Over the last two weeks, we’ve focused on two topics – inflation and the green energy boom. But what if they’re rather entwined? What if the going green triggers the inflation I’m so worried about?
The inflation of the 1970s was tied to a spike in energy costs, after all. But we don’t face anything like that today, do we?
That’s what R.W. wrote to me, with the subject line “1970s vs now”:
The comparison is not valid. The world is quite different and so is the energy market. We have no newly formed OPEC embargo. The year-on-year price comparison for oil is meaningless at present because it was negative a year ago. I could go on, but that’s enough. Now as a rerun of the 1970s just doesn’t wash.
I half agree with half the analysis. We don’t have a newly formed OPEC embargo. And so oil supplies may not be artificially constrained by OPEC that they can produce a spike in prices.
But can’t you think of any other way oil prices, or other energy prices, might suddenly soar in much the same way as they did in the 1970s? Can you think of any artificial politically driven energy supply constraints?
We might not have a new OPEC, but we do have plenty of new acronyms out of the likes of the Paris Agreement – along with the net zero targets and attempts to cut oil production drastically to save the environment…
World Oil quoted Russia’s deputy prime minister and Qatar’s energy minister on this issue:
If the world were to follow the International Energy Agency’s controversial road map, which said investment in new fields would have to stop immediately to achieve net-zero carbon emissions by 2050, “the price for oil will go to, what, $200? Gas prices will skyrocket,” said Russian Deputy Prime Minister Alexander Novak.
The “euphoria” around the transition to clean energy is “dangerous,” Qatar’s Energy Minister Saad Sherida Al Kaabi said at the St Petersburg International Economic Forum in Russia on Thursday. “When you deprive the business from additional investments, you have big spikes” in prices.
Now I’m not so sure that these are your squeaky clean independent green energy experts… They just might have an axe to lubricate…
Still, threatening higher prices is an odd strategy for those nations who have plenty of oil supply and would benefit from other nations cutting exploration…
To get a more balanced view you might want to check out the Beyond Oil 3 Summit.
Our green energy stock picking wizard James Allen and editor Kit Winder have put together a series, with the involvement of some of green energy’s smartest minds. And they’ll reveal how you can profit from the expansion of the green energy initiative into every aspect of our lives.
If that fills you with dread, you’re not alone.
But neither are the attendees to Beyond Oil 1 and 2. Some of them have vast profits from James’ recommendations to keep them company.
For regulatory reasons, I should point out that James and Kit are not, in actual fact, proper wizards. Then again, their results so far might make you think they are…
But, for now, let’s continue along our not-so-merry way of pointing out that inflation and the green boom seem to overlap suspiciously well.
As reported in Zero Hedge, Deutsche Bank’s head of Global Rates Research Francis Yared reckons, “ESG is a negative supply shock that internalizes the climate cost of the production of goods and services”.
And his colleague Jim Reid argues, “Pricing climate-change externalities more generally could make things more expensive over time. Are we on the verge of another change in inflation expectations due to oil and energy, one that is in large part due to ESG?”
That sure sounds like the 1970s to me…
It’s quite simple, really. Going green is expensive – even if only because of the large upfront capital investment required.
This is no gradual rollout, don’t forget. The world must be saved by government action on climate change. What is the alternative? Arctic sea ice will be gone by 2018 at the latest, Britain will be “plunged into a ‘Siberian’ climate by 2020” and the Maldives will disappear by 2019.
So, drastic action is required. But drastic action is especially expensive.
Over in the EU, carbon emission prices have jumped. The Wall Street Journal reported that carbon credits have surged 135% in price over the last 12 months. That’s almost certainly going to be passed on, up through the supply chain, right to consumer prices, which means inflation.
Meanwhile, those responsible for keeping a lid on inflation have decided that climate change is far more important anyway. Central bankers have been busy buying green bonds already, but they may barely be getting started. The Wall Street Journal notes that:
Central banks, the most powerful financial institutions in the world, want to become the guardians of the environment as well.
The central banks say climate change is a financial and economic risk. They believe rising sea levels, more wildfires and bigger storms could cause shortages that spur inflation, the regulators’ traditional nemesis.
The banks that are deepest into the issue are trying to limit climate change by steering their financial systems away from fossil fuels. Their regulations could hit US companies operating overseas. The Bank of England’s remit now explicitly includes environmental sustainability as well as maintaining price stability.
Wouldn’t it be ironic if, in trying to prevent the inflation driven by climate change, central banks cause inflation instead?
No, it would not really be ironic, given that it’s exactly what I expect to happen.
There’s another angle on the green inflation boom. Which, but the way, is getting out of hand over in the United States. If April’s surprise wasn’t enough for you, US CPI inflation for May came in at 5% year over year, the highest since 2008.
Meanwhile, core CPI inflation (which excludes food and energy prices) came in at 3.8%, the highest in about three decades.
The current inflation spike was predictable because producer price inflation – PPI – spiked months ago. Eventually, higher producer prices are almost invariably passed on to consumers.
That’s how John Butler spotted what was coming days before the inflation panic showed up in the data and then all over the news since. I interviewed him about it here.
Commodity prices are a big part of PPI measures. They’re sometimes called “factory gate prices” because the commodities go into the factory and stuff for consumers comes out.
Well, surprise, surprise, last week’s story “China’s highest producer inflation in over 12 years highlights global price pressures” was reported by Reuters. I wonder what might happen to consumer prices going forward?
But inflation itself isn’t our topic for today – we’re trying to stay more than one step ahead. Where might the next bout of inflation come from longer term?
For the economy to go green, certain commodities would have to boom. “We see potential for a multi-decade commodity cycle ahead driven by decarbonisation of the global economy and shift to cleaner energy,” says Tal Lomnitzer, a senior fund manager at Janus Henderson, in the Financial Times. “It has more legs to it than the China boom of the early 2000s.”
That boom, by the way, was predicted by my mentor Dan Denning, the founder of the publishing company behind Fortune & Freedom. He also founded the Australian affiliate at the beginning of the China commodities boom in order to help Australian investors take advantage of it. And he hired me, conveniently, just as it ended…
Anyway, mining is of course notorious for high levels of pollution. But the green energy transition is going to need a heck of a lot of mined resources.
Top of the list this time around, with green energy triggering the boom instead of China, is that green energy favourite… copper. Goldman Sachs’ head of Commodities Research put it like this:
In terms of trying to decarbonise the world, the only possible way we can do that is through copper. There’s really nothing else that can conduct electricity as well.
That’s why we say it is as strategically important as oil, because if you want to decarbonise transport and industrial fuels through electricity, you are going to need copper, and a lot of it.
The copper market “needs to double in size by 2040 if the world is to meet the targets set out in the Paris climate agreement,” estimates the Financial Times. The IEA has bigger estimates:
To achieve net zero emissions by 2050, the International Energy Agency says the total market size of critical minerals such as copper, cobalt, manganese and various rare earth metals will have to grow almost sevenfold between 2020 and 2030.
How are we going to achieve that? Well, first of all, prices need to rise to spur on investment in new mines. That means, you guessed it, more inflation. The Financial Times has estimates from a major copper producer:
Ivan Glasenberg, the long-serving boss of miner and commodity trader Glencore, told the Financial Times recently that the copper price would need to rise 50 per cent to meet projected demand from the global green revolution.
“You will need $15,000 copper to encourage a lot of this more difficult investment,” he said. “People are not going to go to those more difficult parts of the world unless they are certain.”
The delay – how long it takes to find copper, develop the mine and then begin production – is another bottleneck. That is especially so with governments and their green environmental permits delaying the process… Mining copper is awful for the local environment, not just the CO2 emissions.
Of course, all this new metal must either be mined with highly polluting energy, or it requires further investment in green energy. This comment in the Financial Times is a cracker:
“If we knew how hard it was going to be to find a major copper system and bring it into production with hydroelectricity in the Congo, I can assure you we would have given up.”
Over in Chile, the innovative minds at the world’s largest copper producer in 2017 tried to produce “green copper”, but abandoned the premium priced effort in the end.
To sum up, the green bubble may yet hoist itself on its own petard. It may bid up the price of the commodities it needs and trigger even more inflation than is already “baked into the cake” as John Butler put it in our interview. I don’t think people will be enthusiastic for saving the planet when their cost of living soars.
But consider for a moment what all this means for investors who understand it.
Soaring prices, a government and central bank backing the whole movement, supply constraints, a delay on new production, vast capital investment needed… it’s a speculator’s dream scenario in so many ways. There are companies out there poised to take advantage in spectacular ways.
And my friends James Allen and Kit Winder have figured out how you can be amongst the speculators who have a chance to cash in on every single aspect of the changes that are coming.
That’s why they’re launching Beyond Oil 3 tomorrow. Today is your final chance to register for the free event.
Editor, Fortune & Freedom