The week of November 29: oil, climate, infrastructure, and much, much more.
In the last Capital Letter (from two weeks ago), I noted how the president had written to FTC chairwoman Lina Khan talking of “mounting evidence of anti-consumer behavior by oil and gas companies.” “The bottom line,” he argued, was that “gasoline prices at the pump remain high, even though oil and gas companies’ costs are declining.”
And so:
The Federal Trade Commission has the authority to consider whether illegal conduct is costing families at the pump. I believe you [Khan] should do so immediately.
I haven’t seen many details of how the investigation is proceeding (the FTC has expressed “concern” and is, apparently, looking into it), but I doubt it will find any skullduggery. Markets are what they are.
The oil price is the most important determinant (over the last decade, it has accounted for roughly half) of the price that an American driver pays at the pump. The rest is made up of refining and distribution costs, and taxes. And, yes, there is a profit margin too, but there is a limit to the game that can be played by delaying the speed at which the price at the pump reflects a fall in the oil price.
Meanwhile, the oil price is being knocked around by speculation (little of it informed) about the extent to which demand will be suppressed by the effects of the Omicron variant, or, perhaps more likely, by possible government overreaction to it. As variant succeeds variant, the importance of learning to “live with” COVID-19, becomes more and more obvious — not that it wasn’t obvious already.
Meanwhile, while the transition away from fossil-fuels bears, at best, only very limited responsibility for this year’s increase in energy prices in the U.S., the same cannot be said of Europe, some parts of which may be facing a hard winter ahead. On the brighter side, there are some signs that the implications of a premature and rushed move away from fossil fuels are beginning, at least here and there, to sink in. There is a revival of interest, in some countries at least, in nuclear power, and an increasing willingness to contemplate (natural) gas, which is less carbon intensive than oil as a “bridge fuel.” On the other hand, there is this (via Reuters):
Royal Dutch Shell said on Thursday it had scrapped plans to develop the Cambo oilfield in the British North Sea, which became a lightning rod for climate activists seeking to halt the development of new oil and gas resources.
Following “comprehensive screening” of the Cambo field, Shell “concluded the economic case for investment in this project is not strong enough at this time, as well as having the potential for delays,” the company said in a statement.
Private equity-backed Siccar Point, which owns a majority stake in the field, confirmed in a separate statement that “Shell has taken the decision to not progress its investment at this stage.”
Potential for delays?
Senior figures at Shell are understood to have become frustrated by the UK Government’s unwillingness to give Cambo public support . . .
Shell’s fears of delays are likely to be interpreted as based on the political climate, which risks seeing Cambo bound up in regulatory delays, legal challenges or protests.
Also in The Daily Telegraph, Matthew Lynn blamed the U.K. and Scottish governments for their contribution to Shell’s withdrawal. The attitude of the Scottish first minister was unsurprising, that of Britain’s Conservatives, not much less so, but, given what they used to stand for, considerably more contemptible:
It is just as crucial to have a back-up plan, and the oil and gas that is still sitting under the North Sea is the best one we have. In truth, both Sturgeon and Boris Johnson are guilty of extreme recklessness in not backing the field – and they may pay a heavy price.
It remains to be seen whether the Cambo project can still go ahead. The field off the Shetland Islands has the potential to produce more than 170m barrels of oil and gas equivalent making it a major contributor to the UK’s energy supplies.
Shell owns a 30pc stake, but this week concluded the political hassle of developing it meant it was no longer worthwhile.
Siccar Point Energy, a private company that owns the remaining 70pc, could press on, but the legal and regulatory obstacles may prove insurmountable on its own. The oil may well end up lying completely undisturbed in the ground while a battle over its fate meanders through the legal and regulatory system.
And meanders with no support from the government. This would leave Siccar, points out Lynn, in “a lonely place.”
Siccar Point is, tellingly, a private-equity vehicle, rather than a public company. As public markets increasingly fall under the sway of institutional investors using their clients’ money to enforce an essentially political agenda — often described as ESG, a form of “socially responsible” investing under which investors measure actual or portfolio companies against various environmental, social, and governance criteria — it makes a lot of sense for private-equity players who, in our current era, are typically better placed to concentrate on financial return rather than political activism (and less subject to regulatory interference) to pick up pariah assets, such as oil fields, and, incidentally, to do so at a discount price.
The thought of this infuriates ESG’s oligarchs, such as BlackRock’s Larry Fink, perhaps the most important of all those in Wall Street’s corporatist elite (as a reminder, BlackRock is the largest asset manager in the world, with nearly $10 trillion under management).
Larry Fink said too narrow a focus on the climate policies of public companies risks undermining the green agenda and is potentially creating “the largest capital-market arbitrage in our lifetimes,” as hydrocarbon assets move from public to private hands . . .
The BlackRock Inc. chief executive officer was speaking on a panel Tuesday at the Green Horizon Summit, a finance-focused event hosted by the City of London and the Green Finance Institute on the sidelines of the COP26 [COP26 was the recent UN climate conference] meeting in Glasgow . . .
Fink, who turned up to the event in hiking boots and a suit . . .
I thought that I’d leave that sartorial detail in there. It is possible that Fink had forgotten his shoes, but, if not, there is something nauseatingly theatrical about that touch, faintly reminiscent of an old-style communist leader sporting a vaguely “proletarian” costume as he appeared before the masses.
Meanwhile, private equity is doing what it does, and what it does is ignore the corporatist cartel being put together by the likes of Larry Fink and the ubiquitous Mark Carney, a former governor of both the Bank of Canada and the Bank of England, and now one of the most important figures in the “greening” of finance.
Back to Bloomberg Green:
As the dust settles on the finance industry’s most ambitious climate coalition yet, some of the biggest names on Wall Street have remained conspicuously absent.
Among key holdouts is the world’s No. 1 private-equity firm, Blackstone Inc., which leads a parade of buyout behemoths, including Apollo Global Management Inc. and KKR & Co. Inc. None of the three has signed up to a pledge unveiled during COP26 to eliminate CO2 emissions and help avoid catastrophic planetary overheating.
Catastrophic? Bloomberg’s gonna Bloomberg.
Bloomberg Green:
The Glasgow Financial Alliance for Net Zero [GFANZ] lists most of the titans of banking, insurance and asset management in the developed world. Still struggling to resurrect their images after the 2008 crisis, the biggest names in global finance lined up in early November to declare they’d do their bit to help fight climate change. JPMorgan Chase & Co., Citigroup Inc., BlackRock Inc. and Goldman Sachs Group Inc. were among the roughly 450 to add their names to the dotted line.
The achievement was touted as a “watershed” moment by Mark Carney, the co-chair of GFANZ who spent the better part of a year trying to persuade as many finance bosses as possible that they couldn’t afford to ignore this movement. The group he managed to bring together represents a show-stopping $130 trillion in assets, proving, according to Carney, that global finance is positioning itself to land on the right side of history.
The notion that history has a “right side” is, of course, an example the sort of crude teleological thinking that brought us Marxism (in reality, history is no more than — to use a bowdlerized form of a famous line — one thing after another). That Carney believes that being on the right side of history is a convincing argument exposes him as a propagandist or a preacher rather than as someone who should be taken seriously, intellectually, at least. Politically, however, he is a formidable figure, despite never having been elected to any legislature, a characteristic he shares with much of the climate establishment.
Bloomberg Green:
The private-equity industry was also wooed by GFANZ, according to a spokeswoman for the alliance, which is co-chaired by Michael R. Bloomberg, the owner of Bloomberg News parent Bloomberg LP.
GFANZ has “engaged with firms right across the entire global financial spectrum,” the spokeswoman said. And the alliance is still urging those on the sidelines “to join the race to zero and work with their peers, scientists, the UN, and NGOs to accelerate the transition to a net zero global economy,” she said.
The climate warriors are nothing if not masters of the manipulation of language. The use of that phrase “the race to zero” is designed to convey the impression of a fait accompli and that there is something exciting about a set of policies that are both a lemming leap (yes, yes, I know that’s a myth) and power grab, and will do little or nothing to or for the climate.
Bloomberg Green:
A few small PE firms have joined GFANZ’s sub alliances, including Stonepeak and Earth Capital. Brookfield Asset Management Inc., which includes a private equity unit and of which Carney is vice chair, is also part of the initiative.
But as of late November, the biggest names in the industry hadn’t joined. Aside from Blackstone, Apollo and KKR, Carlyle Group Inc. and TPG have also so far abstained. Spokespeople for Carlyle and Apollo declined to comment when contacted by Bloomberg. A KKR spokeswoman said the firm is “currently evaluating future public commitments related to net-zero pledges,” without elaborating.
Other large private-equity firms are also evaluating this, or committing to this, but it is to be hoped that these remain largely empty declarations, and that they stick to their primary purpose: to generate return for those whose money they manage.
Bloomberg Green:
In a criticism of holdouts earlier this year, former United Nations climate chief Christiana Figueres questioned those “taking advantage of the opportunities resulting from the low-carbon transition” as an investment strategy, without committing to net zero. “Given the gravity of the climate crisis, this is no longer sufficient,” said Figueres, who presided over the 2015 Paris accord.
Figueres is, by background, a Costa Rican diplomat. She too has never been elected by anyone.
But back to Reuters and the North Sea:
The Cambo project off the Shetland Isles has been at the centre of a political debate on whether Britain should develop new fossil fuel resources as it seeks to become a net zero carbon economy by 2050.
Climate activists have pointed to a report by the International Energy Agency (IEA) saying that no new oil and gas projects should be developed in order to restrict global warming to 1.5 degrees Celsius.
Think for a moment of what it would mean for energy prices if that particular recommendation were to be followed. Think for a moment, too, of the advantage that it would hand OPEC and Russia.
Reuters:
“Cambo remains critical to the UK’s energy security and economy,” Siccar Point Chief Executive Officer Jonathan Roger said in a statement . . .
Adam Matthews, chief responsible investment officer at Church of England Pensions Board, a shareholder which leads engagement with Shell over its energy transition strategy, welcomed the move.
“The message is clear to the U.K. Government (that ultimately decide if the field is exploited) that companies beginning to transition will not allocate the capital to such projects,” Matthews said in a tweet.
That, to say the least, is a circular argument. At least part of the reason that Shell is not going forward with this project is because it could not rely on the U.K. government to provide it with the political and regulatory support required if the company were to have a reasonable chance of securing a decent investment return on this project.
This is a story that will be repeated time and time again across the Western world. Harassed by activist shareholders (typically managing other people’s money, something that makes the activism rather easier) who no longer put investment return at the top of their priorities, kept at a distance by Western governments pursuing “net zero,” and facing a squeeze of funding from banks that are themselves under growing activist-shareholder and regulatory pressure, publicly held (Western) oil and gas companies are simply not going to make the investment in new production capacity that will be needed until reliable alternatives are available on a sufficient scale. And that might be quite a long wait.
But the activists don’t care.
Reuters:
Friends of the Earth, an activist group which won a climate court case against Shell in the Netherlands this year applauded the move.
“The future of the project is now in serious doubt – as it should be. There is no need for a new oil field during a climate crisis,” the group said on Twitter.
If that attitude — or anything like it — catches on in the U.S., as well as in Europe, and there are clear signs that it is, the current surge in energy costs over here will be nothing more than a rather gentle preview.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 45th episode David is joined by free-market guru, supply-side legend, flat-tax hero, and all-around happy warrior Steve Forbes. The two of them embark upon a far-reaching conversation on the misguided intentions of the current administration, the right way to talk to young adults about markets, and why the future belongs to believers in a free society.
Palm Beach: Book Event
National Review Institute is holding an event on December 7 to mark the publication of a new book, There’s No Free Lunch: 250 Economic Truths, by NRI trustee David Bahnsen.
In the book, Bahnsen pulls from the masters — the great economic voices of the past and the present — to remind readers of the basic economic truths that must serve as our foundation in understanding the challenges of today. In 250 vital points, he combines pearls of wisdom from economic legends with his own careful commentary to provide readers the perspective, information, and reaffirmation they need in order to see economics for what it is. It will empower you and equip you with the truth — 250 truths — that are crucially needed to keep the lights on in civilization and advance the cause of human flourishing.
The event will be held at the Colony Hotel in Palm Beach on Tuesday, December 7 — registration will begin at 5.30 p.m.; the event at 6 p.m.; and a reception and book-signing at 7 p.m. Complimentary books will be provided to all attendees.
RSVP here.
The Capital Matters week that was . . .
Health Care
Amid the fast-paced congressional talks over President Joe Biden’s budget-busting Build Back Better Act (BBBA), the legislation’s massive expansion of federal Medicaid funding for in-home care has thus far received little scrutiny.
Unfortunately, the legislation is cynically engineered to steer potentially billions of Medicaid dollars to labor unions, forcing hundreds of thousands of home care aides into supporting far-left political advocacy and saddling taxpayers with wasteful programs . . .
Cryptocurrency
Sometimes, the news has a real Mad Libs quality, in which it just seems like incredibly disparate words are smashed together and fashioned into a breaking development. That’s how I felt, anyway, after reading a Guardian story headlined “Tolkien estate blocks ‘JRR Token’ cryptocurrency.”
It may be a Mad Libs, but it’s also real. Someone really did try to create a Lord of the Rings/J R. R. Tolkien–themed cryptocurrency called “JRR Token,” with the “JRR” supposedly standing for “Journey from Risk to Reward.” Billy Boyd, who played the hobbit Pippin in Peter Jackson’s trilogy, even signed up to promote it, claiming in a promotional video that “Saruman was trying to unify Middle Earth under centralised rule whereas the fellowship wanted decentralisation. Cryptocurrency is literally a decentralised network.”
But the Tolkien Estate was having none of it, swiftly taking legal action to block JRR Token . . .
Infrastructure
After reminding Americans that the Democrats’ infrastructure proposal includes a “$12,500 discount” for electric cars, transportation secretary Pete Buttigieg declared that “families who own that vehicle will never have to worry about gas prices again.”
Indeed. And if every American rode a ten-speed bicycle to work, no one would have to worry about fuel costs at all . . .
“Years of Delays, Billions in Overruns: The Dismal History of Big Infrastructure” reads a headline from yesterday in the New York Times. The story does well to illustrate the real problems with American infrastructure, which are not primarily about lack of funding . . .
Quick thought experiment for our friends on the left who spent November crowing about an infrastructure bill: Suppose you took a nap and woke up in ten or 15 years. Is Amtrak going to be run any better than it is today?
Thanks to the new law, Amtrak has another $66 billion to spend. In an age when trillions of dollars get slung around this way and that, your eyes glaze over. Is $66 billion a lot? No, it’s more than a lot. It is a colossal, gigantic, Brobdingnagian sum for a service that has previously burned through (only!) about $2 billion a year in federal subsidies. (Reminder that Amtrak is a for-profit corporation. Let’s hear it for the government pumping more money into private industry!) Amtrak has just been given the equivalent of a third of a century’s worth of funding on top of its usual budget . . .
Inflation
Even if supply-chain problems are not the sole cause of the current inflationary spike, they still matter. In the context of Omicron, it is worth remembering that current supply-chain disruptions are partly (only partly) the consequences of overly draconian governmental responses to the coronavirus over the past 18 months. The question now is whether those errors are going to be repeated on enough of a scale to set back the recovery in supply chains — of which there is some evidence — and, for that matter, lead to other disasters that, at many levels, we cannot afford . . .
Supply Chains
As if things couldn’t get any worse at our West Coast ports, it’s also a contract year for the International Longshore and Warehouse Union. The ILWU represents dockworkers at West Coast ports in the U.S. and Canada, including Los Angeles and Long Beach. The current contract expires in July 2022, and the ILWU rejected an offer to delay negotiations to 2023, the Wall Street Journal reported . . .
On Tuesday, Secretary of Labor Marty Walsh visited Southern California and held a press conference with port leadership and California politicians at the Port of Los Angeles.
They told a story of progress and cooperation in the ongoing supply-chain crisis. They emphasized that the ports on San Pedro Bay are some of the busiest in the world and have moved record amounts of cargo. Speakers made sure to give shout-outs to unions, especially the International Longshore and Warehouse Union (ILWU). They credited the Biden administration with making progress on port congestion and passing the infrastructure bill to invest more in ports.
It’s a nice story, and it made for some good photo ops, but it isn’t true. Port congestion is not improving . . .
No matter how you slice it, there’s no way to avoid one conclusion on the state and local tax deduction: The benefits go to people who are already well-off.
A new analysis out today from the Committee for a Responsible Federal Budget (CRFB) shows that Democrats’ latest attempt to expand the SALT deduction (which was capped at $10,000 per year by Republicans in 2017) “will be both costly and regressive.” Democrats think they’ve found a way for the restoration of the deduction to be revenue-neutral, but it’s just another budget gimmick . . .
If you have a business with a bright idea on how to make supply-chains run better, come collect your winnings. Venture-capital investment in supply-chain technology has gone through the roof this year. According to FreightWaves, investment exceeded $7 billion for the third straight quarter. That’s approximately double the investment made in the fourth quarter of 2020. Investment in 2017 was below $2 billion per quarter.
This explosion in capital is exactly what one would expect in a free-market system experiencing a crisis. Lots of people are upset right now with skyrocketing shipping costs. That means there’s a lot of money to be made in solving the problems that are making people upset. So the supply-chain sector becomes more attractive for investment than it was before, and lots of ideas that might not have gotten funding last year will now be able to get funding . . .
Climate
My fear is that the Left has found in the totalitarian Fauci state the playbook that takes this entire COVID farce to the next level. If we can shut down everything, even churches, for 30 days to “stop the spread,” why not shut the entire economy down for half a year to save the planet? And between now and then, widespread public shaming of anyone who dares to contribute to climate change in any way seems as inevitable as the phases of the moon. I should say, incidentally, that I am on the record as supporting a well-designed carbon tax on economic grounds (I know many conservatives disagree).
Climate activists like to emphasize how serious the costs of policy inaction today might be. When I add up the risks and costs, the oppressive behavior of emboldened leftists who would unleash a thousand climate Faucis on us if they could rises to the top of the list. Which might be the best argument for a carbon tax yet.
To achieve per capita economic growth, an economy must either produce goods and services that were not previously produced or produce the existing goods and services in a more efficient way. If an economy continues to produce the old goods and services but replaces the inputs with a more costly set of inputs, per capita growth will be negative. Such an economy would become poorer over time and less wealthy in per capita terms. This is the likely future of the U.S. and Europe as they stumble their way toward an effort to transition their economies to a different, more expensive, set of energy sources . . .
Turkey
It’s no secret that Recep Tayyip Erdogan aspires to become the sultan of Turkey. But there is one huge obstacle that might block Erdogan’s path: the Turkish lira. The lira is one of the world’s junk currencies. Indeed, with each passing day, the lira hits new lows against the U.S. dollar, and with that, inflation in Turkey soars. Today, I measured Turkey’s annual inflation rate at 82.9 percent per year. The lira hangs like the sword of Damocles over Erdogan.
For Erdogan, low interest rates are a fatal attraction . . .
Debt
Never in American economic history was so much owed by so many for so little. The de facto application by both political parties of Modern Monetary Theory, effectively unlimited borrowing and monetary stimulus, is ultimately disproving Keynesian economic principles, of which MMT is a bastardized reductio ad absurdum . . .
Employment
There are still 3.9 million more Americans out of work than there were before the pandemic.
So, there is still quite some way to go, and that some way may be extended because of the Omicron variant, or, perhaps more likely, because of government overreaction to Omicron. This new variant must, of course, be taken seriously. However, a panic-stricken overreaction is not taking it seriously, but an evasion of the sort of thinking that is needed in the face of a problem of this nature. One way or another, we are going to have to “live with” this virus. That’s not a takeaway from these numbers, but it is a takeaway unchanged by them. It’s worth pointing out that retail employment actually declined (albeit by a small number, some 20,000), and leisure and hospitality jobs were flat. These are sectors that will be hit very hard in the event of an Omicron panic . . .
Regulation
One of the features of the first year of the Biden administration has been the way that regulators are increasingly trespassing into territory more properly reserved for legislatures.
If it is true that Richard Cordray is going to be nominated to the Federal Reserve as vice chair for supervision, which is what current talk now suggests (his name is certainly under consideration), it could mean that another imperial regulator may well be on the way to being appointed.
The Wall Street Journal’s editorial board summarizes Cordray’s career here. Let’s just say that it doesn’t make entirely reassuring reading. Let’s also note that Elizabeth Warren is something of a fan . . .