The week of October 10, 2022: Chevron’s CEO pushes back, inflation, the economy and much, much more.
The week of October 10, 2022: Chevron’s CEO pushes back, inflation, the economy and much, much more.
A s the energy crisis deepens, the CEO of Chevron, Mike Wirth, has…thoughts. To be sure, Wirth has a vested interest in defending his company’s business, but to say what he does is brave, especially at a time when the climate agenda’s enforcers – from regulators to investment managers — are still on the ascendant.
The Financial Times:
Western governments have made a global oil and gas crunch worse by “doubling down” on climate policies that will make energy markets “more volatile, more unpredictable, more chaotic”, the head of US supermajor Chevron has warned.
Climate policymakers, however, have been drawing different conclusions. They argue that the current crisis has, in one sense, proved their point: Europe’s heavy reliance on Russian natural gas is an example of the dangers of a fossil fuel “addiction” that is a gift to despots. To avoid such debacles in the future, they maintain, decarbonization should be accelerated. No matter that the West’s “race to net zero” is already moving forward at a pace unconnected with technological, political, or economic reality — central planning is like that.
And on the topic of vulnerability to unsavory regimes, this from Canada’s Financial Post is worth a read:
China [has been] playing both sides — benefiting from cheap, but incredibly environmentally damaging, coal-generated power, while simultaneously securing a near monopoly on the production of solar panels and rare earth elements, which the West relies on to produce clean energy and electric vehicles.
As of last year, China controlled a whopping 75 per cent of the global solar panel market. And according to InfoLink, a Taiwanese renewable energy consulting firm, European imports of Chinese photovoltaic modules increased 137 per cent in the first half of 2022, compared to a year earlier, as it looks for ways to offset reduced supplies of Russian gas.
“With Europe importing 80 per cent of its solar panels from China, dependencies would merely shift from imported oil or gas to imported solar equipment, leaving much to be desired when it comes to the solar sector as a genuine source of energy security and strategic autonomy,” reads a European Parliament backgrounder from July…
And who could forget the performance of America’s climate Metternich, John Kerry? Aware that his climate crusade looks ridiculous unless the world’s leading emitter of greenhouse gases agrees to play along – Kerry has been determined to ensure that petty issues such as genocide or the use of forced labor don’t get in the way of climate “cooperation” with China. But any such cooperation is based on an illusion. America’s climate millenarians believe that climate change is an existential threat; China believes that those fears are a business and strategic opportunity.
But back to Wirth and the Financial Times:
Mike Wirth, Chevron’s chief executive, said a premature effort to transition from fossil fuels had resulted in “unintended consequences”, including energy supply insecurity from crisis-hit Europe to California.
The reference to a “premature” effort to decarbonize is worth noting, particularly when it comes to wind and solar. Both can play an important part in meeting the world’s energy needs, but–in the absence of an effective and scalable battery storage technology–they have been handed a primetime role far too soon. For now, the inescapable reality of their intermittency (the sun doesn’t always shine; the wind doesn’t always blow) means that wind and solar lack the reliability a modern society should expect of its energy supply. Making matters worse, policy-makers abandoned (or turned away from building) power stations that used fossil fuels at precisely the same time that they plowed billions into solar and wind before they were ready. This was (and is) lunacy. Indeed, the only effective back-up system that does not require fossil fuels relies upon nuclear energy, but building nuclear power plants takes a long time, and is such a taboo in many countries that they won’t even attempt it.
The “unintended consequences” to which Wirth refers were certainly unintended — one of the markers of central planners at work. But it should not be forgotten that for some climate fundamentalists, energy scarcity is a feature, not a bug. For some, it is a goad to promote greater efficiency; for others, it is simply part of a broader rejection of an economic growth model they despise. Meanwhile, many climate policymakers are using the crisis they have helped to create as an opportunity to speed even faster down the same ill-conceived path.
But much of the money lavished on solar and wind in recent decades would have been better spent on solving the battery storage problem, not to mention on nuclear power and improving resilience. Indeed, so far as resilience is concerned, investing, say, in stronger flooding defenses for our coastal cities or toughening electricity infrastructure ought, in many cases, and whatever the climate may bring, to pay for itself before too long.
The Financial Times:
Despite heavy global investment in renewables in the past 20 years, fossil fuels still met about 80 per cent of global demand, and governments had to hold an “honest conversation” about the scale of the energy challenge, Wirth said.
“The conversation [about energy] in the developed world for sure has skewed towards climate, taking affordability and security for granted,” Wirth said in an interview at the company’s headquarters in San Ramon, California.
“The reality is, [fossil fuel] is what runs the world today. It’s going to run the world tomorrow and five years from now, 10 years from now, 20 years from now.”…
Wirth said the source of the energy crunch predated Russia’s invasion and followed years of under-investment in new oil supply. Annual capital spending on oil and gas projects was now about half the rate seen in years before the pandemic, he said, even though demand for the energy has continued to rise.
Lower rates of investment in the oil and gas sector predate the pandemic, and were due in no small part to the success of the shale revolution in holding down fossil fuel prices. However, government and regulatory hostility are now clearly playing an increasingly important role in discouraging investment in fossil fuels (or ancillary projects, such as refineries).
The Financial Times:
Wirth was among energy executives called to testify in Congress last year as part of an investigation into what lawmakers described as “Big Oil’s disinformation campaign to prevent climate action”.
That’s one example of harassment among many. Such harassment has serious consequences, though. Investment in fossil fuel production can take years to pay off, and with climate policymakers cracking down, can be a risky gamble.
And then there is ESG (an investment “discipline” that measures companies against various environmental, social and governance standards). It’s no secret that ESG is another factor increasingly discouraging investment in or by fossil fuel companies. Nevertheless, I was still surprised to read a reference in a recent (and terrific) piece for Capital Matters by Russ Greene to research by Goldman Sachs suggesting that ESG raises the cost of capital for frowned-upon sectors such as oil and gas by an estimated 15 percentage points: meaning that tight markets are no longer encouraging the creation of new oil and gas fields in the way they once would.
The Financial Times:
Since Russia’s invasion of Ukraine, the White House has also called for US shale producers, including Chevron, to increase domestic supply, although producers are increasingly eschewing pricey new drilling campaigns in favour of bumper dividends.
Wirth said this was a dilemma for an administration that had entered office with a “very clear agenda …to make it more difficult for our industry to deliver energy to our customers”.
The White House’s responses to the global energy crisis were now “all tactical”, said Wirth.
“There’s not a lot of deep energy expertise in the administration…There’s a point of view that you find quite visible in the administration that we can move from system A to system B very quickly and easily. And it’s not that simple.
Wirth has made several moves (notably an investment program to spend $10 billion on low-carbon technologies over the next seven years) that are seemingly designed to lessen pressure on the company from climate warriors. Such action has been questioned by Vivek Ramaswamy, a fierce critic of ESG and, through his asset management firm, an investor in Chevron (at least in early September). Nevertheless, in a recent article for the Wall Street Journal, Ramaswamy conceded that “compared with his peers…Michael Wirth has exhibited unusual courage.”
It’s hard to disagree.
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 the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 88th episode David is joined by Capital Matters’ own Dominic Pino. They go into all sorts of things economic, from Dominic’s time as an economics student at George Mason to the present state of policy madness to the world of ESG. Talks like this are why Capital Record exists.
The Capital Matters week that was . . .
The Economy
It might seem clichéd to say that those who do not learn from history are doomed to repeat it, but the adage is particularly pertinent to today’s Federal Reserve. Seeming to have learned little from the Lehman Brothers bankruptcy in September 2008, the Fed is now tightening monetary policy at a rapid pace, at a time when the world is as indebted as it has ever been. It is also doing so when clear signs are emerging that major debtors are having trouble servicing their debts, and equity bubbles are bursting…
With interest rates finally rising after a long period in which (at least according to some) they were at 4,000-year lows, there is bound to be a period of painful adjustment, and periods of painful adjustment rarely go smoothly in the financial markets. So far, to take a fairly random selection, we have seen an exaggerated response to the U.K.’s mini-budget (made much worse by the games that have been played with derivatives in the British treasuries, or ‘gilts,’ market), unease over Italian government bonds, emerging market woes, crashing stock markets, wobbly housing markets, and a great deal of (unhealthy) speculation surrounding two major European banks, Credit Suisse and Deutsche Bank…
The current mess in the British government bond markets must be seen, in part, as a consequence of efforts by pension fund managers to ensure that they could, despite ultra-low interest rates, generate the return needed to pay those with defined benefit pensions.
This helped fuel the rise in liability-driven investment (LDI)…
Energy
As I mentioned in the most recent Capital Letter, Britain’s new prime minister, Liz Truss, has lifted the ban on fracking introduced in the Johnson years. But before cracking out the champagne, it’s worth noting that merely allowing fracking does not mean that it will take place. To start with, in addition to the usual objections from climate warriors and other greens, many locals will object to the dislocation that fracking might bring to their parts of the country. Not only is the U.K. more crowded than some of the areas in which fracking takes place over here, but there is also far less incentive for property owners and local communities to agree to it…
LNG is thus, as I have mentioned before, a global product. But the transportability that enables it to be used to help out Europe comes with an in-built complication: Europe is not the only part of the world chasing after LNG. I also mentioned that there has been tough competition for LNG between Asian and European buyers this year, and that this would only be likely to intensify. European demand for LNG has already surged, and it is likely to increase further as most Europeans face the reality that Russian gas won’t be returning in the near future, and construct new floating or fixed import capacity.
Adding floating capacity is the quickest way to achieve that, but there’s also the construction of new export facilities to consider.
Industrial Policy
One of the premises behind the CHIPS Act and its billions in subsidies for semiconductor firms is that the U.S. must avoid being overtaken by China’s state-directed semiconductor industry.
But the Chinese semiconductor industry is not the juggernaut that some in the U.S. believe it to be…
Transportation
The BMWED, the third-largest union representing freight-rail workers, announced today that its members have rejected the tentative agreement that President Joe Biden and Secretary of Labor Marty Walsh celebrated last month.
The deal announced by Biden and Walsh was only tentative, and it still required ratification from union membership to go into effect. Only 43 percent of the nearly 12,000 BMWED workers who voted approved the deal. With that rejection, striking becomes a legal option for the BMWED on November 19. Both sides have agreed to maintain the status quo and continue negotiations in the meantime.
Faced with a declining U.S. commercial-shipping fleet, members of Congress have unveiled new legislation designed to spur demand for these costly ships. Their plan: Force Uncle Sam to use them. Or, more accurately, force the federal government to use the ships even more. Although pleasing to maritime unions and other special-interest groups, this approach would expand an already gaping federal-budget deficit while doing little to address this long-ailing industry’s underlying problems…
The Budget
A Florida man fraudulently used a $7.2 million emergency loan to purchase a 12,579-square-foot mansion and several cars. A California couple fraudulently collected $18 million and purchased “three houses, diamonds, gold coins, luxury watches, expensive furniture and other valuables.” Another man forged enough applications to collect $27 million in Paycheck Protection Program (PPP) funds.
“The biggest fraud in a generation.” That’s how a former U.S. attorney described the immense waste and abuse from the federal government’s emergency pandemic aid. The extent of this fraud and waste is still being uncovered, and most lawmakers do not want to discuss this national scandal.
Taxation
In a wave of reforms, 15 Republican governors have cut income-tax rates in just the past two years. And this year, the Cato report rewards an “A” to five governors:
Kim Reynolds of Iowa is the top governor based on her spending restraint and tax reforms. She converted Iowa’s income tax from a nine-bracket system, with a top rate of 8.98 percent, to a 3.9 percent flat tax. She also slashed the corporate-tax rate from 9.8 percent to 5.5 percent, abolished the inheritance tax, and has held average spending growth to 2.3 percent since 2017….
Most of the tax code is permanent, which means it’s not scheduled to expire automatically. However, there are always some provisions with sunset dates attached to them. The most famous of these are the individual provisions of the Tax Cuts and Jobs Act (TCJA), whose last year in force is 2025. To create a year-end revenue vehicle, Congress extends these expiring provisions a year or so at a time. This “tax extenders” bill often serves as a kind of magnetic force which sucks in other must-pass legislation such as continuing resolutions, omnibus spending bills, and debt-ceiling raises…
Inflation
The September consumer-price index report from the Bureau of Labor Statistics is out today, and it shows inflation at 8.2 percent year-over-year and 0.4 percent month-over-month. That’s a year-over-year decline since August’s 8.3 percent, but a month-over-month increase from August’s 0.1 percent.
The consensus projections were 8.1 percent year-over-year and 0.2 percent month-over-month….
International
Whatever the legend may say, Napoleon never himself said that he wanted “lucky” generals. Nevertheless, he would, for the most part, have expected that they did some homework before going into battle. Kwasi Kwarteng’s failure to have taken the time to check on what was brewing in financial markets (in which, incidentally, he used to work) largely explains why he has just been forced to resign as Britain’s chancellor of the Exchequer (finance minister) after only 38 days. The only chancellor to have been in office for a shorter period, at least since 1900, was Iain Macleod (1970), but in his case death made it difficult to carry on.
Kwarteng’s basic idea was right…
Economics
This week, economists are celebrating the Nobel prize given to Ben Bernanke, Doug Diamond, and Phil Dybvig for their work on banking.
Bernanke pointed out that banks matter in his 1981 paper “Bankruptcy, Liquidity, and Recession.” In the Great Depression, banks failed, and there was nobody left who knew how to make new loans. The economy contracted, not just for lack of money or for animal spirits of investors, but for lack of credit. Diamond and Dybvig wrote the classic economic model of bank runs, which shows how banks can fail even when they are “illiquid” rather than “insolvent.” The logic works like this: The bank has invested our money in illiquid projects, so if I suspect others are going to run to get their money out, I run to get mine out first before it’s all gone.
But it is no insult to say that these are not eternal verities…
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