I think it’s been a big mistake, quite frankly,” Mr. Biden said Tuesday on the sidelines of the summit. “The rest of the world is going to look to China and say, what value add are they providing? They’ve lost an ability to influence people around the world and all the people here.”He said he felt the same way about Russia. “Literally, the tundra is burning,” Mr. Biden said of Russian President Vladimir Putin. “He has serious climate problems and he is mum on his willingness to do anything.
The truth and reality is, China gets it. Without fossil fuels, it’s much harder, costly, and more challenging to transition to net-zero.
China seems to have adopted a two-pronged strategy around duality. Keep on relying on fossil fuels whilst developing Renewable Energy. It’s a phased approach.
China is rated high on the “food chain” concerning electric vehicle (EV) developments. Yet, it still has to set a legislative date when the country will ban the sale of Internal Combustion Engines (ICE) in the future.
Excluding the impact that China may have on global oil demand, the graphic below depicts what the reduction in the demand for oil may look like considering EV legislated cut over future dates. The analysis includes the bold ambitions of Ford and General Motors announced earlier in 2021.
The demand for oil will not disappear instantly. Mankind is the “Siamese Twin” of energy. Without energy, poverty eradication efforts will fail. Without oil, the quality of life will be substantially lower.
A very big part of what is being missed, in all climate change adaption and transition policy and discussion, is the undeniable fact that what we are looking to transition to, being RE, has many obstacles still to be solved around storage, reliability, and replacing baseload. Solving those are more important compared to the effort being invested in sizing up Green House Gas emissions reduction targets.
On top of that, electric grids require massive expansion and capital to expand capacity to feed and support the increase in demand stemming from charging needs. That’s not the issue but rather a consequence.
What’s different with this energy transition compared to when society transitioned from horse and carriage to the ICE, was that what we transitioned to was cheap and in unlimited supply.
In comparison, RE energy is free from the sun and wind. However when the sun shines and when the wind blows. The current global energy crisis, yes it’s driven mainly by low investment in fossil fuels since 2015, and compounded by lower wind occurrence to drive reliance on RE wind.
CNN’s Fareed Zakaria sums it nicely. We need an energy transition strategy. Even if the world can reduce GHG emissions the reality is the world still depends on ~84% of its energy needs forthcoming from fossil fuels.
The question is how much RE is required to fully replace fossil fuels? RE investment and expansion still have a long way to go.
We are undeniably in a compounding energy crisis. It’s merely the beginning gauging the recent rise in electricity production costs in the US and Europe.
Put the climate hysteria to the side and develop policies and strategy that embraces duality as the world transitions to RE.
Is the risk for Hyperinflation real? Or, is it merely a feeling combined with a “word” that comes to mind? I’ll give you that much, I grew up with- and have seen high levels of inflation, but not Hyperinflation. For some, the rise of inflation to above ~4% in Canada and the USA compared to inflation targets set by the Bank of Canada and the Federal Reserve, at around ~2%, is very overwhelming. Especially folks that have been born after the middle 1990s. The rise in inflation over the past few months translates into a ~100% increase in a very short space of time. It is indeed overwhelming.
To talk about Hyperinflation, we need to start observing economies moving towards month-over-month inflation of ~50% (some background on Hyperinflation). Given the rise in inflation since May of 2021, it’s not likely to happen anytime soon. Could we get there gradually? Perhaps, but not likely given the reasons cited that is driven by technology to keep rising costs down, and creative destruction. I’ll add a few extra points to that, to consider: The changing world from being a totally industrialized economy transforming into a services economy and the gig-economy, jobs that were in demand some 30 to 40-years ago are making way for technology-services and technology-serving related jobs.
Recently I needed to assist my younger son to make flight changes. We held on the phone line for a long long time to be connected with a booking agent. We decided to drive to the airport to go to the airline’s ticket booth. We arrived only to learn, that to effect flight changes, one has no other option other than to call; or if the ticket was booked with the ability to make changes, then make those changes online. It got me thinking, technology and the internet removed a services channel and replaced it with a different type of services channel. That is the kind of development that keeps costs down.
Let’s review Money supply as measured by M3 and M2. Other measures include M0. M2 is still used by central banks and economists but the emphasis on measuring money supply from different levels was modified over the years evolving from M0, M1 to M2, M3 and now MZ.
Investopedia defines the various Money Supply measures as:
“M0: Physical paper and coin currency in circulation, plus bank reserves held by the central bank also known as the monetary base M1: All of M0, plus traveler’s checks and demand deposits. M2: All of M1, money market shares, and savings deposits. M3 is a measure of the money supply that includes M2 as well as large-time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets. M3 is traditionally used by economists to estimate the entire money supply within an economy, and used by governments to direct policy and control inflation over medium and long-term periods. As a measure of money supply, M3 has largely been replaced by Money Zero Maturity (MZM). MZM, which represents all money that is readily available, is a measure of the liquid money supply within an economy. It includes money as cash in hand or money in a checking account, for example.“
M2 Money supply for the USA and China reflecting the start of the Covid19 Pandemic:
M2 supply for the USA and China as of July 2021:
M2 Money supply has grown approx. 13.79% in ~18-months in the US and ~32.32% in China over the same period.
To get a clearer picture of the potential risks attached to Hyperinflation long-term long-range economic data is required to plot money supply against inflation trends to make more meaningful assumptions. A good proxy would be the use of the data as it pertains to the USA and China given that they compromise the bulk of the global economic output.
The growth percentages will have an effect on inflation for some time.,as they represent steep growth numbers over a short period of time. Safe to say that transitory inflation arguments, which I have been writing a lot about, do not hold water.
Since 2008, Monetary Policy Management and how it intersects with the economy changed a lot with the introduction of Quantitative Easing (QE) and the advancement of Modern Monetary Theory as the two are connected.
the introduction of new money into the money supply by a central bank”
QE has come modern-day money supply instruments at the wholesale capital market level. It involves the Central Bank purchasing government bonds from investors and banks to exchange the bonds for cash. It has expanded to practices of purchasing bonds other than government bonds. It is another method of injecting liquid cash into the financial system to stem the risk of liquidity risks. QE does not show up directly in the Money Supply. However, as it works its way through to the cash part of the Money Supply, it eventually does get recorded in money supply numbers. One would want to consider what QE looked like before Covid19 and where it is currently.
This would mean as the bond-buying continues the fair value on the central bank’s balance sheet appreciates. What happens when bond yields rise in reaction to concerns about inflation? The fair value of these bonds do down. as long as previously booked unrealized fair value gains and unrealized fair value losses, on a cumulative basis cancels out, or the economic stimulus ignites new economic growth, the risks of huge net-realized losses are lower. But what if we hit stagflation? Or persistent inflation at higher levels?
One would need to go back to the 1970s and derive how effective policy of the past can be combined with “modern-day money printing” to tame the inflation beast.
“Over the weekend, Twitter CEO Jack Dorsey said that hyperinflation is happening and that it’s going to change everything. Of course, nobody really knows what he meant or why he said it. One guess is that he’s long Bitcoin and it’s a good thing to tweet for pumping his bags. Who knows. Also tech types seem to be obsessed with the dollar and monetary policy these days for reasons that aren’t clear. Obviously the U.S. is seeing inflation these days that’s been higher than in the past, but it’s hardly hyper. But then someone will point out this chart of the so-called money supply (or some variant) as their trump card, and show that yes, there really is hyperinflation happening already.
Fans of Austrian economics, in particular, are fond of this definition of inflation, that it’s not about the price of goods, per se, but the volume of dollars. But anytime I see a chart purporting to show an amount of dollars, my thought is always the same “who cares?”. The only reason we should care about any of this stuff is if prices are rapidly getting more expensive. If suddenly there were a huge increase in dollars everywhere, but prices didn’t move much, it wouldn’t matter. If the price of bread went nuts, it would be very bad. So a chart of the money supply tells us nothing that the inflation chart itself doesn’t. And yes, there’s no denying that inflation itself has been elevated relative to recent history, but again it’s not hyper, and really it’s not that wild if you zoom out even just a little.
The year-on-year change in headline CPI remains nowhere close to what we saw in the 1970s, and there were even times throughout the 80s where the numbers were higher. Speaking of the 70s, on the latest Odd Lots, we spoke with Dan Alpert, a managing partner at Westwood Capital, and the author of a new paper that attempts to debunk the idea that a 70s-style inflationary spiral is coming anytime soon. As he sees it, quantitative ideas about money (such as the one above) have been debunked, and there remains plenty of actual capacity in the economy (domestically and abroad). All the bottlenecks and sources of pressure are in the moving of goods, he says, rather than their actual production.”
“Deflationary forces will overcome the supply-chain induced price pressures buffeting the world economy, Ark Investment Management LLC founder Cathie Wood said in a tweet after a Jack Dorsey post on hyperinflation. “Three sources of deflation will overcome the supply chain-induced inflation that is wreaking havoc on the global economy,” Wood said in a thread Monday. She was replying to an Oct. 23 post from Twitter Inc. chief executive Dorsey proclaiming hyperinflation “is going to change everything” and is “happening.”
The three sources of deflation Wood flagged are:
The impact of technological advances like artificial intelligence.
Creative destruction from disruptive innovation pushes down the price of obsolete goods.
Cyclical factors due to the pandemic whereby firms ramped up orders to meet reviving demand and will eventually be left with excess supply and unwinding prices after the holiday season.
Enduring supply-chain snarls are stoking inflation expectations and shaking up markets. Higher Treasury yields have led to questions about whether valuations for the kind of technology investments Wood is identified with are too stretched. The flagship Ark Innovation ETF is down 25% from a February peak.”
“About a decade ago, investing on ESG principles went from budding concept to moral crusade. About the same time, it emerged as one of the prime tools to fight climate change. In simple terms, ESG – environmental, social and governance – meant investing responsibly. Grubby, carbon-intensive businesses were, in effect, to be punished unless they moved fast to clean up their acts. If they didn’t, investors and customers of the saintly variety wouldn’t buy their shares or products. Companies that did not wreak planetary destruction in the pursuit of profits were to be rewarded. Out with the “bad,” in with the “good,” even if the latter could never be adequately defined. Were Amazon and Tesla “good” companies because they didn’t dig great gobs of fossil fuels out of the ground? Apparently yes, given their spectacular stock market performances. Never mind that Amazon’s gasoline-powered trucks filled the streets or that Tesla’s global supply chain extended to distinctly ESG-unfriendly cobalt mines in the Democratic Republic of the Congo. What was certain was that oil, gas and coal companies, and most mining companies, suffered the ESG backlash, turning them into market laggards and raising their cost of capital. Their lives were made more miserable by the new ranks of ESG crusaders – among then Mark Carney, Michael Bloomberg, Klaus Schwab (founder of the World Economic Forum) and just about everyone on the United Nations payroll – who promoted the glories and rewards of ESG investing.“
So is Green, after all, genuinely Green? What is this facade costing economies?
To pivot to Green, and based on calculating emissions, in Kg per 1USD of economic output, globally (when we talk about emissions intensity and per capita emissions, we ought to consider the other side of the same coin, that being, economic output per capita.
You see, there is a strong correlation in all economies between population growth, economic output, and Green House Gas (GHG) emissions. Because of this relationship, one cannot evaluate the one without the other.
In the image below, that relationship, on a global scale, is reflected. The emissions in Kg per 1 USD economic output has steadily declined since the 2000s. That tells us the world is getting better, leveraging technology to reduce emissions for every 1 USD of economic output being generated.
Based on the emissions per Kg per 1 USD of economic output, the Paris 2030 emissions target, which is a 30% reduction lower than the 2005 emissions levels, one can calculate the estimated portion of current-day economic output that has to transform to the “green economy” to meet that target. In other words, what part of the global economic production today needs to be “green” to meet Paris 2030?
It comes down to roughly ~$20 trillion of global GDP., or 26% of global annual GDP output.
This is not the same as the cost of energy transition. In Recent research conducted by The Royal Bank of Canada (RBC), (The $2 Trillion Transition: Canada’s road to Net Zero. RBC estimated the cost of energy transition could amount to ~CAD 2 trillion, the equivalent of approx. a single year’s Canadian GDP output, or roughly ~CAD 60 billion per year. Not a small charge at all.
“Canada has a math challenge. When it comes to greenhouse gas emissions, Canadians account for a relatively large share of what the world produces. Although we’ve committed over the decades to cut those emissions, we’ve fallen short. We continue to consume conventional energy to cross our vast land and heat our homes, and allow methane to seep into the atmosphere to feed ourselves and much of the planet.”
RBC is wrong about it’s statement that Canada is a large contributor without mentioning the basis on which such false statement is being made. This, from one of Canada’s largest banks. That statement is based on emissions per capita. My above comments show why, when looking at per capita it is important to consider per capita output too. Why ignoring the part of the equation (economic output) that gives rise to emissions per capita? It creates a strong bias to support a political narrative which is dangerous and will cost Canadians dearly in many ways – more energy crises.
Canada has a small population in comparison; Canada is the 2nd largest landmass in the world, Canada is a freezing place. It will consume more energy as goods must travel long distances between the East and Western parts of Canada. It’s approx. 7,366km. That does not even take transportation distances in the Canadian north into account.
Canada is not a significant contributor to GHG emissions. Canada accounts in aggregate for 1.6%, China accounts for 27%, USA accounts for 15%, India accounts for 7%, Russia accounts for 5%, the UK accounts for 1.1%
Canada’s GHG emissions are low, notwithstanding having high demands for energy for the reasons stated. Those reasons cannot be changed. Canada has the benefit of having a boreal forest that covers a large part of Canada. It’s a natural carbon sink. Russia too has a sizeable boreal forest which, given its attributes, contributes to Russia only making up ~5% of the global GHG emissions total.
Using the same metrics of what the Canadian economy requires to shift financial output to “green,” to meet the 2030 Paris target (reduce emissions to a level that is 30% less than the 2005 emissions level), Canada needs to shift ~USD 1 trillion cumulative economic output between 2021 and 2030 to meet the Paris 2030 targets. That’s the equivalent of approx. 47% of the current annual GDP.
Stated differently, Canada is to spend ~CAD 60 billion per year to shift ~CAD 115 billion in economic output. Thus the current GDP needs to expand by roughly ~2.8%, to produce the capital required (The CAD 60 billion calculated by RBC) to invest in energy transition efforts.
In other words, the economy needs to grow at approx. 5.8% on an ongoing sustainable basis, year over year for ~10-years to generate the cash to pay for the energy transition. It’s relevant to ask, “how realistic is that given that the fossil fuels industry is the largest contributor to the Canadian economy, but is being marginalized for the past 7 years; Canada is dependant on ~76% of direct trade and exports with the USA. Canada is approx. 10% of the USA in all respects.” – “NOT EASILY DOABLE GIVEN HISTORY!” If Canada cannot diversify its exports and leverage it’s energy to do so; chances are the economy cannot and will not grow at the levels needed to produce the investment capital to make ESG and Net Zero work.
What do we receive in return? The ability to shift CAD 115 billion in economic output to “green”. Spending CAD 60 billion to move CAD 115 billion. It’s an economic ratio of ~52% of what we need to shift to ” green” that we have to spend to go the ~CAD 115.
There are downsides to ESG, the true costs are questionable. RBC suggests it could cost annually ~CAD 40 billion in climate-related disasters if it remains business as usual (BAU). However, just by saying that spending CAD 60 billion to prevent spending CAD 40 billion are wrong for several reasons:
The investment into energy transition costs doesn’t produce dollar-for-dollar savings. There is no direct correlation. At best, an indirect correlation that has delayed future disaster cost-savings effects;
There are other means to reduce climate disaster costs. Landuses need to be better managed;
Humanity does not have proof yet that vast investments will, in fact, generate the targeted emissions education targets.
ESG is coming at a significant cost, a cost that was not foreseen and quantified,
It will take a very long time to reverse the declining investment trend in oil and gas, even if a capital stampede reversal starts now. Oil an has companies are likely “once bitten, twice shy”, ” once marginalused, twice shellfish”. Why should they? It’s more lucrative to ride the wave of tight supply collecting riches.
La Niña may trigger another cold winter, and Russia is not sending enough pipeline gas to Europe. All of these are contributing further to the onset of a commodity supercycle.
RBC further writes:
“This journey will require new approaches to sustainable finance, if we’re to generate the $2 trillion needed to finance the transition. Overall, capital is not in short supply. Investible projects, with reasonable returns, are. What’s needed? An overhaul of industrial regulation and tax policy, and more government backstops, to offset the inherently risky frontier of clean technology, sustainable infrastructure and new consumer products. A lack of consistent and reliable policies continues to impede Canada’s ability to attract the sort of private capital needed to finance the transition.”
If the economy cannot generate ~CAD 2 trillion, lending it through federal government programs will contribute to more debt and deficits. A key catalyst pushing inflation higher over the transition period.
Quite rightly stated by RBC, we need better policies. We need approaches that integrate the path to Net Zero with the transition dependency on fossil fuels while the renewable energy storage, grid demands, and reliability as solved through technology innovations. It’s a dual process, this policy focussing on “Duality.” You honestly don’t need to have a string of Ph.D. letters behind your name to figure this out. All you need is plain old fashioned ” commonsense
Financial Post: Peter Tertzakian: We are witnessing the perils of a disorderly energy transition
Peter Tertzakian: We are witnessing the perils of a disorderly energy transition
Renewables going up is not translating into oil and gas going down
Eugene Van Den Berg, Oct, 2021
From the article above the Financial Post writes:
“Climate crisis plus energy crisis does not equal a good path to net-zero emissions. Policy wonks at the upcoming COP26 conference in Glasgow later this month will have a tough time with this calculus.It’s been a while since the phrase energy crisis has been thrown around. When I hear it, I have déjà vu to the 1970s. We are witnessing the perils of a disorderly transition, the consequence of mismanaged efforts at decarbonizing the world’s energy systems.
And as with the financial crisis of 2008, which spread around the globe because of systemic risk and contagion, the current energy crisis is spreading from Europe to China to Brazil and soon it will start hurting here at home, North America notwithstanding all the Natural Gas and Oil reserves. the last 7-years in Canada are painted with canceled projects all in the support of the climate agenda. Even though Canada has the world’s 3rd largest oil reserves, it means “squad” because the means to carry it to market for Canada and the world to benefit from has been amputated amid the canceled projects. Even if projects are started now it’s too late and will not be completed in time to fend off any energy crisis. It’s ironic, given that the low Green House Gas (GHG) emissions are being recorded by Canada at ~1.6% of the global total. Another astonishing fact is the quick argument that Canada has a very high emission per capita. I’ll write about that in a separate post safe to say that when we talk an=bout “per capita” both sides of the “per capital” coin are important to grasp. Canada is also painted as having a very high emissions intensity per barrel of oil produced. Nothing is further from the truth as Canada’s record compares favorably to the rest of the world. More about that in another post.
Peter Tertzakian, uses a great analogy, in the above article: ” In business, the word ‘transition’ embodies the premise that people replace old products and processes with new. Sales of the latter grow and the former wane. For example, paper map sales go down when GPS unit sales go up.I didn’t stop buying maps, nor took them out of my glove box, until I was convinced GPS was leading me to the right destination and that there was ubiquitous signal coverage wherever I went. Maps may be a trite analogy to oil, but here is the point: Preserving redundancy through a transition offers continuity of a function, security, and a sense of comfort.“
Another way to look at it can be found in history in the late 1800s to early 1950s. The transition from horse and carriage to Internal Combustion Engine (ICE, or car).
When mankind transitioned from horse-to-car it spanned approx. 50-years. The difference then was, making the transition from one reliable source of transport to another cost-effective source of energy to drive transportation. Businesses like blacksmiths went bust only to be replaced by tire shops and dealer repair shops. The transition took place to an energy source in the abundance of supply, reliable, easy to obtain, and cost-effective. No doubt that fossil fuel drove the enhancement of the quality of life for all on planet earth. Fossil fuels play a key role in poverty eradication too evident when comparing the correlation trend between energy consumption, population growth, and poverty eradication.
The transition from fossil fuels to Renewable Energy, and specifically wind- and solar power, aims to capture and tap 100% into the unlimited supply of the sun’s energy and the wind’s power. That’s great, free energy resources, who can say no to that. However, the reality is that although win and sun energy exist in an abundance of supply, the methods in capturing and storing it are the challenges that are tripping up making inroads into this behemoth megalodon transition goal. Wind and sun as of now, contribute approx. 17% and 25% of installed capacity. One can ask a valid question about this. If the climate change agenda has been in effect for ~30-years, why is the effectiveness of its contribution to energy consumption low and seems to remain low? What is preventing these forms of energy to capture compounded market share (of utilization NOT generating capacity)?
The world will still be dependant on fossil fuels for the foreseeable future.
As developed nations race towards ESG utopia ideology and cancel old faithful fossil fuels, other countries like Saudi Arabia and Iran welcome the giving of free gifts in terms of global oil market share. The developed world daily is donating market share to these countries on a silver platter. Imagine the cost for course reversal one day at which point it will be too late and we are likely going to repeat 1973 many times over before we land in ESG utopia. For them, it’s “partying like it’s 1999”, never to be repeated again. This, that right there, plays into concerns of future energy security. I get a feeling and a vision of a “MadMax” landscape where the less ethical controls all the oil when we are long still not quite done with oil and gas. We are following ourselves to ignore “duality” as the basis of transition.
Enthusiasm from individual traders is reshaping the market for nuclear fuel that generates a tenth of the world’s electricity and sending uranium-linked stocks higher.
Eugene Van Den Berg, Oct 2021
From the above article:
“Enthusiasm from individual traders is reshaping the market for nuclear fuel that generates a tenth of the world’s electricity and sending uranium-linked stocks higher. After languishing for a decade after the Fukushima disaster led Japan and Germany to close nuclear reactors, spot uranium prices have shot up to $47.10 a pound from $32.25 at the start of August. They remain below their peak of $137 in 2007”
With the current energy crisis and previous Renewable Energy (RE) transition plans to make a “quantum leap” in the short-term, no that’s wrong. It’s actually “trying to take a shortcut on a global scale to chase an ideology, the world has “injured” itself in doing so”. As we learn in school solving the math problem does not work so well trying to take shortcuts. We may get to the wrong answer, and still get marks for the steps shown in solving the Algebra equation. Let that sink in then you may appreciate that the race to “prefect ESG” creates problems that are best avoided.
Germany wanted to cut nuclear and replace it with RE wind and solar. It did not quite work out as planned.
Other countries are running flat out a stampede to instantly move from coal-fired plants to RE wind and solar, having disregard that energy transition will have better outcomes when executed in a structured and organised fashion. Transition from coal to Natural Gas and Nuclear whilst, alongside that, the challenges around RE wind and solar intermittency is scienced to perfection, including solving battery storage and fast charge challenges for Electric Vehicles, will ensure smoother long-term outcomes.
To top it all off, as we transition, all should be engaging in planting trees and replace forests being destroyed in a rehabilitation ratio of [1:10]