Australia’s energy transition – An epic clown show

With Easter upon us, I thought an essay with some truth bombs in it would be appropriate. After all, Jesus dropped plenty of them and got himself crucified for it.

Literally..

Hopefully, I’ll just be crucified figuratively by the climate zealots.

So let’s get stuck in!

Here’s the first truth bomb. A truth so obvious that it’s strange that it should be considered controversial.

Australia’s political class is inept, immensely stupid and economically illiterate. They are destroying your standard of living and will continue to destroy your kids’ too, if we allow it.

This is so obvious that I often wonder whether plain old stupidity is not actually the driving force behind it. Rather, perhaps it’s good old corruption? That is, politicians have no interest in governing for the people. Instead, they govern for the lobbyists, thinking only of themselves and their careers.

These clowns (from all sides of politics) are presiding over an energy transition that will result in a HIGHER cost of energy for the first time in history.

And Australia is at the forefront of this calamitous transition.

Last week, the Federal Government’s ‘Safeguard Mechanism’ passed the Senate. This effectively puts a hard cap on the emissions of Australia’s largest industrial polluters.

On the surface, it sounds like good policy. Everyone supports lower emissions, right?

Welcome to the world of unintended consequences.

The party of no consequences – the idiotic Green’s – celebrated the deal, believing that it will stop all further fossil fuel development.

It won’t do any such thing, of course. But it will push up production costs and make energy more expensive.

The passage of the Safeguard Mechanism through the Senate especially impacts oil and gas producers, given it comes on the back of recent regulations putting a cap on gas prices.

In addition to that, there is increasing concern that LNG developed for export markets under long term contracts could be diverted to the domestic market. Given the difficulty of bringing new supply to the market, the east coast gas market for domestic consumption looks precarious in the years ahead.

This has our major export customers getting very nervous.

As the Financial Review reported…

‘China has backed Japanese alarm that Australia is slowly abandoning LNG exports, saying it is a “major issue” as the Albanese government weighs up crimping foreign gas sales and saddles the sector with tough new emissions reduction measures.

‘In an exceptional example of North Asian solidarity, China’s embassy in Canberra added its voice to accusations by the head of Japanese gas company Inpex that Australia was “quietly quitting” the LNG export.’

This comes as we learn Australian gas producers are forecast to generate $90 billion in export earnings this financial year. Overall, energy and resource exports are forecast to bring in a record $464 billion in revenue in 2022/23.

These earnings are the lifeblood of our economy. They provide huge royalty revenues to State governments and income tax revenue to the Federal government. They underpin Australia’s high wage rates. They allow governments and banks to continue borrowing at a low rate of interest, to bribe us at election time and finance our housing speculation, respectively.

Renewables are energy intensive

This is obvious to most people with a modicum of common sense. But not to the clueless clowns running the show. They see these earnings as something to be taxed (watch what happens in the upcoming budget). And oil and gas production is enemy number one.

Meanwhile, these fools talk endlessly about the energy transition as if it can occur without traditional energy use.

Let me be clear here. I, like many people, support a world of lower emissions. But no matter how bad you want it to be so, wind and solar will not be able to power a modern industrial economy.

Despite this simple fact, the clowns are throwing billions at it. And the rent seekers are loving it.

They either don’t realise or don’t care that solar and wind farm construction is a very energy-intensive business. The ‘renewable economy’ needs billions of investment dollars to find and produce the metals required for the ‘transition’.

What is the fuel of choice for the miners exploring for and digging up these metals?

Diesel fuel. Lots of it. For the benefit of the Greens, diesel fuel comes from crude oil production.

And, as more wind and solar comes into the grid, we need more ‘firming capacity’ to make sure there is backup power when it’s still and dark. Gas-fired peaking plants are a key firming solution. Unlike renewables, they’re reliable. But energy on demand like that is expensive.

So as the transition continues, we’ll need more and more oil and gas to facilitate it.

But yeah, let’s try and make it more expensive to produce it.

You know who is going to pay for it eventually, don’t you?

A low for oil?

Meanwhile, in the real world, this week OPEC announced a production cut.

The news sent oil prices soaring. The international benchmark, Brent crude, jumped nearly 7% on the news. It’s up more than 20% from the March low.

As you can see in the chart below, going into the surprise OPEC cut, net speculative positions as a percentage of open interest was the lowest it’s been since January 2016. Incidentally, the oil price bottomed at that time, and went on to rise 220% into the October 2018 high.

Will this mark a similar low?

Only time will tell.

Much depends on the state of the physical market. Are the OPEC cuts responding to weak demand or are they taking advantage of a market that has seen the financial ‘longs’ (futures buyers) fall to a seven year low?

It’s probably a bit of both.

All I know is that when demand returns following this economic slowdown/recession, prices are going back to triple digits. That’s why I moved all the energy exposures in my Fat Tail Investment Advisory portfolio to buys a few weeks ago (they were previously hold recommendations). I thought the oil price falls were overdone.

I’m bullish long term because while Australian politicians try to economically cripple this country, other countries – who value the power of their dictatorship (while recognizing its fragility) – are serious about their long-term energy security. From the Financial Times last week:

Saudi Aramco has agreed to acquire 10 per cent of a Chinese oil refiner for $3.6bn in the second in a pair of deals set to strengthen the relationship between the Middle Eastern state oil company and its biggest market.

Under the arrangement with Shenzhen-listed Rongsheng Petrochemical Co, Saudi Aramco will supply 480,000 barrels a day of Saudi crude to China’s largest integrated refining and chemicals facility in Zhejiang province.

The investment comes a day after Saudi Aramco announced a joint venture with two other Chinese companies to build a new 300,000 b/d refinery and petrochemicals complex in China’s north-east.

The combined deals promise to increase Saudi Aramco’s supply contracts with China by up to 690,000 b/d just as Saudi Arabia’s share of the world’s largest oil import market is coming under pressure from a rise in shipments of discounted crude from Russia.

China is selling us expensive wind turbines and solar panels while building out refining capacity, and importing our coal to provide cheap and efficient base load power to their people.

Brilliant…

Adding to the cost of this transition to higher energy prices is the fact that a new power distribution system must be built to connect remote renewable farms to the existing grid.

It’s been estimated, for example, that connecting renewable resources to the new Snowy Hydro project (which is just a big battery) will cost around $9 billion.

Don’t worry, you’ll be paying for that via higher electricity bills.

Why nuclear is ignored

And yet we’re told nuclear power – a virtual emissions-free form of energy – is too expensive! Chief clown, Environment Minister Tanya Plibersek, recently said nuclear was the most expensive form of electricity available to humans!

Case closed then! Let’s go full steam ahead building intermittent, energy-intensive wind and solar, which requires a new distribution system for good measure.

Is that really why we’re not seriously looking at Nuclear?

Of course not. Nuclear is enjoying somewhat of a renaissance around the world. Even the UK, with no shortage of clowns running the circus over there, realise that nuclear must be an important part of a low-emissions energy mix.

The reason we’re not pursuing nuclear is that there is no opportunity for grift in it.

Nuclear is the most energy-dense fuel source on the planet. A well-built nuclear power plant can run for as long as 80 years, far surpassing the lifespan of wind turbines and solar panels. It can also connect to the existing distribution system.

Where is the opportunity to raid the public purse there?

There isn’t much, which is why nuclear remains on the outer. But I think that changes in the years ahead as more people wake up to this scam.

No one wants to see coal-fired power stations continue to supply our electricity. But in the fourth quarter of 2022, coal and gas still accounted for 60% of electricity generation in the National Electricity Market (NEM).

If we want to ‘go electric’ and do so with low carbon emissions, nuclear is the only sensible answer. Otherwise, we’ll be stuck building an energy-intensive ‘renewable’ energy system that will gut our manufacturing and heavy industries, and send energy costs soaring.

In such an environment, you have to have a long-term allocation to energy in your portfolio. Yes, there is regulatory risk. But the inescapable fact is that this drive to (energy intensive) wind and solar, and irrational opposition to oil and gas, will only push prices higher.

You and your kids will be paying for this stupidity for years to come. You may as well try and hedge that risk now.

In addition, keep your eye on nations that are investing in nuclear energy now (rather than trying to shut it down). They will have a comparative energy advantage down the track. They will in turn attract capital and deliver better relative returns.

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