In March, we read on the Financial Times, Wall Street Journal and Bank of America websites diverse stories and research, from pieces focused on the impacts of deglobalization (“BlackRock chief Larry Fink says Ukraine war marks end of globalization” – Financial Times -3-24-22”) to shortages of fertilizer (“Fertilizer Prices Surge as War Cuts Supply,” Wall Street Journal 3-24-22) to the inflationary impact of a way too dovish Federal Reserve (“The Fed’s 90 Degree Pivot,” BofA Global Research). During the last 18months, we have written extensively on many of these issues as they underlie several shipping investments. The President and many others are blaming Putin for inflation. Certainly, the Russia-Ukraine war has accelerated it. However, like work from home and Covid-19, the conditions were already present. The current outcomes would have occurred over time. This new environment is outside of the experience of many investors and economists who have never seen inflation up until now and benefited in 2020 and 2021 from 4,000-year low interest rates. Markets will be volatile as investors adjust, with many looking incorrectly to the last 10 years’ lessons. Bonds and equities no longer seem to be inversely correlated, which calls into question fundamental allocation strategies. Despite experiencing the worst fixed income market in 40 years, the adjustment is not over, and given that capital has been wildly misallocated, it will not occur painlessly.
On March 31st, President Biden announced the largest ever release of the Strategic Petroleum Reserve (“SPR”) of 180 million barrels to reduce the US price of gasoline in the short term. It is bringing out the big bazooka and when finished, will leave no effective US cushion. It will only have a temporary impact, as 250 million barrels will need to be purchased to refill it to January 2021 levels. Our expectation is that much of this oil will be exported, as the SPR is located in Texas and Louisiana, where crude-oil inventories are within five-year ranges. Most US refineries are optimized to run heavy crude, while the US is awash with light crude. We had positioned ourselves for a recovery in tanker equities driven by reopening and increased travel this spring and summer, and the SPR release is providing a tailwind. We take no joy in the massive SPR release, as it is bad policy and likely assures higher oil prices in 2023.
On the other hand, we were positively surprised to see the Federal Energy Regulatory Commission (“FERC”) reverse itself on a new policy requiring a greenhouse-gas analysis for natural gas pipelines and export facilities. It would have realistically meant that no new pipelines or LNG export facilities could be built in the US. Europe desperately needs US gas supplies to reduce their dependence on Russian energy, so the Biden administration was forced to relent. We wonder about the wisdom of ESG investing in general. There is a stated avoidance of conventional energy and mining, ignoring that renewable energy and conventional energy and mining are inextricably linked. For example, let’s examine a 1.5 MW windmill. The foundation alone requires 40 tons of steel and 600 tons of concrete. The tower requires another 150 tons of steel while the generator requires 9 tons of copper, the nacelle requires 45 tons of steel, and the rotors require 15 tons of carbon fiber. When you are finished, since wind power is intermittent, a 1.5 MW windmill is expected to operate at a load factor of only 30%. Energy intensive steel manufacturing has benefited significantly from low conventional energy and mineral prices from 2016 to 2021. By choking off capital for energy and mining, ESG investing has increased the cost of steel and other materials, making renewable energy much more expensive in addition to delivering a power source that is inferior to nuclear or gas in reliability and efficiency. When we look back at Wall Street and the damage done to the economy during the pandemic, it may be the distortions caused by ESG investing that are writ large.