Timelines rarely match-up in the real world. Your expectations vs. my forecast vs. the reality of things. We currently live in a backdrop where global oil demand is set to rise in the coming months, propelled by a receding pandemic and historically loose fiscal and monetary policy. This is a world where pent-up demand will link arms with unprecedented savings and stimulus to create a recovery unlike any other. It’s the pendulum swing in full effect.
That pendulum is gaining momentum as we recover, morphing into a wrecking ball. Having swung one way to absolutely destroy global energy demand, it’s now swinging the other way and endangering energy security.
It’s coming quickly, arguably too quickly because we’ve recovered too quickly. Why do we say this? We’ve recovered faster than our energy supplies have. Remember at the beginning of COVID, experts and market strategists thought that COVID would last for years, and that given our history of drug and vaccine development, we’d be unable to create and commercialize something that loosens the pandemic’s grip. Instead at the time we wrote this . . .
“Contrary to the throngs of newly self-credentialed epidemiologists and armchair doctors on social media who so confidently predict dire outcomes, we know that the scale of the pandemic has created a global response that’s completely under-appreciated or overlooked. When seeing their predictions, we’re reminded of an Isaac Asimov quote that reads “[t]here is a cult of ignorance in the United States . . . nurtured by the false notion that democracy means that my ignorance is just as good as your knowledge.”
Government institutions, public/private companies, NGOs, healthcare providers, innovators and thought-leaders worldwide are almost singularly focused on developing treatments and vaccines to combat the virus. Their motivations to do so and attendant rewards are immense. Many have argued with certainty that no current treatment is a panacea and that a vaccine will take 12-18 months, fair enough, but breakthroughs and advances are much more likely when timelines accelerate as regulations relax. Some treatments are already showing clinical benefits. Although full clinical data is still pending, keep in mind that we are two months into this pandemic. Politically there’s an effort to manage expectations, but the private reality is pushing everyone to exceed them. We simply don’t know, but if our options are to trust in the innumerable scientists who do and who are working tirelessly on corralling this virus then our money is firmly on the scientists. Blind optimism? No. It’s an asymmetrical bet on human incentives, and in incentives we trust.”
11 months later? We’ve already seen 6 vaccines approved, 1 more likely to be approved and numerous treatment options approved and available. Falling positive cases, death rates, and hospitalizations means either our vaccination programs are working and/or we’ve developed some type of effective immunity. We’re going on 11 months (in the West) since the start of this global pandemic, and we’re beginning to see the end.
Alot Can Happen in 11 Months
Recovering in 11 months is frankly a miracle. Despite our confidence of an accelerated recovery (vs. the “Twitter timelines”), it’s still about the best case scenario anyone could have imagined . . . just 11 months ago.
What 11 months isn’t though is long enough to change habits. 11 months is a blink of an eye, and instead of changing our behavior to become less social creatures, it’s only reinforced it. The desire to congregate and socialize has simply been heightened throughout this collective experience. Forced to acknowledge our individual mortality, the YOLO (“You Only Live Once”) force will be strong. Most doctor’s would advise patients who have experienced a traumatic life event to “take it easy,” but we doubt a call for reflection will occur here as the authorities Red Bull us to get the economy restarted. Certainly the market already recognizes this because the reflation trade is alive and well.
What the market doesn’t know though is what we’ve done to our energy supplies. The assumption is that things will return to normal because we’ll return to normal. Yet, what’s happened to the energy sector in the past 11 months has been transformational. 11 months may not have changed our individual behaviors, but it’s been enough to change an industry.
A reckoning had to occur, and a reckoning did as the pandemic wiped the slate clean. E&P companies only had themselves to blame for the demise, as they entered the pandemic weakened after years of poor management decisions, a complete disregard for shareholder value, and a misplaced focus on growth over value. Faced with insolvency and a complete loss of lender/shareholder support, companies began changing (voluntarily or involuntarily), consolidating, slashing expenses, and taking “the pledge” to generate free cash flow and focus on shareholder returns via buybacks, debt reduction, and dividends (variable or not).
Externally, the overcapacity, bloated inventories, historically low oil prices, ESG mandates, and changing political landscape gave environmentalists an opening to shift the conversation and pivot our priorities. Armed with a presidential seal and potentially limitless funds, climate crusaders began touting the benefits of a green revolution if we only electrified and decarbonized our energy infrastructure. 2030, ’40, ’50, these were the years thrown out by companies, environmentalists, government officials, and the media for when we could achieve net-zero carbon emissions. Read the fine print though and many acknowledge that despite the pledges, for the foreseeable future, fossil fuel consumption will continue to climb higher until at least 2030. So even under the most optimistic scenario, we’re a decade away. Still, if you want people to change, you have to create a sense of urgency, and fine print has no place with fear.
11 months. 11 months to hammer home a green energy agenda while we’re consuming less, driving less, and using less. 11 months to convince the masses that an energy transition was easy if only we threw money at it; that an energy utopia was within reach because the technology to capture and store it have matured enough to replace our current unhealthy diet. The message couldn’t be further from the truth, but nevertheless the idea that “we have to change” and “we should change” morphed into “we’re able to change” and “we can change, quickly and painlessly.” A sensible message morphed into intentional obfuscation.
So as we revert to our old habits of traveling, socializing, entertaining, as we resume our higher-energy consuming lifestyles with our padded pocketbooks, we’re doing so with an industry ill-equipped to power our recovery. Years of underinvestment in long-lead projects, the impacts for which are beginning to be felt this year, are now compounded by capital scarcity, spending restraint, and the demands of green energy investments.
If non-OECD consumption patterns are any guide, then OECD countries will largely recover to pre-COVID demand levels by year-end. India consumption levels are 2-3% away from pre-COVID levels, and China’s demand is nearly the same. We’d expect a similar path for OECD countries.
Said another way, by year-end we’ll have exhausted our global spare capacity . . . 11 months from now.
We will then be asking companies, national oil companies, and governments to quickly increase supplies, despite the knowledge that one day, very soon, after we slake our thirst, we’ll again shun your dirty resources. Still, despite our desire to change, we just need one more hit as we celebrate the twilight of oil. Which brings us full-circle to what we wrote in early 2020, before the COVID pandemic crossed the Pacific and landed on our shores. Before the energy industry imploded and curtailed its ability and desire to adequately supply the world.
“It was the year of the environmentalist. As the movement gained traction and garnered attention, one could argue that its influence has never been greater and its momentum never higher. Nearer the peak, the sight lines are clear and the perspectives are different. You below, you don’t see what we see. Follow us, for we know the way. As a society, our use of fossil fuels is destroying the environment, what we extract from the ground and burn into the air is endangering our survival and we need to stop. Fair point. We’ll leave it to the scientists to determine the speed and impact of climate change since that’s what they do best, science. Although we acknowledge the arguments, we think the environmental climbers have raced ahead of reality. The movement has advanced the argument beyond the rational, using a mixture of alarmism and fear based tactics to galvanize action, and when opposition appears, shaming is deployed. If the very movement is called the “Extinction Rebellion”, does it mean those not part of it are really pro-extinction?
Perhaps some of this is necessary in a complacent society, one bombarded daily by the next existential threat. Yet, when emotions come into play to sell things, it can oversell them. At the top, conviction hardens into certainty, and rational arguments for why we need fossil fuels are batted away. Don’t we need fossil fuels to bridge our society to cleaner alternatives? No, because apparently the impact of fossil fuels on our environment outweighs any utilitarian value they bring. We need change, and we need it now. In contrast, we’ve said
“As investors, we’re making no moral judgments on the use of petroleum products. We’re simply saying people use them and they’ll continue to use them until it costs too much financially and/or socially and a suitable substitute is found. For now, neither has happened, which means demand for oil and petroleum products will increase because global living standards continue to rise.”
We simply don’t value things when they’re cheap. When energy is abundant, the stirring shouts for change reaches a peak because the repercussions of those demands are muted. Try advocating for wholesale global change when energy prices run higher. Lost amidst today’s rancor is the understanding that the movement’s very expedition to the top has been sherpa’d by low energy prices. Those guides are now fading one-by-one. Capital starvation, Middle East instability, OPEC+ self-interest, stalling US production, disappointing non-OPEC production, trade war detente, take your pick. In fact, take it all. The tailwind that allowed the environmental movement to gain momentum is turning into a headwind. Oil inventories have remained flat in 2019 only because global demand grew at the slowest pace in a decade. The shortage we’ve been projecting has long been delayed, but the reasons remain undeterred. The force of today’s environmental movement will be drowned out by higher energy prices before rising sea levels, and only then will the next era of green energy become economically viable on a mass scale.
It’s never been about the desire to change, but the collective will to do so. Our willingness to change has always been driven by the cost of change. Nothing is free, and when reallocating capital, a price must be paid. In the end, a transition will happen, but not before energy prices climb high enough to displace the environmental movement at the top. That day is approaching, we’ve little doubt. It’s time to change, but undoubtedly we’ll all pay a price.”
So again, your timeline doesn’t match ours, it doesn’t match reality because Day 1 of the energy utopia isn’t a year from now, it’s 10 years from now. In the meantime, Day 1 of our global recovery begins now, and with that, Day 1 of our next energy crisis. In 11 more months, our appreciation for fossil fuels will shift again.