Markets are shocked, shocked by the specter of higher energy prices. There is widespread support in the environmental community, mainstream media, and from many financial institutions, to rapidly remove conventional energy sources while not paying attention to their availability, cost or reliability. The results are lower availability, higher energy prices and dramatically less reliability. This is the world’s worst energy crisis in a decade.
We see opportunities in dirty and clean tankers in this environment as oil demand increases. Not only is oil the only conventional energy source that is available, it is also the least expensive on a Btu equivalent basis. Pakistan is substituting oil for natural gas to generate power. Sweden has activated an oil powered peaking plant earlier than normal. Japan, which is the world’s largest user of oil fired power capacity, has additional dual-fired capacity that can switch from gas to oil. China’s gasoline and diesel inventory dropped to a one-year low due to strong demand and supply crunch. China’s SOE refiners will likely import more diesel as domestic prices rose to 3-year high in parts of China on expectations for more switching to oil products from coal and gas in the run-up to winter. VLCC rates were up 114% in September and there is more to come this winter.
Countries are responding to the energy crisis differently. China has told its coal miners to ignore their quotas and produce full out. Blackouts will not be tolerated. New Jersey on the other hand, despite its location next to the Saudi Arabia of natural gas, denied permits for an extension of the PennEast natural gas pipeline, which was abandoned at the end of the month. There will likely not be a US supply response to higher energy prices. Until there is a fundamental change of attitude to address shortages while decarbonizing, the likelihood of higher energy prices will continue. Due to environmentalist rigidity, fortunes will be made in conventional energy just like manufacturing whiskey during Prohibition. As governments restrict supply and endowments and financial institutions pull out of fossil fuel investing, it won’t eliminate the need for conventional energy but only increase its profitability.