- Republicans are in no position to repeal the Inflation Reduction Act.
- John Kerry’s idea of funding carbon reductions might have a chance.
- Oil and gas companies will find it difficult to compete with renewable resources that have fixed capital costs but no variable costs.
The “pundits” and pundits of American public opinion pontificated ahead of last week’s election. Then they pontificated afterwards. explaining what they got wrong. They are paid twice. Good job if you can get it. Well, if they can do it, why can’t we? This is how we read the tea leaves when it comes to energy and electricity policy based on recent events.
- Give up dreams that Republicans will repeal the Inflation Reduction Act. They don’t have the votes to do so, and by the time they have the votes, energy players will have grown accustomed to all the benefits in the form of tax credits or other handouts. Whether it is oil depletion allowance, ethanol subsidies or simple farm support payments for example, industries and groups are extremely reluctant to give up attractive economic benefits. And if you’re betting a politically resurrected Donald Trump returns chanting “Drill, baby, drill,” please note that mainstream conservative media owner Rupert Murdoch and other political figures appear to have lost interest in his candidacy, so don’t count on that either.
- John Kerry’s idea to fund carbon cuts might have a chance. Kerry’s plan would force big companies to pay for carbon emissions cuts on foreign power grids instead of cuts at home – details are hazy. (This idea closely resembles the notion of buying carbon offsets where an industrial polluter, say Gary, IN buys and preserves a rainforest in Indonesia to save it from logging and of course maintain robust carbon sequestration. ) This doesn’t sound like a big idea except that there are plenty of old fully depreciated coal burning power plants that could be economically replaced with great environmental benefits if the host country had the capital to do so. We see this as a serious attempt to achieve substantial carbon emission reductions through a trading or trading system that produces real emission reductions, as opposed to planting slow growing trees somewhere in a dying forest that may burn anyway due to climate change. This type of transnational approach addresses the problem of what we might call pollution arbitrage, where pollution-intensive industries simply relocate to places where it is relatively cheap to pollute. Wishful thinking? Critics say the plan isn’t enough, but it’s a start.
- Public relations can only substitute for substance for a while. The fossil fuel industry and its advocates have mounted a colossal public relations campaign centered around the UN climate conference in Egypt. They no longer deny the reality of climate change or the negative impact of fossil fuel use, but rather offer solutions without solutions. To us, this campaign indicates at least some level of corporate concern. Otherwise, why invest in this extensive public relations effort? But then they come up with the usual remedies: planting trees, burning natural gas (although some of it is disguised as hydrogen), and more carbon capture (which still sounds like vaporware to us). Four Republican members of Congress attended the climate conference, offering their conservative solutions to the global climate challenge. They argued that the problem was not carbon fuels but their emissions, so they came up with complicated and expensive ways to reduce emissions. You would think that, as conservatives, they would devise a simple, inexpensive and minimally intrusive solution, which would suggest avoiding burning fossil fuels in the first place. Conceding causality may have been a strategic error.
- Real investment responsibility is needed. Investing and banking’s approach to net-zero has been denounced as “sales pitch” in the world’s leading financial publication. Now, some of you may have come to this conclusion a while ago, and maybe we’ve been slow to get the word out. But it seems a whole host of smart bankers and consultants have found a way to profit from climate change, look virtuous, and accomplish nothing of substance at the same time. Why should we care about what could be described as low-level financial chicanery? Well, US securities regulators are responsible for ensuring that investors are not intentionally misled. Regulators can set standards, which could cause investors to really reduce their investments in fossil fuel producers, which would increase their cost of capital. (How could investors not invest in such a vital economic sector as energy? Easily, because oil and gas stocks only represent about 3% of the value of US equities. That figure is down from around 15% in 2008.)
Here is the basic problem for consumers. The war in Ukraine and OPEC excesses have driven up oil and gas prices. Both of these events can give local fossil fuel production a boost, but only temporarily. Why? Because in the long term, the still high energy prices make non-fossil energies (renewable, green hydrogen or even new nuclear) more competitive. According to an old Wall Street adage, the solution to high prices is high prices (meaning creatives find cheaper substitutes). Once non-fossil energy resources are in place, they will remain in use for decades. Oil and gas companies will find it difficult to compete with renewable resources that have fixed capital costs but no variable costs. Once they lose market share to renewable energy resources, they will never get it back. From a business perspective, this fight is indeed existential for the fossil fuel industry.
Will a divided Congress mean a government that is unsympathetic or simply indifferent to energy interests? Are there possible game-changing technologies in nuclear power and battery technology that could be a game-changer for energy generation and storage? A losing strategy, the flimsy public relations campaign instead of substantial environmental remediation, will hopefully be abandoned. Even investor greenwashing is likely to come under increased regulatory scrutiny – and that’s saying a lot, as the same regulators have staunchly ignored calls to regulate crypto exchanges that have caused investor losses of multiple billion. As a result, we can confidently say that tea leaves predict a murky future. So say the experts.
By Leonard Hyman and William Tilles for Oilprice.com
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