The European crisis forces a transition that should have happened ten years ago
Oil has become more than ‘just’ the commodity that runs the world. It has taken the front lines, defending the planet against a tyrant bent on death and domination.
This is an incredible turnaround from what we have known and seen in the past 5 years. Oil and gas, annihilated by low prices, has been the butt of jokes on Wall Street, a pathetic under-performer with investors. Huge investment conglomerates, (I’m looking at you, Blackrock), chose to read oil and gas its last rites and pour huge firm capital (and investor money) into ESG, spitting in the eye of big oil. European markets and European governments doubled down on renewable incentives and put their faith in the transition towards solar and wind. In both Europe and the US, the Left meted out scorn on oil companies who were ready, willing and able to participate in the coming (and necessary!) energy transition.
Now Europe has decided to fight back against a murderous dictator bent upon regaining control of Eastern Europe with the strongest weapon at their disposal – sanctions and isolation, including oil and gas, nearly 40% of the Russian economy. This is stunning and important – the withdrawal of oil majors BP, Shell and Exxon represent a capital and technology blow that the Russian economy ultimately cannot sustain and survive – and these moves were voluntary, all the more remarkable considering that Big Oil normally isn’t discerning of the corrupt governments it often chooses to partner with.
Russia has the largest global reserves of natural gas and is the third largest supplier of oil in the world. Their revenues from oil and gas won’t be immediately cut, but curtailed – but even a 30% decline in oil and gas revenues in Russia assures a major depression there. On the other side, Europe will be looking for sources of energy – ANY source of energy – to supplant their primary supplier.
And so, we’re back to our energy villains turned heroes – Oil and gas, and most specifically, US natural gas.
There is here, perhaps, a silver lining inside the horrors happening in Ukraine – A necessary push towards the energy transition that should have been started twenty years ago and be finished by now – towards natural gas and LNG.
The US does not have the largest reserves of Natural gas, it is fifth on the list. What it does have is the most well developed natural gas infrastructure by far in the world. No one can get out their reserves as efficiently, or as quickly, as US nat gas producers can.
There are limited nat gas reserves in Europe, but LNG technology is ready to bring it there. We are about to see a revolution in LNG supplanting Russian gas throughout Europe and to a lesser degree, into Japan and Asia. Whether that gas comes from Australia, Qatar or the United States, this revolution is about to make natural gas a far more globally fluid and globally priced commodity than it has ever been in the past. Nat gas, as opposed to oil, was always priced locally – the basis differentials between hubs (and between countries) remained enormous and wildly volatile. That’s about to change forever. LNG can make local, volatile markets in every country for natural gas far more global and stable.
We’re about to witness the beginnings of the REAL energy transition (that will lead ultimately towards renewables) that we should have already seen ten years ago – with a tsunami wave towards natural gas.
Oil is now expensive and it will stay expensive. Nat gas is about to get more expensive too – but the vast available reserves worldwide make it more more stable and relatively far cheaper than oil – and begin to dominate fossil fuels going forwards. The sources (outside of Russia) are reliable and plentiful, and they can be tapped more quickly and cheaply than oil reserves. The further development of electric and other renewable resources will take the better part of a decade, while natural gas is ready NOW.
And that’s what the West needs – an energy source that’s ready now.
The rise of oil and oil stocks was inevitable, in my view – even without the geopolitical earthquake now taking place in Europe. We saw that coming nearly two years ago.
But the next revolution in Energy is about to start, and hasn’t been talked about much and I believe the opportunity there couldn’t be greater – maybe even greater than seeing oil rise from $40 a barrel to $115 in a year.
