January 24, 2022

Larry Fink and Ray Dalio to Petroleum Industry: Drill Baby Drill

This year’s annual letter from Blackrock CEO Larry Fink and recent comments by Bridgewater’s Ray Dalio add to the growing chorus advocating for maintaining one of modern society’s critical pieces of infrastructure.  Not roads and bridges. Not the healthcare or education system. That wouldn’t be news.  It takes a billionaire to say it’s okay to maintain the existing energy system.

While even mentioning the energy system is usually fraught with political risk, the recent spike in energy prices – especially the tripling of natural gas prices in Europe – demands a response.  What we find interesting is that these gentlemen felt the need to – in part – justify their support with currently popular themes: income inequality and inflation.

In his letter, Mr. Fink warned against any energy policy that “focuses solely on limiting supply and fails to address demand for hydrocarbons will drive up energy prices for those who can least afford it.”  We would point out that such policies drive up the costs for everyone, but we agree 100% with the idea that letting existing critical infrastructure deteriorate before a replacement is ready is bad policy, bad politics and bad economics in addition to being inequitable.  As Mr. Fink said in his letter, “As we pursue these ambitious [climate] goals… governments and companies must ensure that people continue to have access to reliable and affordable energy sources. This is the only way we will create a green economy that is fair and just and avoid societal discord.” Democracies require majorities – at least occasionally – in order to function.

At the Abu Dhabi Sustainability Conference last week, Ray Dalio called for a “smart” shift to a green economy and warned that it’s dangerous to “cram” too much into the transition phase. “Inflation is an issue.” He also said “Thank God for the oil producers” because they are providing reliable supply. (Source: Bloomberg).  Wow.  First of all, even if inflation weren’t an “issue”, policies that drive up energy prices are bad policies for all the reasons stated above. Second of all, I must have missed in Sunday school the chapter in the Bible that taught us that oil producers are among the things we can ascribe to the eternal and almighty.

We are not being critical (well, maybe a little), we are just having some fun watching the world’s leaders in business, government and the non-profit sector stumble a little as they jump off the bandwagon that was calling for the early demise of the old energy system even if the new one wasn’t ready yet.  Just two years ago, Mr. Fink’s annual letter boasted about “exiting investments that present a high sustainability-related risk, such as thermal coal producers.”  In this year’s letter, however, divestment is viewed differently. “Divesting from entire sectors – or simply passing carbon-intensive assets from public markets to private markets – will not get the world to net zero.  The bold type on the statement is Mr. Fink’s designation, not ours.

Again, we agree with the 2022 Mr. Fink.  Selling shares – sorry, “divesting” shares in publicly traded companies simply changes the ownership of existing assets.  It doesn’t change the assets any more than divesting of tobacco companies gets anyone to smoke less.  “Yeah, I was about to light up a Marlboro when I asked myself, why am I doing this if BlackRock is divesting its shares in Altria in order to promote a more sustainable world.”

But as we wrote in our year-end blog post, changes in investor sentiment usually beget more changes in sentiment.  When Mr. Fink penned his letter two years ago, the bear case for conventional energy was gathering steam as Covid slashed demand and energy prices collapsed. Weaker oil prices and stock performance only served to reinforce the idea that the energy system had crossed a Rubicon to a green land of wind, solar, batteries and hydrogen, just like the workplace that had permanently moved from Midtown to the spare bedroom.

Last year, however, a number of events began calling that narrative into question.  A February cold front knocked out power across much of Texas, the self-styled energy capital of the world.  Extreme warm weather drove electricity shortages across the western U.S., leading to rotating blackouts.  Unreplenished natural gas supplies from last year’s polar vortex in Europe exposed the underbelly of Europe’s frenzied push on closing existing coal and nuclear power plants which has led to an over reliance on intermittent renewables and imported natural gas, much of which comes from Russia.  It is these events that are shifting investor sentiment regarding conventional vs “clean/alternative” energy and altering the narrative of business leaders and politicians.

Transitioning the energy system is like rebuilding the aviation fleet while it is flying. You don’t garner public support by advocating for any essential infrastructure or service to be less available and more expensive in order to encourage a shift to a new one. You win public support by encouraging financial and human capital to provide alternatives that perform better and cost less. (And if you are Germany, you don’t trade in your Boeing 757s for a fleet of Tupolev Tu-204s.)  Doing these things for a transitioning energy system may or may not reduce income and wealth inequality nor help with inflation fueled by central bank and fiscal policies, but they are still worth doing.

The above is Energy Income Partner LLC’s (EIP) opinion, and such opinions may change without notice or duty to update. The information is based on data obtained from third party publicly available sources that EIP believes to be reliable, but EIP has not independently verified and cannot warrant the accuracy of such information. Discussions regarding specific companies are for illustrative purposes only and should not be considered as representative of any portfolio or portfolio holding contained in accounts or funds managed by Energy Income Partners, LLC nor should it be construed as a recommendation or an offer to purchase or sell or solicitation of a purchase or sale of a particular security.

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