A Great Bull Market in Inflation Has Just Begun.. And It Has Its Origins in ESG
As of 2019, almost 6% of Europe’s electricity was generated by burning wood chips (trees), which is almost twice the amount of electricity generated by solar.
Roughly 30% of the wood-chips came from Russia.
Sanctions have put a halt to this and additional supply cannot be made up by the US and Canada (the other two big wood-chip suppliers to Europe). You probably know where we are heading here… About 2% of Europe’s base load electricity production is gone, putting additional demand on electricity generated by gas, coal and nuclear.
Burning wood is quite literally retarded, but these muppets have decided in their wisdom that wood chips are actually “green”. In any event, they’ve now lost 30% of this wonderful “green, renewable” energy source.
Gas can’t be increased (for obvious reasons) and neither can nuclear (those nuke plants that haven’t been shuttered are operating at full capacity). So that leaves coal, which needs to come from South Africa, the US, Indonesia, or Australia — not that there was much spare capacity from these producers even before the sanctions went on… and that was with Russian thermal coal exports. Oh, what a pickle!
When looking at the components of European energy, it is literally impossible to come away without a view that their energy crisis has no realistic viable solutions on the horizon.
One would logically think that Europeans would be going hell for leather to bring back online idled nuclear power plants or at least halt anymore being closed. But it would seem that ideals trump logic in Europe.
THE GREAT DOUBLING DOWN
You would think that by now folks in Europe (and around the world) would be waking up to the fact that the belief in “renewables powering the planet” is what has largely caused the energy crisis and that “doubling down” on renewable energy is as bad an idea as putting your special bits in a toaster. But it seems that this isn’t the case. We should not underestimate egos and political ideology.
From the article:
It sounded like a fair question. With sanctions against Russia likely to disrupt Germany’s energy supply, why, asked MP Marc Bernhard, couldn’t Berlin just restart its mothballed nuclear power stations?
“If we reactivate the three plants that were switched off last December they could, together with the three that are still operating, replace all the coal we import from Russia or 30 percent of the Russian gas,” the Alternative for Germany MP told Olaf Scholz, Germany’s chancellor, in the Bundestag earlier this month.
Scholz gave him short shrift. “If the world were as simple as you make out in your question, we’d have a very good life,” he said.
Yet Bernhard is far from alone in raising the issue. Germany decided to phase out nuclear power after Japan’s Fukushima disaster in 2011 and the last reactors were due to be shut down at the end of this year. But with EU sanctions now being imposed on Russia’s coal, and some demanding an embargo on its oil and gas, there are growing calls to plug the resulting energy gap with nuclear power.
The government says it will not change its position. It cites technical reasons but the biggest argument could be political, especially for the Greens, who control the economy ministry.
“It would be suicide for the Greens to say we were wrong about nuclear power,” said Thomas O’Donnell, a Germany-based energy analyst and nuclear physicist. “So they’re forced to continue with the old battle plan.”
And just to give you a taste/reminder of how broad this ideology is:
These are classic examples of “doubling down” on ideals and why we believe the energy crisis has only just begun and is unavoidable.
Don’t lose sight of the fact that what is happening in energy markets now is a function of capital expenditures some seven years ago. We say seven years because that is about how long it takes to develop an oil or gas field… or a coal mine (assuming you have already discovered the resource), and how long it takes to construct a nuclear power plant.
THE COMMODITY “CAPEX” CYCLE
We are currently at a 19-year low in commodity capex adjusted for GDP, but this is just because the records only go back 19 years.
The graphs depicted below shows what we have been banging on about for a “while” now: capex on commodities is at generational lows.
Blame it on the climate change/ESG movement or whatever. The real deal is the increase in supply of commodities (particularly energy) isn’t going to occur in any meaningful way for the next seven years and that is assuming energy and commodity majors started writing cheques today with gay abandon, but they are not.
As we discussed above, the supply of commodities and energy today is essentially a function of capex spent 7+ years ago.
So if little is being spent on capex now, what then?
But what if we could go back further than the graph above. Well, this gives you an appreciation of where we stand.
Who would have ever thought that the great bull market in inflation that has only just begun had its origins in ESG?
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