You may have seen the headlines that President Biden has visited Saudi Arabia or been in talks with oil producers, essentially begging for more oil. You’ve definitely seen the heart-stopping prices at the pump. We hear a lot about America’s dependence on foreign oil, yet the US is actually the world’s largest oil producer (at least as of 2021). So if we have such a thriving oil and gas industry, why is Biden really going overseas and basically begging our enemies for more oil?
Before we dive into the weeds, we would like to stress that this is not an attack piece on Biden. He is but one of many who are contributing to the problems we face in the oil and gas market. Bigger Insights also does not make a habit out of discussing politics. However, we feel it’s important to shed light on this issue because many, particularly those less fortunate, are becoming victims of poor energy policies.
Inflation is an Election-Killer
With the June 2022 CPI print coming in at 9.1%, it’s no secret that inflation is hot. Of course, anyone who shops, pays bills, or fills up at the pump could tell you this without the government’s heavily-skewed data. Whether you like it or not, this inflation will be a major tailwind for republicans in upcoming elections. Inflation is a stone-cold election-killer. Why? Because most people just want to be left alone so they can live their lives in peace. When inflation causes a material decline in living standards, people blame those in charge, whether fairly or not.
The Biden administration is well aware of this, so they’re making inflation a top priority. That is, however, a priority of desire, not necessarily one of policy. Only time will tell, but:
- The administration’s energy policies are inflationary by disincentivizing production
- Biden seems to have an undying desire to spend trillions of borrowed dollars into the economy through Build Back Better. He actually believes that said trillions will reduce inflation. We disagree. It’s almost as if we just went through trillions of fiscal spending in the COVID era – how did that turn out?
ESG Magical Thinking
Unintended Consequences
We have a saying here at Bigger Insights: “We all want the same things, we just disagree on how to get them.” Who doesn’t want cleaner air, polar bears, less waste, and less Greta Thunberg? As exciting as renewable energy and electrification are, we have to be realistic about our energy needs. When we’re not, there are unintended consequences. For example, coal, one of the dirtiest fuel sources, is on-track for record demand in 2022. This is largely due to governments around the world shutting down nuclear and fossil fuel power plants, as well as stifling the production of oil and gas. Protecting the environment is a noble goal, but if our policies do more harm than good to the environment, we need to rethink our energy strategy.
ESG Consequences
With the proliferation of ESG (Environmental, Social, and Governance) investing, there is systemic underinvestment in the oil and gas industry. This is not only by institutional investors, but by oil and gas companies as well. After all, why would you invest in new capacity if much of the developed world is hell-bent on trying to put you out of business?
We would like to see a greener world as much as anyone else, but it’s magical thinking to believe we can cancel fossil fuels like a Netflix subscription. Nuclear power, the cleanest, most reliable and energy-dense source of power we have, is generally considered non-ESG. So if nuclear and fossil fuels are off the table, what’s left? Wind, solar, and hydroelectric? What if you don’t live near a dam, or in an area that’s neither sunny, nor windy? Bear in mind that mining, which is essential to ESG agendas, is also frowned upon in the ESG crowd. This line of magical thinking is a major contributor to the oil and gas crisis we’re experiencing in many parts of the world. Unless we quickly reverse course, this is going to have major implications on energy supplies for years to come.
Demonizing the Oil Industry
I guarantee you we're going to end fossil fuel.
I would transition from the oil industry.
My message to the companies running gas stations and setting prices at the pump is simple: this is a time of war and global peril. Bring down the price you are charging at the pump to reflect the cost you’re paying for the product. And do it now.
The Real Reason Biden's Begging for Oil Overseas
In 2019, the US was a net exporter of energy for the first time since 1953. In 2022, we’re a net importer once again. Everyone, including Biden himself, acknowledges that we need more oil, but this begs the questions:
- If we could satisfy our energy needs in 2019, why can’t we now?
- Why are we asking countries like Saudi Arabia, UAE, and Venezuela to produce more oil if we can produce it here?
The real reason why Biden is going overseas to beg for more oil is because he, his administration, and his cohorts have demonized and undermined the oil industry:
- 2019-2020 (quotes above): Biden vowed to end the fossil fuel industry
- January 20, 2021: On his first day in office, Biden signed an executive order that effectively ended the Keystone XL pipeline
- January 27, 2020: Biden signed an executive order ending oil and gas leases
- Biden, Elizabeth Warren, and others have been clamoring for a “windfall” profits tax on oil companies
- July 2, 2022 tweet (above): Biden threatened gas station owners who make very little money selling gas as it is (~15 cents per gallon)
- On and on – someone could write a book on this
What Should Oil Companies Do?
Now that oil prices are elevated, and oil companies are finally making money after years of poor performance, they have two basic options for their earnings:
- Invest them in new capacity
- Distribute them to shareholders
Given the hostile political climate, what would you do if you owned or controlled an oil company? Would you invest those earnings at high risk of losing your investment for political reasons, or would you take the money and run? If you’re going to invest billions of dollars in new plant and equipment, you’re going to want a decades-long, stable environment. Those days are all but gone for the oil and gas industry.
What This Means for You
Biden realizes he has burned the bridge with oil and gas companies. He knows that they have little appetite for investing in this environment. So he’s going hat-in-hand to shady regimes around the world, many of whom we consider enemies, begging them for more oil. So what does this mean for you?
The oil industry has suffered from a major supply glut in recent years. This has resulted in unusually-low prices for consumers and a lack of investment in maintenance and new capacity. Ordinarily, this would result in an average bull market for oil, meaning higher prices for consumers. We don’t believe that we will be so lucky as to have only an ordinary bull market in oil. Due to political and ESG disruptions, we expect demand to materially exceed supply for oil and gas for years to come. That being said, we also believe oil and gas prices will be rather volatile. We may very well see $2-3 gas during the next recession, but don’t get used to it.
While this is bad news for consumers, that doesn’t mean you have to be a victim. If you’re concerned about the prices of energy, you can, as we do, hedge your risks by investing in energy and energy producers. When we see the price of gas rise at the pump, we take solace in knowing that our energy assets will be worth more and pay more dividends.
If you would like to learn more, please reach out to us by filling out the contact form at the bottom of the page.
