Sometimes, it’s difficult to think of topics to write about. I shy away from posting on a pre-determined basis, preferring to comment only when a particular item has grabbed my attention. However, it’s not a problem I have at the moment. I could, pretty much, write something every day; all to the flapping soundtrack of those chickens coming home to roost.
Energy is currently a favourite theme of mine although historically, it has not been a sector I paid much attention to from an investment point of view. Its returns on capital are generally, not only mediocre but volatile, to boot. Furthermore, commodity producers have no control over the price of their output although a supranational cartel like OPEC does obviously attempt to influence this. As a rule, I have only been interested in energy at times of extreme stress when oil/gas prices weakened to levels I considered were below the long term cost of production. While, in the near term, this does not guarantee a satisfactory result, over a longer period it does, in my view, put the odds in your favour as for all energy’s faults, it is a vital commodity that will eventually be in short supply if producers cannot make adequate returns. And when something is in short supply and demand is constant (or indeed rising) it will always lead to an increase in price. It’s just the way those pesky supply and demand curves work (please keep this information to yourselves; there’s no point imparting it to politicians and central bankers as it would only confuse them further).
Last week, OPEC+ (OPEC countries plus a looser grouping of producers that includes Russia) agreed to reduce oil production by 2m barrels per day. White House spokeswoman, Karine Jean-Pierre said “OPEC+’s decision to cut production quotas is short sighted while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine. It’s clear that OPEC+ is aligning with Russia with today’s announcement”. To those not fluent in the language of government double speak and hypocrisy, allow me to translate; this administration’s energy policy is now being shown up for the nonsense it always was and with mid-term elections on the horizon, my boss desperately needs weaker oil prices to reduce both inflation and voters’ bills’.
OPEC+ is simply doing what all cartels are designed to do and that is to restrict output when demand may falter (like a recession) in order to support prices. It’s not personal, Ms Jean-Pierre, it’s business. I acknowledge it’s the kind of organisation that ironically in the US, would ensure a massive anti-trust lawsuit but in the real world you appear quite happy to deal with it. Cartels are not created for the benefit of the customer. They are, by definition, anti-competitive which suits producers. Asking a cartel to act against its best interests is not going to get you very far. OPEC is simply saying, in the words of the Co-Op, ‘it’s what we do’.
Ms Jean-Pierre speaks for an administration that cancelled the Keystone XL pipeline on its first day in office. That pipeline was designed to bring heavy Canadian oil to the heavy oil refineries of the Gulf of Mexico but was canned on environmental grounds. Leaving aside that infrastructure, hidden underground, surely offers advantages in terms of foregone carbon discharge from other transport sources, a secure source of oil from a friendly neighbour must surely have real strategic value? It certainly beats begging a collection of states that include Iran, Russia, Saudi Arabia and Venezuela for a favour. However, if you cannot appreciate such strategic mis-steps, you’re unlikely to be able to fix them.
Which leads me, once more, to Jennifer Granholm, US Secretary of State for Energy, who really is the gift that keeps on giving. Think of her as a kind of Kwasi Kwarteng but without the competency and you’ll not be too far away. Last year, she was unable to quantify the US’s daily consumption of oil when asked by a journalist. At the same press conference, she lauded Biden’s release of 50m barrels from the Strategic Petroleum Reserve (SPR) in order to exert downward pressure on prices. The look on her face told you everything when the very same journalist informed her that 50m barrels amounted to less than 3 days’ consumption. Yet, she was at it again the other day, touting Biden’s actions to increase the domestic supply of fuel. She described the release of 1m barrels per day from the SPR as the “biggest tool at our disposal”. Initially, I wondered whether she was describing herself but she confirmed my suspicions when she continued “this is all about supply and demand. When Russia invaded Ukraine, that pulled millions of barrels off the global market. Since oil is traded globally, we have to make up for that lost amount of fuel”. Thanks …… I, and I’m sure millions of others were hopelessly confused until you clarified matters.
Granholm readily illustrates the kind of dimwits that infest the upper echelons of far too many Western democracies. The SPR presently stands at a 40 year low and at the risk of stating the obvious, it can only be drawn down once and the more it is so, the more expensive it will be to refill at current prices. However, with Granholm demonstrating absolute mastery of the vagaries of supply and demand, I’m sure she is aware of that.
Throughout the developed world, traditional energy companies have found themselves in the crosshairs of governments and regulators and all too often, public opinion. They’ve subsequently made logical capital allocation decisions by questioning whether it makes sense to spend billions on exploration and infrastructure when the return from such long term projects may never be captured in such a hostile environment. Yet, demand for energy is still growing and supply growth is not keeping pace. I would argue that if net zero is the goal, it needs a combination of carrot and stick and the carrot requires incentives to develop clean technologies while not punishing traditional energy producers with endless bureaucracy and windfall taxes. Or, to put it another way, are impediments to production going to increase energy supply or decrease it? Who knows, even Jennifer Granholm and her boss might eventually cotton on although I’m not holding my breath. The unfortunate reality is that you can’t power the world with ‘likes’ on Facebook and ‘thumbs up’ on LinkedIn.
The value of investments and any income from them can go down as well as up and you may not get back the amount originally invested.
This material should not be considered as advice or an investment recommendation. Investors should seek advice from an authorised financial adviser prior to making investment decisions.
John Newsome can be contacted on 01423 705123 or john.newsome@williams-im.com. Williams Investment Management LLP is authorised and regulated by the Financial Conduct Authority.
