Energy Crisis30 Jun 2022 19:44
For anyone not familiar with Goehring & Rozencwajg, I would urge you to read their recent market commentaries.
Running Out of Spare Oil Capacity - What's Next?
06/ 30/ 2022
The article below is an excerpt from our Q1 2022 commentary.
On Between 2010 and 2020 the world grew accustomed to cheap, abundant conventional energy. Global energy markets were so well supplied for so long that neither investors nor consumers gave energy markets much thought. We were one of the few warning that an impending energy shortage and crisis would emerge in the next several years. The calm of the past decade has been turned upside down seemingly overnight. Conventional wisdom holds that today’s energy shortage is the result of Russia’s invasion of Ukraine; however, we strongly believe this is incorrect. While Russia’s invasion has made the energy shortage much worse in the short term, the underlying problems have been building for many years and cannot be easily remedied.
Our biggest short-term problem is that we are now running out of spare oil pumping capacity. In every prior energy shortage, including the dual oil crises of the 1970s and the rally of 2008, OPEC maintained ample spare capacity that could quickly be brought online. In past letters, we explained why the second half of 2022 would mark the first time in history that global demand bumped up against total pumping capacity.
As we begin to run out of spare capacity, we are only starting to see what that world looks like and, unfortunately, investors still do not appreciate the huge impact this will have. Energy related equities have now significantly outperformed the general stock market over the last two years and yet, investor interest remains extremely low. As far as we can tell, few investors have repositioned their portfolios at all.
Internally, we have discussed what we should expect to see as the world runs out of spare pumping capacity. Although extremely challenging and uncertain, we find it valuable to lay out a roadmap with mile makers that we should expect to pass if our premise is correct. We agreed that if we are in fact running out of spare capacity, we should see a series of large releases from strategic petroleum reserves. On March 31st 2022, President Biden announced he would release a record 1 m b/d for six months from the SPR. Other countries followed suit and agreed to release another 1 m b/d for at least two months.
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