(No) Power To The People

America’s “energy crisis” continued to grab headlines Tuesday, where “crisis” just meant (and forgive me here) it got cold and some states didn’t know what to do.

There’s more nuance to it than that, but not much. “Gas pipelines began to seize up, wind turbines started to freeze, and oil wells shut in — just as homes and businesses raised demand for heating to record levels,” Bloomberg recounted. At least two people are dead.

“To prevent the collapse of their networks, suppliers from North Dakota to Texas are having to institute rolling power cuts to limit demand,” a separate article said, recapping the events of the past 72 hours, and noting that “more than a million barrels a day of oil and 10 billion cubic feet of gas production are shut [while] massive refineries have halted gasoline and diesel output.”

So, temperatures plunged, people wanted to keep warm (as they’re wont to do when it gets cold) and faltering supply collided with surging demand. What generally happens when there’s a supply/demand imbalance skewed to the latter? Well, prices surge.

As noted Monday, wholesale power prices jumped above $9,000 a megawatt-hour in Texas. A couple of people have asked for the chart (below). I’ll oblige, although this is one of those situations where the visual is pure eye candy — that is, there’s very little informational value beyond what you could glean simply by reading the headlines.

To reiterate what’s implicit in the brief commentary above, this isn’t solely the “fault” of icy wind turbines. I alluded to this on Monday too, and I’ll say it again here: One problem is Texas’s “unique” (a euphemism) electricity market.

In any event, mistakes were made. Planning needs to be better. And the US has, again, shown itself incapable of dealing with something which, while rare, was hardly unforeseeable. It does get cold sometimes. Records are meant to be broken. Climate change means extreme weather is likely to become more commonplace. Plan accordingly, as they say.

Rabobank’s Michael Every had a characteristically colorful take. “Yes, higher oil pushes up US breakevens and hence a lot of the ‘reflation trade’ momentum. But does anybody believe that pushing up energy bills 10,000% is what people mean when they conceive of ‘reflation’?,'” he wondered. “I bet an hour of good ‘ol Texas electricity that Joe Public is thinking of higher wages – not oil, gas, electricity, rent, or food prices as a sign of ‘recovery’.”

That gets us to markets, where delusional human beings enamored with their own capacity to create not just wholly fictitious entities (companies, countries), but derivatives based on them (stocks, bonds, etc.), pushed global equities higher. World stocks rose a twelfth session. That’s the best streak since 2003. I suppose I’ll reprint the visual from Monday — plus one.

Hong Kong came back online, and dutifully rallied nearly 2%. Especially buoyant were shares tied to the Chinese entertainment industry. Lunar New Year box-office revenue surged to a record, data showed. In China, it’s safe to go to the movies. What a world that must be. Americans can only hope.

10-year US yields hit 1.25% coming off the holiday, and breakevens rose to the highest since 2014. Rangebound theses will be tested, apparently.

So far, this is the worst year for global bonds since 2013, Bloomberg trumpeted Tuesday, as though it’s not just February. Still, it’s a point worth making. After all, 2013 featured an infamous bond market event (the taper tantrum) and there’s a ton of duration embedded across markets, either explicitly or implicitly. So, a vicious bond bear has the potential to be destabilizing.

Bitcoin is back near $50,000. “Those who need to hedge will want to put their hands on any assets,” PVM’s Tamas Varga wrote, commenting on the prospect of the reflation trade morphing into actual, real-world inflation. “When Bitcoin, which has a fundamental value of zero, is deemed an acceptable vehicle to use against inflation then oil must surely fall in this category, too.”


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7 thoughts on “(No) Power To The People

  1. Nuclear ( fusion not fission) energy would solve a lot of problems- from a cleaner energy source to ending geo- political problems throughout the world- especially the Middle East.

  2. First we had Trump, then the evolving Pandemic, now it seems like the climate is starting to show what’s possible going forward, which is absolutely anything. All this on top of whatever is happening with the internet and social media and computers and smartphones connecting people across the world. Decentralizing power, with destructive as well as constructive results.

    It is possible that sane and stable is over? How do we function in a this new world? Feels like walking on a moving sidewalk winding through funhouse mirrors. What do we hold on to?

    On the flip side maybe these are birthing pains of a new civilization – humanity attempting to become a single organism. Will we survive? We are definitely in a period of mind boggling discovery and progress in ALL areas of science. Would be such a shame to fail now.

  3. Bill Gates addressed some of this in his Sunday 60 Minutes segment. I’d recommend giving it a look.

    Looks like he is close to building the first new generation nuclear power plant……smaller and much safer than the
    current designs and without the need for massive amounts of water for cooling.

    His basic approach is to innovate our way out of many of the planets problems.

  4. I used to live in Texas and I used to work in the power industry before I quit working. So I have some perspectives that are based on that experience.

    Texas regulatory system for all the good it’s done promoting renewables has a fundamental flaw. It is that the primary system operator and designer is also a supplier to the system centerpoint. To someone familiar with the power business the issue was glaring enough that I contracted with centerpoint for my power even though other companies looked like they might be lower in the near term. The risk of going outside their ecosystem was simply too great for me.

    It is relatively easy for the wires company to under invest in those facilities which would keep their competitors online. And since the calculation methodologies are relatively esoteric they do not lend themselves to a hands-off regulator as Texas prefers. In my view the way to simultaneously promote renewables and to achieve fairness in the power markets is to have a government owned wires company like we have found is wise for roads.

    I think this situation should be studied and published throughout the country as a model for understanding what can go wrong and we can go right about energy deregulation. That this event occurs now with a federal government interested in changing regulatory structure to promote wind solar is as much an opportunity as it is a problem. It also dampens political criticism of California for their ruling blackouts, a state that has deregulation but in a different form that I do not understand.

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