The impact of green policies “can be explained in one sentence,” JPMorgan’s Marko Kolanovic said last month, while elaborating on the energy crisis he predicted nine months previous.
“Given that a goal of the ESG/green initiative is to divert capital from fossil fuels development, affected companies will not have sufficient capital to provide needed supply, or will require significantly higher profits to clear the (higher) cost of capital hurdle,” he went on to write.
That state of affairs makes episodic supply shortages and price spikes virtually inevitable as the world transitions to cleaner energy.
In January, Kolanovic called an energy crisis a “tail risk.” Without wanting to overdramatize the situation, that risk was realized in September and October, when prices for coal surged in China and natural gas went parabolic in Europe.
Things eventually calmed down a bit, but the figures (below) are now seared into many market participants’ minds. The worry is that, eventually, they’ll be burned into the consciousness of households via enormous electric bills over the course of what’s sure to be a long, arduous road to our future in a green utopia.
In a sweeping new note, SocGen’s commodities team took up the issue, and while the specifics are (far) beyond the scope of any single article, the language employed in the introduction was striking.
The bank’s Michael Haigh described a kind of self-fulfilling prophecy. It’s quite simple, really, but poignant nonetheless.
Haigh noted that the transition to green and alternative energies will be a “massively metal-intensive” process. The key point is that, as Haigh wrote, “a commodity supercycle driven by base metal consumption in a quest to replace traditional forms of energy will have unintended consequences for the energy complex that will give the appearance, price wise, that it too is entering a supercycle.”
The reason is simple: In order to produce the metal we need to transition to green energy, we need energy. It’s a paradox of sorts, and it’ll likely manifest in a self-referential dynamic. The more ambitious we are about meeting climate goals, the more energy we’ll need. As Haigh put it, “if we need more metal to meet more aggressive goals, we will need even more energy.”
Like JPMorgan’s Kolanovic, SocGen was careful to avoid casting aspersions at the green push. Last month, Kolanovic wrote that green policies aren’t the sole cause of the burgeoning energy crunch. He cited “a more complex interplay” of green initiatives, pandemic distortions and “several current geopolitical developments.” Similarly, SocGen’s Haigh spoke of an “energy storm… driven by a confluence of specific microeconomic issues globally.”
You might recall, for example, that pandemic effects made China’s economy more energy-intensive. The ongoing export boom juiced Chinese manufacturing just as officials stepped up efforts to reduce coal emissions, while geopolitics impacted coal imports.
Notwithstanding unrelated contributing factors and the complex interplay of geopolitics and microeconomic issues, SocGen wrote that it “would be dishonest to say that attempts to wean ourselves off coal in particular did not exacerbate this situation.”
I’m not editorially constrained, so I can simplify the read-through without having to lean on euphemisms. Policymakers will find themselves forced to choose between rolling panics and meeting environmental targets aimed at averting an existential calamity.
Political expediency will almost surely favor temporary deviations from green roadmaps to meet pressing energy needs, with the cruel irony being that many acute situations are likely to be caused by extreme weather made worse by climate change. It’s conceivable we’ll run out of time.
Haigh was more diplomatic, but he didn’t mince words when it came to describing the ramifications for markets.
“Replacing a significant source of conventional energy due to environmental considerations with metal-intensive solutions is going to imply massive volatility,” he wrote, adding that “if the contradictions of the energy transition are managed only by prices and not by policy smoothing, we expect significant energy storms ahead [with] prices much higher at times, and prone to turbulence pretty much all of the time.”