The painful jump in gasoline prices over the past year has become a popular topic of conversation. It also has created a raft of jokes; here are some of the better ones:
- I got gas for $1.70 yesterday. Unfortunately, it came from Taco Bell.
- I got robbed at the gas station today. I called the police and they asked me if I knew who did it. I said, "yes sir, pump number 5."
- The college kid pulled into a gas station and ordered $2 of gas. The attendant dabbed a little behind his ears.
And finally, SUV now stands for “sports utility victim”. That one rings true as I glare at the price gauge while pumping twenty-three gallons of petrol into my V8 guzzler.
How did we arrive at the current US energy crisis? It was both sudden and a long time in the making, owing to unforced errors, world events, a chronic lack of leadership and raw politics.
Let me clear the air. I’m all for a cleaner environment, a (gradual) shift away from hydrocarbon energy sources and that climate change is real.
Notwithstanding these sincere beliefs, the science is unclear as to what is causing climate change. Excess greenhouse gas is a reasonable theory as to causation but not proven science; more research is needed to get definitive answers. Regrettably, the topic of climate change is now woven into the culture war.
While renewable energy is an exciting frontier, it’s not remotely ready to serve as a mainstream energy source. And it won’t be for decades; that’s a stubborn fact.
Yet the Biden administration rode into Washington with the misguided notion we could stop drilling for oil/gas now, unilaterally disarm as a carbon user and give everyone an electric car. They launched a bizarre full-scale political attack on the oil/gas industry as an enemy of the people.
The sad thing is that there is a compelling national energy policy that both sides could get behind: a natural gas-powered economy.
The advent of shale drilling tapped into some of the largest, cleanest reservoirs of natural gas on the planet and was a remarkably fortunate geological/geopolitical break for the US.
I had the privilege to work closely with many gas lease landowners during the nascent Marcellus Shale boondoggle years ago. I developed a working knowledge about the geology and economics of natural gas and an appreciation about how natural gas could readily serve as the bridge energy source between oil/coal and renewables.
As shale gas drilling proliferated, there were encouraging signs of its transformative power. Compressed natural gas (“CNG”) vehicles entered production and CNG pumps started to appear at gas stations. And then it petered out.
The oil industry has powerful lobbyists that squelched the CNG movement before it gained traction. It didn’t help that neither Obama nor Trump had a coherent energy policy. “Drill baby drill” is a clever political slogan but not an energy policy.
Few even talk about CNG anymore, now liquified natural gas (“LNG”) is the hot new energy topic. Why? Because it is being weaponized against Russia as a substitute natural gas source for Europe and LNG prices are sky high and rising.
Somehow, political dolts in Europe allowed Russia to supply 40-50% of their oil and gas needs. Europe is in an energy vice, beholden to an evil despot and scrambling to find alternative hydrocarbon suppliers.
The US is filling the energy void by liquifying vapor gas at silly low temperatures, which is then piped onto a massive cargo ship and ferried to Europe - and to a growing number of other world ports as well.
The infrastructure to move sufficient volumes of LNG to Europe doesn’t yet exist, but the Americans and the Europeans are working on it.
The burgeoning global demand for LNG energy has been a shot in the arm to the beleaguered US natural gas industry, which has suffered from unprofitable low commodity prices from oversupply since shale drilling began.
As a result, investors should keep the natural gas commodity and/or economic sectors advantaged by LNG exports - like pipeline businesses - on their radar.
Back to oil. The industry has been on a roller coaster ride since 2020. First OPEC made their second attempt to murder the US shale oil industry during COVID by pushing oil futures prices to a negative ($40) per barrel. Surreal times, to say the least.
Secondly, from his first day in office, Biden has attacked the oil industry seeking cheesy political points. At the same time, investors were pressuring oil companies to curb drilling and generate more profits. The net effect of these pressures has been less US oil drilling activity while global oil demand is rebounding smartly.
Oil (and gasoline) prices were already ascending at an uncomfortable rate entering 2022 when Russia inexplicably went to war with Europe, spiking oil and natural gas commodity prices even higher.
The upshot of these factors weighing on energy prices is higher headline/core inflation, more pressure on the Fed Reserve to raise interest rates aggressively and more wealth inequality.
I read that nearly 70% of all manufactured products are derived from crude oil, from medicines to laptops. These entanglements mean it will take a really long time to wean off crude oil. This inconvenient fact must be part of the discourse if we want to craft a smart new national energy policy, not one driven by partisans. Good luck with that.
Given the disinterest by the developing world to eschew oil consumption, global demand will grow for many years to come, which means the price of crude oil is more likely to hover in $80-100 per barrel range than $20-30 for the next several years.
In the meantime, our investment outlook is to invest in natural gas but trade in oil as it cycles up and down. Crude oil is and will remain a lightning rod topic and is already avoided by the socially responsible investor community.
Until next time, drive slower and be well…Tim