The global energy crisis will deepen

Capital continues to flee fossil fuels and there are no alternatives today

Fossil fuels remain the primary source of energy for the World, with little else registering on a global chart despite trillions of money squandered on so-called “renewables”. Everyone should think about these data from the International Energy Agency (IEA).

Consumption of coal, natural gas and oil has continued to rise throughout the past few decades while left-wing leaders have vilified fossil fuels and claimed the world would “transition” to “renewables” like wind and solar. That seems ludicrous in context.

Under relentless attack by Joe Biden in United States, Justin Trudeau in Canada and a plethora of their ilk abroad and scattered throughout the halls of left-wing organizations like the United Nations, oil & gas companies have slashed capital budgets. Estimated 2020 capital outlays by oil & gas companies of about US$450 billion are a 17% drop from 2019. The curbs on capital spending by oil & gas companies are broadly based and range from a modest 10% to almost 60%.

The dire outlook was predictable and is manifesting itself in crippling energy costs in Europe and United Kingdom, with a combination of declining output and some curtailment of supply from Russia creating a full-blown crisis. Forecasting oil & gas supply is not complex - decline rates are well known across all major reservoirs and capital efficiency data (capital efficiency is the approximate cost to add one barrel of oil equivalent per day) are similarly subject to ready analysis. With output of about 100 million barrels a day and a global decline rate of about 6% enough capital must be spent annually to replace 6 million barrels a day of oil. At a capital efficiency of $20,000 (most operators would be delighted with such a result) US$120 billion of capital expenditure is needed to stand still. The number are illustrative. The fact is that the US$450 billion of capital outlays in 2020 saw no increase in output and by most estimates a decline.

Declining output combined with rising demand has inescapable results - growing shortages and higher prices. Throw in the Ukraine war and a problem becomes a crisis. In United Kingdom, natural gas prices have risen to the equivalent of US$300 to US$500 a barrel over the past year and households often have to choose between food and home heating. This winter will be brutal for Brits.

Desperate for more fossil fuels, Biden went on bended knee to Saudi Arabia to beg for higher production and quickly learned OPEC had little spare capacity. German leader Sholz came to Canada to ask Trudeau for LNG to ease their crisis and Trudeau told him “there was no business case” for LNG from Canada. How would Trudeau know whether there was a business case or not? He has never run a business, knows virtually nothing about economics, and is deluded by his belief that CO2 causes climate change. He seems to prefer the destruction of lives and livelihoods today to the common sense answer - drill baby drill. Canada and United States have the resources to solve the global energy shortage by expanding oil & gas production but refuse to do so claiming “climate change” is a greater threat at some future point than starvation or freezing this winter are right now. Absurd nonsense. CO2 is demonstrably harmless.

Absent a change in American or Canadian policy, European pleas for help will become outright begging and the economies of European countries will pay the price for institutional stupidity. Canada and United States are trading countries and they too will suffer as their European customers weaken.

Who benefits? China, who embraces coal and keeps using more oil. India, who embraces fossil fuels and nuclear. Russia, whose foreign exchange reserves have offset sanctions through Russia selling less oil & gas but at higher prices. North Korea, who sensibly relies on mitigation and adaptation to any extreme weather caused by CO2 or otherwise.

It is amusing and disturbing that Biden and Trudeau’s policies strengthen our international adversaries and weaken our allies, and Trudeau thumbs his nose at their requests for help. Is it possible to formulate worse foreign policy? Likely not.

For investors, face the obvious. Investments in fossil fuels will pay dividends and investments in stocks dependent on economic growth will underperform until common sense returns to the halls of Washington and Ottawa. In the meantime, if you have stocks like CNQ, TOU, SU, CVE, SDE, BIR, PEY, PNE, ARX, CJ, TVE, NVA or BNE in your portfolio you may be pleasantly surprised in an otherwise dismal outlook for this winter.