The Hydrocarbon Empire Strikes Back…

“How stupid is it, to think you can shut down an industry that delivers 100 MILLLION BARRELS PER DAY of oil, every day, to power the world”

Jeremy Werner writes in the Telegraph, to predict that high oil prices are here to stay might seem the height of foolishness, for it runs counter to all historical experience, where oil price shocks of the type we are experiencing today are invariably self-correcting.

But there are two big differences this time around—the climate change agenda and sanctions against Russia for its murderous assault on Ukraine.

Even before the Russian invasion, it was obvious that climate change goals, which began to kick in with ever increasing intensity from around 2017 onwards, were going to result in a major SUPPLY PROBLEM.

Despite continued reliance on hydrocarbons for virtually all our creature comforts, here was an industry said already to be obsolete, and therefore essentially uninvestable.

Investment in E&P progressively slowed, and then ground to a virtual standstill when the pandemic hit.

It was seemingly the end of the line for Big Oil. You are no longer needed, the oil companies were firmly told; your reserves of oil and gas will be left stranded with no one to sell to, and they are therefore not worth developing.

Institutional investors, with ESG demands to answer to, piled in on top.

But then enter stage left the villainous Putin. Turns out we are going to need those big bad oil companies after all, and maybe even the pariah fuel of COAL.

Now, by seeking to ban Russian oil and gas, Europe has all but removed one of the world’s biggest suppliers from the mix, hugely compounding the capacity shortages that became apparent as economies bounced back from the enforced closures of the pandemic.

The result is a kind of bifurcation in previously global oil and gas markets, with Western countries forced to seek pricey alternatives to Russian hydrocarbons, but less principled countries such as China and India able to access the Russian product at what by today’s standards look like bargain basement prices.

“Where once these nations enjoyed the competitive advantage of cheap labour, these countries now gain the additional benefit of relatively cheap oil and gas”

As long as Russia remains out of the action, it’s going to take a long time for Western supply and demand to come back into balance, even with the dampening effects on demand of a recession.

“That means, as long as the war persists, energy prices are going to remain destructively high, at least for the West”

SUMMARY

The consensus designation of oil and gas as “uninvestible” by the seers and sayers of Wall Street and Canary Wharf just might prove to be the biggest, and most expensive, swing and miss any of us will witness in our lifetimes.

“Still, we doubt woke investors have learned much, as the workings of the energy sector remain a giant mystery to most”

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