, but this Administration’s energy policy does remind of the Keystone Kops.
Fortunately, in its final communique the G7 said investment in liquefied natural gas was a “necessary response to the current crisis”. It added: “In these exceptional circumstances, publicly-supported investment in the gas sector can be appropriate as a temporary response.”
With gasoline prices rising and little prospect of relief, it’s not hard to see the Republicans running as the party of cheaper energy. They have little useful to say on curbing emissions, so the appeal of such a message will reflect Americans’ concern about climate change. White House actions suggest that they believe only the liberal wing is willing to rapidly phase out fossil fuels. They’ve assessed that swing voters care more about what they pay at the pump.
Therefore, a Republican-controlled Congress following the mid-terms could pass legislation supportive of increased investment in domestic oil and gas production – by making it harder for endless court challenges to block infrastructure projects for example. Signing or vetoing such a bill would offer an uncomfortable choice for a lame duck president.
For now it seems meeting demand growth for traditional energy will drive prices higher. There’s little sign of demand destruction at current levels, and China is still enduring partial lockdowns.
*St Augustine is credited with saying, “Oh Lord, give me chastity, but do not give it yet.”
We have three funds that seek to profit from this environment:
Please see important Legal Disclosures.
The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)
This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r
Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.
Past performance of the American Energy Independence Index is not indicative of future returns.