Green bubbles threaten to pop stock markets

On Oct 2, 2021

Prices for all energy commodities jumped during the past month, some by record margins, as a global energy shortage set off a scramble for gas, coal and oil. Brent crude has doubled in the past year, Newcastle coal has quadrupled, and Netherlands natural has risen seven-fold.

There are many small reasons for the global energy squeeze, and one big one: Investment in hydrocarbons has collapsed under pressure from the Green agenda adopted by international consensus.

Energy investment in the United States has dwindled as large institutional investors boycott fossil fuel investments. China’s critical electricity shortage is the result of draconian regulation of coal mining, exacerbated by Beijing’s punitive ban on Australian coal imports.

The idea is fanciful that the world can re-direct US$100 trillion in capital investment during the next 30 years to reduce carbon emissions to zero by 2050, as the International Energy Agency has proposed.

To put in context what this number implies, I note that the combined free cash flow of the 4,100 companies worldwide with a market capitalization of at least $1 billion was $332 billion in the first quarter of 2021, or $1.33 trillion annualized.

To put this in context: $100 is about 70 times that sum to be spent over 30 years. In other words, the entire free cash flow of the world’s private corporations would barely make up a third of the Global Reset investment budget.

The political pressure of the Green agenda has virtually wiped out investment in the US oil and gas industry. Capital expenditures for US exploration and development companies during 2021 (and projected for 2022) are only a fifth of the 2015 peak of $150 billion.

Meanwhile, oil and gas companies are sitting on mountains of cash. The free cash flow of the oil and gas industry will rise to $50 billion next year, the highest on record. In 2015 the oil and gas industry showed negative free cash flow because it borrowed to expand production.

Now oil and gas companies are paying down debt and returning cash to shareholders rather than take hydrocarbons out of the ground.

There has been an increase in energy demand due to an unseasonably hot summer and the reopening of airline flights and other forms of transportation, but the spectacular increase in energy prices is the result of constraint on demand.

Virtually the whole of the world’s political elite has signed on to the carbon neutrality agenda, including the government of China, which appears to believe that support for carbon neutrality (which China has pledged by 2060) will mitigate hostility to China in the West.

But the energy market suggests that the hard reality of supply constraints will overwhelm the Green agenda before it gets started.

The energy price shock adds to the inflationary pressures that continue to build in Western economies. Supply constraints in the United States have spilled over to the services sector, as the…