By Shelburne, Vermont Financial Advisor Josh Kruk
March 1, 2022
In an ideal world, the path from fossil fuels to renewable energy would be smooth and predictable. But that was never going to be the case. Unless the scales tip to the point where traditional energy no longer represents the majority of global consumption, disruptions in the supplies of oil and gas will continue to cause economic instability. As we’ve seen with continental Europe’s reticence to fully sanction Russian energy exports, these episodes also magnify the geopolitical leverage enjoyed by autocratic oil and gas producing countries.
In addition to prompting the usual, relatively ineffective band-aid solutions like releasing oil from strategic reserves, the higher fuel prices that accompany these disruptions should logically provide even greater motivation to address the root cause of the problem. Historically, when energy became intertwined with geopolitics, the rallying cry in the U.S. was often, “we need to end our dependence on foreign oil." That’s valid, but the current situation in Europe underscores the fact that commodity supply, demand and pricing are global issues that do not always neatly confine themselves to a domestic agenda. And when climate change is added to the equation, the “how” part of changing our energy consumption becomes much more relevant than it was in the past.
Because the assets in question often have useful lives measured in decades, it seems unlikely that we’ll suddenly see a boom in domestic financing for fossil fuel projects despite today’s more attractive short-term economics. For that investment to make sense, one would need to believe that global oil and gas demand (and hence, prices) will remain high enough on average over much longer time frames in order to justify a large capital outlay today. That seems tenuous in an era where awareness around climate change has ballooned. If investment in infrastructure for traditional energy does in fact continue to wane, the magnitude and impact of future supply disruptions will probably increase as it gradually becomes harder and harder to quickly turn the spigot back on.
So, as bleak as many current headlines seem, one big picture consideration is that nothing happening today should derail the long-term momentum toward renewable investment. Objectively, it should do the exact opposite. The faster the transition happens, the less leverage (and cash) will be available for a number of authoritarian regimes. That should further underpin the long-term attractiveness of investments in renewable technology. In fact, we’ve probably reached the point where the old rallying cry referenced above can best be adjusted by simply removing the word “foreign."1
1 One could probably argue that some of the key resource inputs to EV batteries and solar panels may also subject the buyers to the whims of non-democratic countries. That’s fair, but it seems unlikely to rise to the level of negative impact oil producing despots have had over the last half century.