Energy Shortage as Green Energy Mandates Go Global

Energy production has come a long way since the Chinese discovered Oil in 600 BC and used pipelines of bamboo for transport. It took until 1919 before US Oil discoveries and the burgeoning automobile industry utilized enough Oil to surpass Whale Fat and kerosene as the leading source of energy consumption. As Whaling peaked, the energy era of Petroleum awakened and has reigned supreme for the past century. In our current generation, the eventual supplanting of Oil with Green energy is a political decision that guarantees an inexorable trend toward a Carbon light future. With geopolitical unity in mandating clean energy, it was ironic that our President returned from the Global Climate conference recently and the first thing he conveyed to cameras was that OPEC should pump more Oil as they were to blame for soaring fossil fuel prices. Obviously OPEC had very little impact on growing US energy shortages and higher prices at the pump. Refineries are increasing their product output, but Oil production has not grown with demand. Record delays in our supply chains, a shortage of labor and lack of investment due to the political war on fossil fuels has led to a sharp drawdown of inventories and higher energy prices.

The war on dirty energy can move too quickly and risk a serious supply crunch when political mandates move faster than industry can accommodate. Fossil fuels and nuclear energy comprise 80% of our electric grid, but producers are less inclined to invest which delays supply and demand becoming balanced.

While inventory drawdowns are normal in the back half of each year, the current reduction in stock is becoming extreme. Stockpiles typically begin to expand in December or January, so it will be interesting if Oil producers and supply chains will meet the seasonal demand increase. The thin margin for error means that colder than normal winter weather could create historic shortages and rationing. 

Virtually every analyst that has opined on Oil in recent months have been forecasting a continued Bull market well past $100 a barrel ($82 currently). Some Oil options expecting $200 have also been bought by investors in case there is a snowmageddon that spikes fuel consumption this winter. The venerable US Energy Information Administration (EIA) was too conservatiuve with its $75 target high for 2021, but their recent update expects an eventual fossil fuel surplus in the first half of 2022. This news sent prices into correction mode from its recent $85 top. EIA and most forecasters assume that the free markets will find a way to increase employment and and solve the global supply chain production-delivery quagmire in the months ahead. Wage incentives and tech productivity has accelerated and its logical that the acute shortages plaguing the world will abate in conjunction with a fading pandemic in 2022.


The Global desire to convert to clean energy is a fait accompli, but of course being energy independent and transitioning in a way that is safe for our economy is extremely vital. Many are unaware that CO2 emissions have been falling in the US and Western countries for many years. This is  due primarily to our increased burning of cheap Natural Gas, which is far cleaner than the Coal it has replaced. In fact total US CO2 output is back to levels of the early 1990’s and on a per capita basis we pollute less than in the 1950’s. While fears of huddled masses freezing to death due to a winter vortex and clogged supply chains are likely overblown, there is also no sense of urgency to prevent a crisis or bring down inflation. The release of Oil from the US strategic petroleum reserves is more political than economic as it would not provide much additional refined output and would incentivise drillers to supply less should prices fall. As maligned as free markets are in this era, Governments are using their mouth to allay fears, but sitting on their hands with regard to solutions while assuming free enterprise will deflate this growing bubble. Less stimulus and higher interest rates are the main measures our Government and the Federal Reserve can implement to nornmalize overall US inflation.

There is unforecastable risk of a price panic into the $90’s this winter during extreme cold spells, but by next Spring we expect a trading range between the $60’s and $80’s. However, there is significant risk of disinflation and ‘selective’ deflation once supply chains and labor supplies approach balance in the later part of 2022. Investors should look to pick up favored energy plays such as Pioneer (PXD) and Oil indices (USO) when West Texas Crude Oil falls into the low to mid $70’s.

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