Cheap energy unlocks demand for everything else

Every few years, mentions of a peculiar website suddenly explode on social media. It’s called the “WTF happened in 1971?” movement. The site tracks a very large number of statistical measures that went haywire since that date.

The real point of the site is just how much began to go wrong. But let’s mention some examples to give you a feel for just how fundamental the shift was…

Since 1971, the link between workers’ pay and their productivity broke down. It has steadily diverged since. Meaning workers continued to produce more with less, but stopped getting paid the proportional increase they’d achieved.

Real GDP per capita and wages likewise diverge from 1971. Inequality surges, inflation surges, house price affordability plunges and so on and so forth.

The list of things that went haywire extends to all sorts of social and political trends too, by the way.

But the point is that something broke the back of the economy in 1971.  That was the year it all began to go wrong for us.

Left unsaid is the obvious answer to the question. What did happen in 1971?

The last vestiges of the gold standard were abandoned. We entered the realm of fiat money.

The implication is that unsound money is a poison. It causes all sorts of things to break down.

But it’s not 1971 that I want to talk to you about. It’s a similar shift that’s just as insidious and important. It has also rewritten the rules that govern our economy and thereby financial markets…

WTF happened in 2015?

Climate alarmism’s sway over our economy has grown slowly and steadily. It’s hard to put a date on when the policies began to have an economic effect. There is no identifiable moment like 1971.

Perhaps the Kyoto Protocol, the 2008 Copenhagen Summit or the 2015 Paris Agreement fit the bill. Perhaps the more recent net zero legislation passed around the world.

The point is that, for decades now, some governments have actively been trying to shift the world to less efficient and more expensive forms of energy.

If you dispute this, consider that it must be inherently true. Otherwise the world would’ve undergone a transition to renewables without the US$4 trillion spent trying to do so.

That’s a rather large bill to cut the world’s share of fossil fuel use by between 1% and 3%, depending on who you ask.

Mind you, that’s the share of energy, not the total amount. Demand for fossil fuels continues to hit records.

The unseen costs of climate alarmism

That US$4 trillion in cost is a measure of how much was spent on the attempted transition. My question is what else we’ve lost as a result.

As the economist Frederic Bastiat pointed out in 1850, it is the ability to consider the unseen impacts of an economic policy which sets analytical people apart.

What has been the unseen impact of our carbon crusades?

What could we have achieved with $4 trillion, for a start?

But I suspect the climate campaign is also behind a vast share of what has gone haywire in our economies. A bit like leaving the gold standard in 1971.

How much of our manufacturing was offshored to China because of emissions standards?

How much of our cost-of-living crisis can be blamed on carbon policies?

We do have some hints. The share of our petrol and electricity costs that are linked to climate policies is extraordinary, for example.

How much oil and gas would we have if governments hadn’t constrained its production? The lack of domestic fossil fuel supply caused chaos for many economies in 2022, for example.

What would the geopolitical situation look like if countries hadn’t strangled domestic production of fossil fuels in favour of imports? Would Putin have invaded Ukraine if Europe wasn’t reliant on his gas? Would Europe have responded differently if some of its constituents had alternative suppliers?

How would our stock market portfolios have performed without disastrous green energy projects? If governments and boards hadn’t constrained fossil fuel investment decisions, what would their revenue be now?

These days, companies are falling over themselves in their attempts to sell renewable energy projects. The write-downs on their green projects have been eye watering. Abandoned projects amount to an extraordinary list.

How much infrastructure would’ve been built if absurd environmental standards didn’t apply?

The list goes on. You can probably do a better job of fleshing it all out than I can. Here in Japan, the country dodged the worst of the emissions panic thanks to a culture of prioritising energy security.

But what’s gone so dreadfully wrong thanks to climate alarmism isn’t what I want to dig into…

What happens when energy becomes cheap?

The history of human civilisation is a history of improvements in energy technology. From cooking food to the steam engine to nuclear power, it’s been a series of lurches in what’s economically possible. Each stage is marked by the ability to do more with less – energy efficiency.

What makes the green energy transition so interesting is that it is a shift to a less efficient system. The intermittency and grid upgrades alone amount to an impossible equation. We are trying to achieve less with more.

Unfortunately, energy is the basic building block of an economy. It impacts everything else. And so the transition to a less efficient system undermines a great deal of other economic activity. It’s not a cost in isolation, but a poison that spreads.

The good news is that this is rather simple to reverse. If politicians were to discover that energy security, cost or efficiency matters more to voters than carbon emissions, they could very easily unwind the transition. Some have begun to do so.

Are we on the cusp of a surge in demand for fossil fuels as they become permissible again? You might think this would cause the oil, coal and gas price to surge.

But that’s not what’s happened. US GDP grew at a rip-roaring pace recently. While energy prices remain low. In fact, oil, gas and coal are underperforming other commodities badly.

What if the causation and investment opportunity lie in the other direction? What if a shift back to fossil fuels means a return to cheap and abundant energy?

The lurch to a more efficient system could prove surprisingly fast. Especially if it coincides with low energy prices. Which would require ample supply.

Right on cue, we face a global oil glut and a gas glut. Markets are oversupplied for a few years according to consultancies and research pieces.

Not everyone fell for the climate alarmism, it seems. Plenty of companies are abandoning their green projects and producing oil and gas at pace. Not to mention making new long-term investments in fossil fuel projects.

This is a signal that an economic recovery could be remarkably swift if reversing climate regulations continues as a political trend.

But how are we to profit?

Cheap and abundant energy causes 
 everything else to boom

Hoping for a recovery in oil and gas prices may be the wrong way to go about it.

Because energy is an input in all economic activity, making it cheap and abundant allows everything else to flourish. It makes more economic activity viable. People can commute further for better jobs, manufacture more stuff, build bigger mines and fly further on holidays.

There are two ways to profit.

Firstly, consider that cheaper energy triggers a surge in economic activity itself. That’s how the US dodged Europe’s economic malaise.

Without the energy transition and green regulation holding us back, living standards could suddenly surge.

But not all resources are cheap and abundant like oil and gas. A surge in demand on the back of growth means a surge in price for many commodities.

You can profit from this by owning the right assets. Those that can’t keep up with cheap energy world.