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Tobin Smith: Bad Energy Decisions Matter

 

Image by Harry Stilianou from Pixabay

Bad Energy Decisions Matter

The 2022 Energy Crisis Is Here as Nations Struggle to Keep The Lights On

Courtesy of Tobin Smith, Transformity Research

Many Transformity Research investors have made a fortune in our energy infrastructure investments in the last 20 months, and we stand to make a lot more profits as the 2021-2022 energy crisis deepens.

For a variety of reasons, the profitless public Exploration and Production (EP) Fracking Boom is unlikely to happen again… and thus we are in a structural bull market for energy and a longer-lasting Fracking Bust while the resurging world economy that still runs on 80% hydrocarbons for energy barely hangs on. 

We forecast $75 oil in June and $4 natural gas after it became clear the major oil and natural consumption countries were on a path to at least enough vaccination and natural immunity to re-open their economies. We knew there would be more pent-up demand for oil and natural gas, and not nearly enough marginal new production.

We knew that because in the United States, the world's new leader in energy production, the public companies that created the Great American Energy Fracking BOOM had lost $trillions in borrowed money in a race to the bottom of the energy fracking mountain. Wall Street and energy banks were not lending any more energy production money because it would only serve to make them lose MORE money per barrel of oil or MMMbtu of natural gas.  

The old rule of commodity economics--the cure for high priced energy is high priced energy--requires willing lenders and investors to finance unprofitable energy drilling and production. But the folks with the money called uncle even before the pandemic hit the oil patch. When combined with OPEC+ getting religion on oil production that skews oil prices higher at the margin, now the new marginal producer of oil and natural gas in the world (American energy industry) was cut off from their financial enablers.

When fracking technology became profitable, lenders and private equity forgot that the cure for $100 oil was $100 oil…and the $100s of billions of drilling spending made the US the new marginal producer of light sweet crude. The “produced natural gas” that also came out of the ground via the fracking technology also made the US the new marginal producer of Nat gas. After losing about $1 trillion (almost all borrowed $$) investing in oil wells that cost $50 per barrel with $30 a barrel oil (because of a new marginal supply of oil) — and after a near death experience during Covid, when oil prices turned negative, banks and private equity got religion — they cut EP investing 60-80%. Over-supply became under-supply, and, this time, EP lenders and investors did not chase the “easy money”. 

The exception to this new paradigm is the PRIVATE EP companies that don't answer to shareholders. Oil prices around $80 a barrel are once again spurring a revival of shale drilling in the Permian Basin of Texas and New Mexico, America’s biggest oil field, where production is expected to return to pre-pandemic highs within weeks.

Only this time, the surge is being driven by private operators, rather than the publicly traded companies that fueled the previous booms. And the private operators see little reason to slow things down.

Strong oil and natural gas demand has created an opening for closely held producers, most of whom are backed by private equity or family money, to ramp up output in West Texas and southeast New Mexico. With the other major U.S. shale basins either holding steady or declining, according to BloombergNEF, the surging growth in the Permian isn’t likely to risk upsetting OPEC or tanking crude prices as it did in previous shale booms—at least not yet.

“It’s a win for the privates without being a loss for the oil markets,” according to Raoul LeBlanc, an analyst at IHS Markit Ltd. “The big takeaway is that private growth won’t ruin the party.”

Key Point: The United States hydrocarbon industry became the marginal supplier of oil and natural gas to the modern world, but the Fracking Bust in the United States was and is very real. Somehow most folks missed the memo that all the renewable energy in the world would not make a dent in the world's energy crisis 2021-2022.   

To make matters worse, mother nature and unrealistic timetables for conversion to renewable energy kicked in. Last year’s unusually cold winter drained European and Russian gas reserves significantly below normal reserves, and of course, Germany with the largest European economy has been phasing out nuclear power. The renewables that are meant to replace those sources aren’t yet close to picking up the slack. 

Then the wind in Norway and Europe stopped blowing. Wind turbines didn’t produce as expected with wind power at 20-year lows. Usually, we can blame exporter Russia for high natural gas prices, but not this time. And not to be outdone, Europe heads into winter with households paying five times the usual rate for their main heating source, nat gas. 

Then there is China and India.  According to the India Times, "half of our 135 coal-fired power plants are running on fumes because an intense monsoon season swamped the coal mines with rain and blocked key transport arteries with landslides."

Why not import more coal? Importing coal is “not an option” according to the India Times since demand from China has driven global prices to record highs, with a 40 percent increase through August and September. The price of both oil and cooking gas is also up about 60 percent this year. India's citizens are trying to buy alternative fuel sources such as “cow dung and firewood.” 

I did not make that last part up. 

China is trying to make up for the loss of coal with imports and has unofficially eased its ban on Australian coal, imposed a year ago after Canberra called for an investigation into the origins of Covid-19. They're also trying to boost coal production.

Why? Mostly so angry Chinese citizens don’t turn on the government. Yet Beijing has been shutting power plants for years because of environmental concerns and slowing production at coal mines as part of a workers’ safety campaign. Financial Times says China’s shortage has “panicked businesses,” into hoarding. 

Some Chinese provinces are already suffering rolling blackouts, with companies rationing the use of factory equipment and instructing workers to take the stairs. And, oh yea--the Winter Olympics are in China in early 2022. They can't have their guests freezing to death! 

The U.K. draws 70 percent of its electricity from coal, 90 percent of which has been mined domestically. They were depending on 25% of their power from offshore windmills that unfortunately have endured a historic wind shortage. And Lebanon actually went completely dark for 24 hours this week, after its biggest power stations ran out of fuel and its whole grid failed. Power companies in Europe, India, and the U.S. are warning there could be outages in the months ahead (remember Texas last winter?)  

Our expectations for "green energy" are unrealistic: it will take decades for green energy to ramp up and replace hydrocarbon energy.  

There are no magic answers and quick solutions. Poor decisions have led to an energy crisis and to get out, the United States' energy investment and banking world would need to return to the grand old days of stuffing $trillions into the pockets of major public oil and natural gas frackers. I doubt that's going to happen. 

Image of wind farm by Jose Roberto Jr. Del Rosario from Pixabay 


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