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Temporary price weakness means contrarian-play opportunity for Quebec-focused iron ore junior

October 7, 2021
Iron ore is up and down like a bride’s nightgown, as my dad used to say, with the price oscillating wildly over the past six months but…

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This article was originally published by A Head of the Herd

October 7, 2021

Iron ore is up and down like a bride’s nightgown, as my dad used to say, with the price oscillating wildly over the past six months but ultimately being cut in half from a record $233 per tonne in May to $117.85 on Thursday.

Source: Markets Insider

The price is encountering resistance from China which has moved to clean up its heavily polluting industrial sector in time for the Beijing Winter Olympics next year. Coal-fired steel mills cause a significant portion of the country’s carbon emissions so Beijing has imposed steel production cuts in an effort to slow its construction-intensive economy.

Power shortages have also dampened iron ore demand. Many Chinese steel mills have had to cut output due to a dearth of metallurgical coal. Strong demand from manufacturers and industry have pushed coal prices to record highs and triggered widespread curbs on usage.

Provinces including Inner Mongolia and Guangdong, as well as local governments and industrial zones along China’s east coast, have all ordered consumption caps and power cuts.

Like most policies in China, the new energy targets emanate from the Chinese Communist Party. In 2020 President-for-life Xi Jinping promised the country would cut its carbon dioxide emissions per unit of GDP, or carbon intensity, by more than 65% from 2005 levels by 2030.

We must always remember China is a command economy meaning that whatever Beijing commands, shalt be done. This includes turning the screws on China’s industrial sector which may be a polluter but has also been a significant driver of economic growth over the years. Seems foolhardy for Beijing to kill the goose that has laid so many golden eggs.

Olympic Blue

Nonetheless, China is reportedly aiming for ‘Olympic Blue’ with plans to extend steel curbs into March of next year. The city of Tanshan is a major steelmaking hub about 150 km from the Bird’s Nest Stadium that will host the opening ceremonies. When Beijing held the Summer Olympics in 2008, authorities shut down a swath of factories near the capital. The operation dubbed ‘Olympic Blue’ allowed Beijing residents and Games visitors to enjoy blue skies for a month, before the factories restarted and the smog returned.

This is just another version of the same thing, only this time, the Communist Party has doubled down with promises to do its part to cut global emissions. According to researcher Mysteel, Tanshan will extend existing steel curbs to March 2022 to meet a targeted 40% drop in air pollution during the Games. For the city’s steel mills, that means keeping in place production curbs ordered this year — a reduction of 12.4 million tons compared to 144 million tons of production in 2020. For the surrounding province of Hubei, the steel cuts mean a 21.7 million-ton decrease. 

Beijing can and will do what it likes to reduce air pollution. The fact remains, China will continue to demand a high volume of mineral commodities needed for construction projects. China spends three times more on infrastructure than the US, claiming a million bridges including most of the world’s highest. Of the world’s 100 tallest skyscrapers, 49 are in China.

The Wall Street Journal reported that in 2014, China used more cement in the previous three years than the US did during the entire 20th century. The country also produces more than half the world’s steel, last year 14 times more than the US, according to the World Steel Association. China’s 23,000 miles of high-speed rail could link New York and Los Angeles more than eight times and Beijing plans to add 30% more track by 2025.

Of course we can’t forget President Xi’s Belt and Road Initiative. 2,600 infrastructure projects costing $3.7 trillion are linked to BRI, as of mid-2020. Think about how much metal that will entail.

Tempest in a Chinese teapot

Recently the iron ore sector (and other metal markets) was thrown a curve ball in the form of the Evergrande crisis in China. As one of the country’s largest real estate developers, investors not only in Asia but worldwide have been fretting about “Asian contagion” should the company not receive a bailout from the Chinese government and become insolvent. 

A meltdown in the Chinese property market could have widespread repercussions, potentially impacting the demand for construction commodities including copper, iron ore and steel.

It’s estimated around 1.5 million people could lose the deposits on their homes if Evergrande goes under. The companies that Evergrande does business with, like construction and design firms, could potentially go bust if their deposits aren’t repaid. The effect on the country’s financial system could also be far-reaching; Evergrande owes money to around 171 domestic banks and 121 other financial firms.

Despite all the “Chicken Little” headlines, I personally don’t believe Evergrande is another Lehman Brothers. A deal will be done to stabilize Evergrande’s debt and restructure bonds and loans by selling most of its assets; some investors will be repaid with real estate.

Another way to save Evergrande is for a corporate white knight to step forward. This week it has been reported that Hopson Development Holdings, a Hong Kong-listed real estate firm controlled by the billionaire Chu family, has agreed to buy a controlling stake in Evergrande’s property services business. Al Jazeera names three other Chinese billionaires who are offering to shore up Evergrande’s finances.

Rebar & cement booming

The health of the Chinese steel industry is good reason to think the markets are over-reacting to Evergrande. Take a look at rebar.

The Washington Post notes that, for all the government’s promises of steel output curbs, usage as of July this year was running nearly 10% higher.

The price of the reinforcement bar used on construction sites is at almost the same elevated level it was two months ago, before its key ingredient — iron ore — starting falling and drifted below $100 a tonne for the first time in over a year.

That suggests that end-use demand is still pretty much where it was before this panic started, which should deliver mill owners handsome profits, WaPo adds, concluding that, we’ve not yet seen the reckoning with its steel addiction that China, and the world, ultimately needs. Until that happens, don’t assume this market is dead.

The World Steel Association forecasts global steel demand to grow 5.8% this year to exceed pre-pandemic levels, followed by another 2.7% increase the year after. The association expects China’s steel consumption, about half of the global total, will keep growing from record levels.

Beyond China, the cement market is another sign that major infrastructure projects will be rolled out this year and over the short to medium term.

Despite covid-related construction slowdowns in 2020, global cement production was consistent with 2019 output. The biggest cement consumers last year were Vietnam, Indonesia, India and China.

According to IndexBox, between 2020 and 2030, the global cement market is set to expand at an average annual rate of 1.8% CAGR, reaching 5B tonnes by 2030.

Infrastructure full speed ahead

Future needs for cement, steel, stainless steel, iron ore and a host of other industrial metals such as copper and zinc, are being driven by big infrastructure programs planned in some of the world’s biggest economies as governments find ways to return to growth following the disastrous 2020 pandemic year.

In the United States, President Biden’s $1.2 trillion infrastructure package, passed by the Senate but not yet by the House of Representatives, includes transitioning the US transportation system to battery-powered vehicles and supporting renewable wind and solar energies over carbon-based sources like coal and natural gas.

The legislation includes rebuilding traditional infrastructure like highways, bridges and rail lines, and investing in technologies to reduce greenhouse gases. The latter includes installing thousands of EV charging stations, providing incentives to encourage Americans to buy more electric vehicles, and constructing new electric power lines that provide renewable energy and expand electricity storage.

The Biden administration is aiming for carbon-free power generation by 2035 and net-zero emissions by 2050.

The bill proposes nearly $550 billion in new spending over five years, setting aside $110 billion for “blacktop” infrastructure such as roads & bridges; $55 billion to replace lead pipes and ensure access to clean drinking water; $66B for upgrading passenger and freight rail; $65 billion for broadband; and $73 billion for clean energy. 

An even larger $3.5 trillion spending package is also under consideration by the House. It includes:

  • $198 billion in direct payments to utilities for hitting clean energy goals, providing consumers with rebates to make homes more energy-efficient, and financing for domestic manufacturing of clean energy and auto supply chain technologies;
  • $67 billion to fund climate-friendly technologies and impose fees on emitters of methane, to reduce carbon emissions;
  • $37B to electrify the federal vehicle fleet.

The Chinese government also sees infrastructure investment playing a key role in the country’s recovery plans.

A December 2020 report by Moody’s Investors Service that Beijing has historically relied on such investment to reverse economic downturns including the RMB4 trillion fiscal stimulus package that followed the 2008-09 financial crisis. The government is thus seeking to boost household income and strengthen the social safety net as part of its efforts to boost consumption, upgrade manufacturing industries and develop advanced technologies, the report states:

Investment will focus on developing “new infrastructure” – such as informational networks, urbanization and major transportation and water conservancy projects – while traditional infrastructure projects will continue to drive infrastructure spending, given their very large scale, capital intensity, and ambitious development targets.

Nearly all of China’s 31 provinces, municipalities and autonomous regions have announced key infrastructure investment plans for the next 5-7 years, covering 24,515 projects at RMB43 trillion, of which around 25% will be spent on transportation projects.

Source: Moody’s via Finance Asia

All of this has to be good for construction, in particular the steel, rebar and iron ore markets. A recent report by Australia’s department of industry, science, energy and resources forecasts the iron ore price will reach $150 per tonne by the end of this year, due to supply constraints in the second half including congestion at Chinese ports and slowed deliveries.

The report also notes that high iron ore prices earlier in the year resulted in a second-quarter iron ore exploration boon. A total of $151 million in exploration was spent in Q2, which is 52% more than was spent in the second quarter of last year.

This bodes well for iron ore explorers hoping to catch a bid when the iron ore price climbs, as expected, during the fourth quarter.

Manning Ventures Inc.

Manning Ventures Inc. (CSE:MANN, Frankfurt:1H5) in September announced it has finalized drill targets at three of its 100%-owned projects located in the Wabush-Fermont iron ore district of Quebec.

Thus far, Manning has assembled five iron ore projects with past exploration history, carrying high development upside. With three recent acquisitions, Manning now has a landholding of over 16,000 hectares covering 311 claims in Wabush-Fermont.

Manning’s properties within the Wabush-Fermont iron ore district, Quebec

As previously reported in June, the Phase 1 ground mapping and sampling program has successfully confirmed the analytical results of iron formation at the Lac Simone, Hope Lake and Broken Lake properties. A total of 14 outcrop samples returned results of greater than 30% Fe (iron content).

Permitting is currently underway, with drilling expected to take place later this year.

The drill program will test the thickness of iron formation, where positive surface sampling results have been obtained, and magnetic surveys have indications of thicker iron accumulations.

The company expects to complete five to eight drill holes on the highest-priority target areas.

“There’s no doubt these projects are extremely viable, you just go back and look at the historical work and the grades we pulled on the sampling results, those are good numbers. I think 15% is the base case of working mines in the area and we’re getting a dozen of our samples greater than 30% so these are good signs. The horizons are established we just need to go in and poke holes so this is more of a test program to get our feet wet but certainly the beginning of a series of drill programs across all of those projects,” Manning CEO Alex Klenman told me over the phone this week, in an exclusive interview with AOTH.

Mineral exploration is all about location and Manning is no exception to this tried and true maxim. Consulting the above map, it’s immediately clear that Manning surrounds the main exploration player in the camp, Champion Iron Mines.

To the north of MANN’s Lac Simone  project, Champion’s Moire Lake deposit has a resource estimate of 164 million tonnes grading 30.5% Fe in the indicated category and 417.1 million tonnes grading 29.4% Fe inferred. At Lac Simone, the magnetic signature, along with the regional mapping and historical work, indicates several iron formation horizons are present.

 Historical work and unexplored iron formation at Lac Simone.

East of Champion and south of Arcelormittal’s Fire Lake mine, in operation since 2006, Manning’s Hope Lake project was previously explored by Jubilee Iron and Champion Iron Mines. Between 1959 and 1962, Jubilee completed ground and airborne magnetic and geological surveys at the northernmost magnetic anomaly, plus two diamond drill holes. Twelve samples were collected at the east end of the property, with average results of 34.18% Fe. Later testing on surface samples returned concentrate grades of 68.4% and 68.1% Fe.

In 2011, Champion collected 8 samples from the eastern part of the current property, returning an average grade of 28.7% Fe. It followed up with 8 more samples in 2013 from the western part of the property, which had average results of 33.7% Fe.

Both sampling programs indicated that the Hope Lake property, similar to Lac Simone, hosts high-grade quartz-hematite +/- magnetite iron formation.

Sample locations and grades from Hope Lake

Broken Lake is just west of Champion Iron’s Peppler deposit. The recently acquired property features an ~18 km-long trend of iron formation that has been historically drill-tested. A well-mineralized interval exceeding 84m was reported on this 4,500-ha property, although no assays were documented.

A 6 km-long belt of highly magnetic rocks in the area, not yet drill-tested, has been mapped as a magnetite-rich iron formation and currently represents a prime exploration target.

According to Manning, the project contains magnetic signatures and geological mapping that suggest structural thickening and possibly overturned sequences of rocks that have the potential to create favorable iron formation horizons.

Heart Lake is a 2,855-ha property featuring approximately 10 km of linear-style iron formation. Recent drilling intersected 26.7% Fe over 25.6m and ended in high-grade iron formation. The claims are along strike with Champion Iron’s ground, where iron formation on the same trend, approximately 6 km away, contains a drill hole with two separate iron formations of 31.2% Fe over 50.8m and 30.8% Fe over 42.2m.

Hydro, a 2,122-ha property, features approximately 12 km of linear-style iron formation. Several historical rock samples, among three separate zones, have been collected along the trend and average approximately 32.5% Fe. The trend does not have any historical drilling.

Conclusion

Sentiment is an important driver of investor interest in mining properties, although playing the long game and using a “top-down bottom-up” strategy has worked well for me over the years.

The sentiment in the iron ore market was strong earlier this year, helping to bid the shares of iron ore producers and explorers alike higher and that includes Manning Ventures which hit an all-time high of $0.57/sh on Feb. 8, 2021.

With sentiment weakening due to the lower iron ore price, the prices of these companies have also dipped, however, we at AOTH do not think that iron ore is done and, imo, this is the ideal time to pick up a junior like Manning on the cheap.

Consider: all of Manning’s projects are situated within a few kilometers of producing iron ore mines and deposits in a historical mining camp that has become one of the pre-eminent iron ore districts in the world.

The iron ore price was trading over $200 a tonne earlier this year and it is forecast to hit $150 again before the year is out. Infrastructure projects requiring copious metal content are in the planning stages in the US, Europe and China. Right now China is forcing steel mills to cut production but this, like the Evergrande tempest in a Chinese teapot, is a temporary phenomenon. Once the Winter Olympics in Beijing are done in early 2022 and all the athletes and dignitaries have gone home, will those output cuts continue? My money is on steel production and iron ore demand to rise higher to meet the needs of all of the infrastructure projects coming on stream.

Once that happens, sentiment will return to the market floating all boats including Manning’s. The last comment goes to CEO Alex Klenman who expressed that, while it is early days for Manning, the future looks bright for the small-cap as it goes to work in Quebec.

“We’re very confident in the projects and what we’re going to get out of them. It’s a long-term play for us and we’re just scratching the surface,” he says, adding:

“All the indications are the environment is right for large deposits. You can’t speak too much without drilling it and getting a better idea but in terms of lithologies and geologically speaking we have the right nest for the bird to land in and lay some big eggs, that’s what gets me excited.” 

Manning Ventures Inc.
CSE:MANN, Frankfurt:1H5
Cdn$0.15, 2021.10.05
Shares Outstanding 42.6m
Market cap Cdn$6.3m
MANN website

Richard (Rick) Mills
aheadoftheherd.com
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Author: Gail Mills

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Energy & Critical Metals

Lithium darling Vulcan Energy calls a halt in the wake of J Capital short report

Activist short seller J Capital Research has put ASX market darling Vulcan Energy (ASX:VUL) in its cross hairs, calling the … Read More
The post Lithium…

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Activist short seller J Capital Research has put ASX market darling Vulcan Energy (ASX:VUL) in its cross hairs, calling the company a “wannabe lithium miner” which “based highly optimistic assumptions for (its) project on work done by small consultancies that were owned by management and acquired by Vulcan.”

Vulcan Energy, J Capital — game on

Vulcan owns the Zero Carbon Lithium Project in Germany’s Upper Rhine Valley, where it promises to produce both renewable electricity and lithium on a ‘carbon negative’ basis from deep geothermal wells.

Excitement around the project has seen Vulcan raise more than $300 million from investors this year alone, secure lithium offtake deals with Umicore and LG and bring Australia’s richest person Gina Rinehart on board as a backer.

The company’s shares are up more than 6,000% since its management engineered a reverse takeover of minerals explorer Koppar Resources, having dropped in recent weeks from a high of more than $16 — 80x Vulcan’s 20c share price in early 2020.

That market exuberance transferred through to Kuniko (ASX:KNI), an arguably run of the mill Scandinavian base metals explorer spun out of Vulcan that mooned on listing in August.

Vulcan has also been the subject of some scepticism. While it maintains both its component parts of geothermal energy generation and direct lithium extraction are well understood and existing commercial technologies, no geothermal lithium project has entered commercial production to date.

“They claim the project is a twofer: profitable geothermal power and “green” lithium,” J Capital’s Tim Murray wrote in the note, titled ‘Vulcan: God of Empty Promises’.

“Neither assertion is likely to be true. ”

“Our research shows that the project may never actually get under way: the costs are higher than the company claims, output will be lower, the environmental impact is brutal enough that public outcry will block permits, as has happened before in the area, and the quality of the lithium resource is low.

“Many experts agree with us that this project is a non-starter.”

What was Vulcan’s response?

Pre-market indicators on Commsec suggested Vulcan, which was trading at $14.99 and a market valuation of $1.87 billion, was looking at 13% hit to its share price on the open this morning (now more like 10% according to Commsec).

It is now in a trading halt to prepare a detailed response to the J Capital Research note, after issuing a brief riposte this morning.

In it, Vulcan took aim at Murray’s background, as well as J Capital’s disclaimer that it plans to profit off shorting the stocks it reports on and does not hold an Australian Financial Services License.

“The report is authored by a Mr. Tim Murray, co-founder of J-Capital, who according to his own bio has lived in China for 19 years and has a degree in “Chinese Political Economy”,” Vulcan said.

“Based on his online profile, it is not apparent that Mr. Murray has any technical qualifications in geothermal energy or lithium extraction.”

“Mr. Murray’s report makes a large number of inaccurate statements and assertions regarding Vulcan and its Zero Carbon Lithium Project — in particular its Pre-Feasibility Study (PFS) published over nine months ago.

“Given the warning on J Capital’s website, it is clear the report is merely an attempt to profit from ‘shorting’ Vulcan.”

Vulcan went on to trumpet the “globally unique experience in geothermal energy project development and direct lithium extraction” across its 80 person team, saying it was committed to delivering the project.

“We are highly motivated towards achieving our goals of decarbonising these industries, and will always happily dedicate time and effort to answer any questions about our Zero Carbon Lithium Project that come from stakeholders with a genuine interest in the Company and the Project,” Vulcan claimed.

A more detailed response to the claims made in the J Capital report appears to be on its way.

What did J Capital claim?

J Capital claimed in its report that several positive claims made by Vulcan in its January pre-feasibility study were inflated. The PFS gave the Zero Carbon Lithium Project a 2.8 billion Euro NPV.

Murray said “assumptions in the PFS that beautify the project are easily disproved.”

He claims Vulcan has likely overstated its flow rates and recoveries in the PFS, and ignored evidence of community opposition to geothermal energy projects in Germany and adjacent regions of France.

He also criticised the use of Vulcan co-founder Horst Kreuter’s consultancy Geo-T, later purchased by Vulcan, in its PFS.

Murray claimed Kreuter received 1.5m performance shares on the successful completion of the PFS, and resigned as a director on March 25.

Vulcan also acquired Gec-co, which had worked on the PFS, having appointed its CEO and owner Thorsten Weimann as COO of Vulcan.

“Gec-co and GeoT provided a key assumption for the PFS, for flow rate, that is unrealistic,” Murray claimed.

“The recovery rate for lithium is also unrealistic. Realistic assumptions would halve the output of lithium and kill the commercial viability of the project.”

Among a litany of other claims, J Capital says Vulcan has published an unrealistic production schedule and is likely to face significant public opposition, something MD Francis Wedin said was not likely in an interview with Stockhead in July, and that geothermal wells often have a high failure rate.

Although it released a statement this morning, Vulcan requested a trading halt “pending an announcement to the market in order to prepare a response to an online report.”

Vulcan Energy share price today:

 

The post Lithium darling Vulcan Energy calls a halt in the wake of J Capital short report appeared first on Stockhead.





Author: Josh Chiat

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Green Energy: A Bubble In Unrealistic Expectations

Green Energy: A Bubble In Unrealistic Expectations

Authored by David Hay via Everegreen Gavekal blog,

“You see what is happening in Europe….

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Green Energy: A Bubble In Unrealistic Expectations

Authored by David Hay via Everegreen Gavekal blog,

“You see what is happening in Europe. There is hysteria and some confusion in the markets. Why?…Some people are speculating on climate change issues, some people are underestimating some things, some are starting to cut back on investments in the extractive industries. There needs to be a smooth transition.”

– Vladimir Putin (someone with whom this author rarely agrees)

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of its citizens.”

– John Maynard Keynes (an interesting observation for all the modern day Keynesians to consider given their support of current inflationary US policies, including energy-related)

Introduction

This week’s EVA provides another sneak preview into David Hay’s book-in-process, “Bubble 3.0” discussing what he thinks is the crucial topic of “greenflation.”  This is a term he coined referring to the rising price for metals and minerals that are essential for solar and wind power, electric cars, and other renewable technologies.

It also centers on the reality that as global policymakers have turned against the fossil fuel industry, energy producers are for the first time in history not responding to dramatically higher prices by increasing production.  Consequently, there is a difficult tradeoff that arises as the world pushes harder to combat climate change, driving up energy costs to painful levels, especially for lower income individuals. 

What we are currently seeing in Europe is a vivid example of this dilemma.  While it may be the case that governments welcome higher oil and natural gas prices to discourage their use, energy consumers are likely to have a much different reaction.

Summary

  • BlackRock’s CEO recently admitted that, despite what many are opining, the green energy transition is nearly certain to be inflationary.

  • Even though it’s early in the year, energy prices are already experiencing unprecedented spikes in Europe and Asia, but most Americans are unaware of the severity.

  • To that point, many British residents being faced with the fact that they may need to ration heat and could be faced with the chilling reality that lives could be lost if this winter is as cold as forecasters are predicting.

  • Because of the huge increase in energy prices, inflation in the eurozone recently hit a 13-year high, heavily driven by natural gas prices on the Continent that are the equivalent of $200 oil.

  • It used to be that the cure for extreme prices was extreme prices, but these days I’m not so sure.  Oil and gas producers are very wary of making long-term investments to develop new resources given the hostility to their industry and shareholder pressure to minimize outlays.

  • I expect global supply to peak sometime next year and a major supply deficit looks inevitable as global demand returns to normal.

  • In Norway, almost 2/3 of all new vehicle sales are of the electric variety (EVs) – a huge increase in just over a decade. Meanwhile, in the US, it’s only about 2%. Still, given Norway’s penchant for the plug-in auto, the demand for oil has not declined.

  • China, despite being the largest market by far for electric vehicles, is still projected to consume an enormous and rising amount of oil in the future.

  • About 70% of China’s electricity is generated by coal, which has major environmental ramifications in regards to electric vehicles.

  • Because of enormous energy demand in China this year, coal prices have experienced a massive boom. Its usage was up 15% in the first half of this year, and the Chinese government has instructed power providers to obtain all baseload energy sources, regardless of cost. 

  • The massive migration to electric vehicles – and the fact that they use six times the amount of critical minerals as their gasoline-powered counterparts –means demand for these precious resources is expected to skyrocket.

  • This extreme need for rare minerals, combined with rapid demand growth, is a recipe for a major spike in prices.

  • Massively expanding the US electrical grid has several daunting challenges– chief among them the fact that the American public is extremely reluctant to have new transmission lines installed in their area.

  • The state of California continues to blaze the trail for green energy in terms of both scope and speed. How the rest of the country responds to their aggressive take on renewables remains to be seen.

  • It appears we are entering a very odd reality: governments are expending resources they do not have on weakly concentrated energy. And the result may be very detrimental for today’s modern economy.

  • If the trend in energy continues, what looks nearly certain to be the Third Energy crisis of the last half-century may linger for years. 

Green energy: A bubble in unrealistic expectations?

As I have written in past EVAs, it amazes me how little of the intense inflation debate in 2021 centered on the inflationary implications of the Green Energy transition.  Perhaps it is because there is a built-in assumption that using more renewables should lower energy costs since the sun and the wind provide “free power”. 

However, we will soon see that’s not the case, at least not anytime soon; in fact, it’s my contention that it will likely be the opposite for years to come and I’ve got some powerful company.  Larry Fink, CEO of BlackRock, a very pro-ESG* organization, is one of the few members of Wall Street’s elite who admitted this in the summer of 2021.  The story, however, received minimal press coverage and was quickly forgotten (though, obviously, not be me!). 

This EVA will outline myriad reasons why I think Mr. Fink was telling it like it is…despite the political heat that could bring down upon him.  First, though, I will avoid any discussion of whether humanity is the leading cause of global warming.  For purposes of this analysis, let’s make the high-odds assumption that for now a high-speed green energy transition will continue to occur.  (For those who would like a well-researched and clearly articulated overview of the climate debate, I highly recommend the book “Unsettled”; it’s by a former top energy expert and scientist from the Obama administration, Dr. Steven Koonin.)

The reason I italicized “for now” is that in my view it’s extremely probable that voters in many Western countries are going to become highly retaliatory toward energy policies that are already creating extreme hardship.  Even though it’s only early autumn as I write these words, energy prices are experiencing unprecedented increases in Europe.  Because it’s “over there”, most Americans are only vaguely aware of the severity of the situation.  But the facts are shocking… 

Presently, natural gas is going for $29 per million British Thermal Units (BTUs) in Europe, a quadruple compared to the same time in 2020, versus “just” $5 in the US, which is a mere doubling.  As a consequence, wholesale energy cost in Great Britain rose an unheard of 60% even before summer ended.  Reportedly, nine UK energy companies are on the brink of failure at this time due to their inability to fully pass on the enormous cost increases.  As a result, the British government is reportedly on the verge of nationalizing some of these entities—supposedly, temporarily—to prevent them from collapsing.  (CNBC reported on Wednesday that UK natural gas prices are now up 800% this year; in the US, nat gas rose 20% on Tuesday alone, before giving back a bit more than half of that the next day.)

Serious food shortages are expected after exorbitant natural gas costs forced most of England’s commercial production of CO2 to shut down.  (CO2 is used both for stunning animals prior to slaughter and also in food packaging.)  Additionally, ballistic natural gas prices have forced the closure of two big US fertilizer plants due to a potential shortfall of ammonium nitrate of which “nat gas” is a key feedstock. 

*ESG stands for Environmental, Social, Governance; in 2021, Blackrock’s assets under management approximated $9 ½ trillion, about one-third of the total US federal debt.

With the winter of 2021 approaching, British households are being told they may need to ration heat.  There are even growing concerns about the widespread loss of life if this winter turns out to be a cold one, as 2020 was in Europe.  Weather forecasters are indicating that’s a distinct possibility.  

In Spain, consumers are paying 40% more for electricity compared to the prior year.  The Spanish government has begun resorting to price controls to soften the impact of these rapidly escalating costs. (The history of price controls is that they often exacerbate shortages.) Naturally, spiking power prices hit the poorest hardest, which is typical of inflation whether it is of the energy variety or of generalized price increases. 

Due to these massive energy price increases, eurozone inflation recently hit a 13-year high, heavily driven by natural gas prices that are the equivalent of $200 per barrel oil.  This is consistent with what I warned about in several EVAs earlier this year and I think there is much more of this looming in the years to come.

In Asia, which also had a brutally cold winter in 2020 – 2021, there are severe energy shortages being disclosed, as well.  China has instructed its power providers to secure all the coal they can in preparation for a repeat of frigid conditions and acute deficits even before winter arrives.  The government has also instructed its energy distributors to acquire all the liquified natural gas (LNG) they can, regardless of cost.  LNG recently hit $35 per million British Thermal Units in Asia, up sevenfold in the past year.  China is also rationing power to its heavy industries, further exacerbating the worldwide shortages of almost everything, with notable inflationary implications.

In India, where burning coal provides about 70% of electricity generation (as it does in China), utilities are being urged to import coal even though that country has the world’s fourth largest coal reserves.  Several Indian power plants are close to exhausting their coal supplies as power usage rips higher.

Normally, I’d say that the cure for such extreme prices, was extreme prices—to slightly paraphrase the old axiom.  But these days, I’m not so sure; in fact, I’m downright dubious.  After all, the enormously influential International Energy Agency has recommended no new fossil fuel development after 2021—“no new”, as in zero. 

It’s because of pressure such as this that, even though US natural gas prices have done a Virgin Galactic to $5 this year, the natural gas drilling rig count has stayed flat.  The last time prices were this high there were three times as many working rigs. 

It is the same story with oil production.  Most Americans don’t seem to realize it but the US has provided 90% of the planet’s petroleum output growth over the past decade.  In other words, without America’s extraordinary shale oil production boom—which raised total oil output from around 5 million barrels per day in 2008 to 13 million barrels per day in 2019—the world long ago would have had an acute shortage.  (Excluding the Covid-wracked year of 2020, oil demand grows every year—strictly as a function of the developing world, including China, by the way.)

Unquestionably, US oil companies could substantially increase output, particularly in the Permian Basin, arguably (but not much) the most prolific oil-producing region in the world.  However, with the Fed being pressured by Congress to punish banks that lend to any fossil fuel operator, and the overall extreme hostility toward domestic energy producers, why would they? 

There is also tremendous pressure from Wall Street on these companies to be ESG compliant.  This means reducing their carbon footprint.  That’s tough to do while expanding their volume of oil and gas. 

Further, investors, whether on Wall Street or on London’s equivalent, Lombard Street, or in pretty much any Western financial center, are against US energy companies increasing production.  They would much rather see them buy back stock and pay out lush dividends.  The companies are embracing that message.  One leading oil and gas company CEO publicly mused to the effect that buying back his own shares at the prevailing extremely depressed valuations was a much better use of capital than drilling for oil—even at $75 a barrel.

As reported by Morgan Stanley, in the summer of 2021, an US institutional broker conceded that of his 400 clients, only one would consider investing in an energy company!  Consequently, the fact that the industry is so detested means that its shares are stunningly undervalued.  How stunningly?  A myriad of US oil and gas producers are trading at free cash flow* yields of 10% to 15% and, in some cases, as high as 25%.

In Europe, where the same pressures apply, one of its biggest energy companies is generating a 16% free cash flow yield.  Moreover, that is based up an estimate of $60 per barrel oil, not the prevailing price of $80 on the Continent.

*Free cash flow is the excess of gross cash flow over and above the capital spending needed to sustain a business.  Many market professionals consider it more meaningful than earnings. 

Therefore, due to the intense antipathy toward Western energy producers they aren’t very inclined to explore for new resources.  Another much overlooked fact about the ultra-critical US shale industry that, as noted, has been nearly the only source of worldwide output growth for the past 13 years, is its rapid decline nature. 

Most oil wells see their production taper off at just 4% or 5% per year.  But with shale, that decline rate is 80% after only two years.  (Because of the collapse in exploration activities in 2020 due to Covid, there are far fewer new wells coming on-line; thus, the production base is made up of older wells with slower decline rates but it is still a much steeper cliff than with traditional wells.) 

As a result, the US, the world’s most important swing producer, has to come up with about 1.5 million barrels per day (bpd) of new output just to stay even.  (This was formerly about a 3 million bpd number due to both the factor mentioned above and the 2 million bpd drop in total US oil production, from 13 million bpd to around 11 million bpd since 2019).  Please recall that total US oil production in 2008 was only around 5 million bpd.  Thus, 1.5 million barrels per day is a lot of oil and requires considerable drilling and exploration activities.  Again, this is merely to stay steady-state, much less grow. 

The foregoing is why I wrote on multiple occasions in EVAs during 2020, when the futures price for oil went below zero*, that crude would have a spectacular price recovery later that year and, especially, in 2021.  In my view, to go out on my familiar creaky limb, you ain’t seen nothin’ yet!  With supply extremely challenged for the above reasons and demand marching back, I believe 2022 could see $100 crude, possibly even higher. 

*Physical oil, or real vs paper traded, bottomed in the upper teens when the futures contract for delivery in April, 2020, went deeply negative. 

Mike Rothman of Cornerstone Analytics has one of the best oil price forecasting records on Wall Street.  Like me, he was vehemently bullish on oil after the Covid crash in the spring of 2020 (admittedly, his well-reasoned optimism was a key factor in my up-beat outlook).  Here’s what he wrote late this summer:  “Our forecast for ’22 looks to see global oil production capacity exhausted late in the year and our balance suggests OPEC (and OPEC + participants) will face pressures to completely remove any quotas.” 

My expectation is that global supply will likely max out sometime next year, barring a powerful negative growth shock (like a Covid variant even more vaccine resistant than Delta).  A significant supply deficit looks inevitable as global demand recovers and exceeds its pre-Covid level.  This is a view also shared by Goldman Sachs and Raymond James, among others; hence, my forecast of triple-digit prices next year.  Raymond James pointed out that in June the oil market was undersupplied by 2.5 mill bpd.  Meanwhile, global petroleum demand was rapidly rising with expectations of nearly pre-Covid consumption by year-end.  Mike Rothman ran this chart in a webcast on 9/10/2021 revealing how far below the seven-year average oil inventories had fallen.  This supply deficit is very likely to become more acute as the calendar flips to 2022.

In fact, despite oil prices pushing toward $80, total US crude output now projected to actually decline this year.  This is an unprecedented development.  However, as the very pro-renewables Financial Times (the UK’s equivalent of the Wall Street Journal) explained in an August 11th, 2021, article:  “Energy companies are in a bind.  The old solution would be to invest more in raising gas production.  But with most developed countries adopting plans to be ‘net zero’ on carbon emissions by 2050 or earlier, the appetite for throwing billions at long-term gas projects is diminished.”

The author, David Sheppard, went on to opine: “In the oil industry there are those who think a period of plus $100-a-barrel oil is on the horizon, as companies scale back investments in future supplies, while demand is expected to keep rising for most of this decade at a minimum.”  (Emphasis mine)  To which I say, precisely! 

Thus, if he’s right about rising demand, as I believe he is, there is quite a collision looming between that reality and the high probability of long-term constrained supplies.  One of the most relevant and fascinating Wall Street research reports I read as I was researching the topic of what I have been referring to as “Greenflation” is from Morgan Stanley.  Its title asked the provocative question:  “With 64% of New Cars Now Electric, Why is Norway Still Using so Much Oil?” 

While almost two-thirds of Norway’s new vehicle sales are EVs, a remarkable market share gain in just over a decade, the number in the US is an ultra-modest 2%.   Yet, per the Morgan Stanley piece, despite this extraordinary push into EVs, oil consumption in Norway has been stubbornly stable. 

Coincidentally, that’s been the experience of the overall developed world over the past 10 years, as well; petroleum consumption has largely flatlined.  Where demand hasn’t gone horizontal is in the developing world which includes China.  As you can see from the following Cornerstone Analytics chart, China’s oil demand has vaulted by about 6 million barrels per day (bpd) since 2010 while its domestic crude output has, if anything, slightly contracted.

Another coincidence is that this 6 million bpd surge in China’s appetite for oil, almost exactly matched the increase in US oil production.  Once again, think where oil prices would be today without America’s shale oil boom.

This is unlikely to change over the next decade.  By 2031, there are an estimated one billion Asian consumers moving up into the middle class.  History is clear that more income means more energy consumption.  Unquestionably, renewables will provide much of that power but oil and natural gas are just as unquestionably going to play a critical role.  Underscoring that point, despite the exponential growth of renewables over the last 10 years, every fossil fuel category has seen increased usage. 

Thus, even if China gets up to Norway’s 64% EV market share of new car sales over the next decade, its oil usage is likely to continue to swell.  Please be aware that China has become the world’s largest market for EVs—by far.  Despite that, the above chart vividly displays an immense increase in oil demand

Here’s a similar factoid that I ran in our December 4th EVA, “Totally Toxic”, in which I made a strong bullish case for energy stocks (the main energy ETF is up 35% from then, by the way): 

“(There was) a study by the UN and the US government based on the Model for the Assessment of Greenhouse Gasses Induced Climate Change (MAGICC).  The model predicted that ‘the complete elimination of all fossil fuels in the US immediately would only restrict any increase in world temperature by less than one tenth of one degree Celsius by 2050, and by less than one fifth of one degree Celsius by 2100.’  Say again?  If the world’s biggest carbon emitter on a per capita basis causes minimal improvement by going cold turkey on fossil fuels, are we making the right moves by allocating tens of trillions of dollars that we don’t have toward the currently in-vogue green energy solutions?”

China’s voracious power appetite increase has been true with all of its energy sources. 

On the environmentally-friendly front, that includes renewables; on the environmentally-unfriendly side, it also includes coal.  In 2020, China added three times more coal-based power generation than all other countries combined.  This was the equivalent of an additional coal planet each week.  Globally, there was a reduction last year of 17 gigawatts in coal-fired power output; in China, the increase was 29.8 gigawatts, far more than offsetting the rest of the world’s progress in reducing the dirtiest energy source.  (A gigawatt can power a city with a population of roughly 700,000.)

Overall, 70% of China’s electricity is coal-generated. This has significant environmental implications as far as electric vehicles (EVs) are concerned.  Because EVs are charged off a grid that is primarily coal- powered, carbon emissions actually rise as the number of such vehicles proliferate. As you can see in the following charts from Reuters’ energy expert John Kemp, Asia’s coal-fired generation has risen drastically in the last 20 years, even as it has receded in the rest of the world.  (The flattening recently is almost certainly due to Covid, with a sharp upward resumption nearly a given.)

The worst part is that burning coal not only emits CO2—which is not a pollutant and is essential for life—it also releases vast quantities of nitrous oxide (N20), especially on the scale of coal usage seen in Asia today. N20 is unquestionably a pollutant and a greenhouse gas that is hundreds of times more potent than CO2.  (An interesting footnote is that over the last 550 million years, there have been very few times when the CO2 level has been as low, or lower, than it is today.) 

Some scientists believe that one reason for the shrinkage of Arctic sea ice in recent decades is due to the prevailing winds blowing black carbon soot over from Asia.  This is a separate issue from N20 which is a colorless gas.  As the black soot covers the snow and ice fields in Northern Canada, they become more absorbent of the sun’s radiation, thus causing increased melting.  (Source:  “Weathering Climate Change” by Hugh Ross)

Due to exploding energy needs in China this year, coal prices have experienced an unprecedented surge.  Despite this stunning rise, Chinese authorities have instructed its power providers to obtain coal, and other baseload energy sources, such as liquified natural gas (LNG), regardless of cost.  Notwithstanding how pricey coal has become, its usage in China was up 15% in the first half of this year vs the first half of 2019 (which was obviously not Covid impacted).

Despite the polluting impact of heavy coal utilization, China is unlikely to turn away from it due to its high energy density (unlike renewables), its low cost (usually) and its abundance within its own borders (though its demand is so great that it still needs to import vast amounts). 

Regarding oil, as we saw in last week’s final image, it is currently importing roughly 11 million barrels per day (bpd) to satisfy its 15 million bpd consumption (about 15% of total global demand).  In other words, crude imports amount to almost three-quarter of its needs.  At $80 oil, this totals $880 million per day or approximately $320 billion per year.  Imagine what China’s trade surplus would look like without its oil import bill!

Ironically, given the current hostility between the world’s superpowers, China has an affinity for US oil because of its light and easy-to-refine nature.  China’s refineries tend to be low-grade and unable to efficiently process heavier grades of crude, unlike the US refining complex which is highly sophisticated and prefers heavy oil such as from Canada and Venezuela—back when the latter actually produced oil.

Thus, China favors EVs because they can be de facto coal-powered, lessening its dangerous reliance on imported oil.  It also likes them due to the fact it controls 80% of the lithium ion battery supply and 60% of the planet’s rare earth minerals, both of which are essential to power EVs.    

However, even for China, mining enough lithium, cobalt, nickel, copper, aluminum and the other essential minerals/metals to meet the ambitious goals of largely electrifying new vehicle volumes is going to be extremely daunting.  This is in addition to mass construction of wind farms and enormously expanded solar panel manufacturing.

As one of the planet’s leading energy authorities Daniel Yergin writes: “With the move to electric cars, demand for critical minerals will skyrocket (lithium up 4300%, cobalt and nickel up 2500%), with an electric vehicle using 6 times more minerals than a conventional car and a wind turbine using 9 times more minerals than a gas-fueled power plant.  The resources needed for the ‘mineral-intensive energy system’ of the future are also highly concentrated in relatively few countries. Whereas the top 3 oil producers in the world are responsible for about 30 percent of total liquids production, the top 3 lithium producers control more than 80% of supply. China controls 60% of rare earths output needed for wind towers; the Democratic Republic of the Congo, 70% of the cobalt required for EV batteries.”

As many have noted, the environmental impact of immensely ramping up the mining of these materials is undoubtedly going to be severe.  Michael Shellenberger, a life-long environmental activist, has been particularly vociferous in his condemnation of the dominant view that only renewables can solve the global energy needs.  He’s especially critical of how his fellow environmentalists resorted to repetitive deception, in his view, to undercut nuclear power in past decades.  By leaving nuke energy out of the solution set, he foresees a disastrous impact on the planet due to the massive scale (he’d opine, impossibly massive) of resource mining that needs to occur.  (His book, “Apocalypse Never”, is also one I highly recommend; like Dr. Koonin, he hails from the left end of the political spectrum.)

Putting aside the environmental ravages of developing rare earth minerals, when you have such high and rapidly rising demand colliding with limited supply, prices are likely to go vertical.  This will be another inflationary “forcing”, a favorite term of climate scientists, caused by the Great Green Energy Transition.

Moreover, EVs are very semiconductor intensive.  With semis already in seriously short supply, this is going to make a gnarly situation even gnarlier.  It’s logical to expect that there will be recurring shortages of chips over the next decade for this reason alone (not to mention the acute need for semis as the “internet of things” moves into primetime). 

In several of the newsletters I’ve written in recent years, I’ve pointed out the present vulnerability of the US electric grid.  Yet, it will be essential not just to keep it from breaking down under its current load; it must be drastically enhanced, a Herculean task. For one thing, it is excruciatingly hard to install new power lines. As J.P. Morgan’s Michael Cembalest has written: “Grid expansion can be a hornet’s nest of cost, complexity and NIMBYism*, particularly in the US.”  The grid’s frailty, even under today’s demands (i.e., much less than what lies ahead as millions of EVs plug into it) is particularly obvious in California.  However, severe winter weather in 2021 exposed the grid weakness even in energy-rich Texas, which also has a generally welcoming attitude toward infrastructure upgrading and expansion.

Yet it’s the Golden State, home to 40 million Americans and the fifth largest economy in the world, if it was its own country (which it occasionally acts like it wants to be), that is leading the charge to EVs and seeking to eliminate internal combustion engines (ICEs) as quickly as possible.  Even now, blackouts and brownouts are becoming increasingly common.  Seemingly convinced it must be a role model for the planet, it’s trying desperately to reduce its emissions, which are less than 1%, of the global total, at the expense of rendering its energy system more similar to a developing country.  In addition to very high electricity costs per kilowatt hour (its mild climate helps offset those), it also has gasoline prices that are 77% above the national average. 

*NIMBY stands for Not In My Back Yard.

While California has been a magnet for millions seeking a better life for 150 years, the cost of living is turning the tide the other way.  Unreliable and increasingly expensive energy is likely to intensify that trend.  Combined with home prices that are more than double the US median–$800,000!–California is no longer the land of milk and honey, unless, to slightly paraphrase Woody Guthrie about LA, even back in the 1940s, you’ve got a whole lot of scratch.  More and more people, seem to be scratching California off their list of livable venues. 

Voters in the reliably blue state of California may become extremely restive, particularly as they look to Asia and see new coal plants being built at a fever pitch.  The data will become clear that as America keeps decarbonizing–as it has done for 30 years mostly due to the displacement of coal by gas in the US electrical system—Asia will continue to go the other way.  (By the way, electricity represents the largest share of CO2 emission at roughly 25%.) 

California has always seemed to lead social trends in this country, as it is doing again with its green energy transition.  The objective is noble though, extremely ambitious, especially the timeline.  As it brings its power paradigm to the rest of America, especially its frail grid, it will be interesting to see how voters react in other states as the cost of power leaps higher and its dependability heads lower.  It’s reasonable to speculate we may be on the verge of witnessing the Californication of the US energy system. 

Lest you think I’m being hyperbolic, please be aware the IEA (International Energy Agency) has estimated it will cost the planet $5 trillion per year to achieve Net Zero emissions.  This is compared to global GDP of roughly $85 trillion. According to BloombergNEF, the price tag over 30 years, could be as high as $173 trillion.  Frankly, based on the history of gigantic cost overruns on most government-sponsored major infrastructure projects, I’m inclined to take the over—way over—on these estimates.

Moreover, energy consulting firm T2 and Associates, has guesstimated electrifying just the US to the extent necessary to eliminate the direct consumption of fuel (i.e., gasoline, natural gas, coal, etc.) would cost between $18 trillion and $29 trillion.  Again, taking into account how these ambitious efforts have played out in the past, I suspect $29 trillion is light.  Regardless, even $18 trillion is a stunner, despite the reality we have all gotten numb to numbers with trillions attached to them.  For perspective, the total, already terrifying, level of US federal debt is $28 trillion.

Regardless, as noted last week, the probabilities of the Great Green Energy Transition happening are extremely high.  Relatedly, I believe the likelihood of the Great Greenflation is right up there with them. 

As Gavekal’s Didier Darcet wrote in mid-August:  ““Nowadays, and this is a great first in history, governments will commit considerable financial resources they do not have in the extraction of very weakly concentrated energy.” ( i.e., less efficient)  “The bet is very risky, and if it fails, what next?  The modern economy would not withstand expensive energy, or worse, lack of energy.” 

While I agree this an historical first, it’s definitely not great (with apologies for all the “greats”).  This is particularly not great for keeping inflation subdued, as well as for attempting to break out of the growth quagmire the Western world has been in for the last two decades.  What we are seeing in Europe right now is an extremely cautionary case study in just how disastrous the war on fossil fuels can be (shortly we will see who or what has been a behind-the-scenes participant in this conflict).

Essentially, I believe, as I’ve written in past EVAs, we are entering the third energy crisis of the last 50 years.  If I’m right, it will be characterized by recurring bouts of triple-digit oil prices in the years to come.  Along with Richard Nixon taking the US off the gold standard in 1971, the high inflation of the 1970s was caused by the first two energy crises (the 1973 Arab Oil Embargo and the 1979 Iranian Revolution).  If I’m correct about this being the third, it’s coming at a most inopportune time with the US in hyper-MMT* mode.

Frankly, I believe many in the corridors of power would like to see oil trade into the $100s, and natural gas into the teens, as it will help catalyze the shift to renewable energy.  But consumers are likely to have a much different reaction—potentially, a violently different reaction, as I noted last week. 

The experience of the Yellow Vest protests in France (referring to the color of the vest protestors wore), are instructive in this regard.  France is a generally left-leaning country.  Despite that, a proposed fuel surtax in November 2018 to fund a renewable energy transition triggered such widespread civil unrest that French president Emmanuel Macron rescinded it the following month.

*MMT stands for Modern Monetary Theory.  It holds that a government, like the US, which issues debt in its own currency can spend without concern about budgetary constraints.  If there are not enough buyers of its bonds at acceptable interest rates, that nation’s central bank (the Fed, in our case) simply acquires them with money it creates from its digital printing press.  This is what is happening today in the US.  Many economists consider this highly inflationary.

The sharp and politically uncomfortable rise in US gas pump prices this summer caused the Biden administration to plead with OPEC to lift its volume quotas.  The ironic implication of that exhortation was glaringly obvious, as was the inefficiency and pollution consequences of shipping oil thousands of miles across the Atlantic.  (Oil tankers are a significant source of emissions.)  This is as opposed to utilizing domestic oil output, as well as crude from Canada (which is actually generally better suited to the US refining complex).  Beyond the pollution aspect, imported oil obviously worsens America’s massive trade deficit (which would be far more massive without the six million barrels per day of domestic oil volumes that the shale revolution has provided) and costs our nation high-paying jobs.

Further, one of my other big fears is that the West is engaging in unilateral energy disarmament.  Russia and China are likely the major beneficiaries of this dangerous scenario.  Per my earlier comment about a stealth combatant in the war on fossil fuels, it may surprise you that a past NATO Secretary General* has accused Russian intelligence of avidly supporting the anti-fracking movements in Western Europe.  Russian TV has railed against fracking for years, even comparing it to pedophilia (certainly, a most bizarre analogy!). 

The success of the anti-fracking movement on the Continent has essentially prevented a European version of America’s shale miracles (the UK has the potential to be a major shale gas producer).  Consequently, the European Union’s domestic natural gas production has been in a rapid decline phase for years. 

Banning fracking has, of course, made Europe heavily reliant on Russian gas shipments with more than 40% of its supplies coming from Russia. This is in graphic contrast to the shale output boom in the US that has not only made us natural gas self-sufficient but also an export powerhouse of liquified natural gas (LNG). 

In 2011, the Nord Stream system of pipelines running under the Baltic Sea from northern Russia began delivering gas west from northern Russia to the German coastal city of Greifswald.  For years, the Russians sought to build a parallel system with the inventive name of Nord Stream 2.  The US government opposed its approval on security grounds but the Biden administration has dropped its opposition.  It now appears Nord Stream 2 will happen, leaving Europe even more exposed to Russian coercion. 

Is it possible the Russian government and the Chinese Communist Party have been secretly and aggressively supporting the anti-fossil fuel movements in America?  In my mind, it seems not only possible but probable.  In fact, I believe it is naïve not to come that conclusion.  After all, wouldn’t it be in both of their geopolitical interests to see the US once again caught in a cycle of debilitating inflation, ensnared by the twin traps of MMT and the third energy crisis?

*Per former NATO Secretary General, Anders Fogh Rasumssen:  Russia has “engaged actively with so-called non-governmental organizations—environmental organizations working against shale gas—to maintain Europe’s dependence on imported Russian gas”.

Along these lines, I was shocked to listen to a recent podcast by the New Yorker magazine on the topic of “intelligent sabotage”.  This segment was an interview between the magazine’s David Remnick and a Swedish professor, Adreas Malm.  Mr. Malm is the author of a new book with the literally explosive title “How To Blow Up A Pipeline”.   Just as it sounds, he advocates detonating pipelines to inhibit fossil fuel distribution. 

Mr. Remnick was clearly sympathetic to his guest but he did ask him about the impact on the poor of driving energy prices up drastically which would be the obvious ramification if his sabotage recommendations were widely followed.  Mr. Malm’s reaction was a verbal shrug of the shoulders and words to the effect that this was the price to pay to save the planet.

Frankly, I am appalled that the venerable New Yorker would provide a platform for such a radical and unlawful suggestion.  In an era when people are de-platformed for often innocuous comments, it’s incredible to me this was posted and has not been pulled down.  In my mind, this reflects just how tolerant the media is of attacks on the fossil fuel industry, regardless of the deleterious impact on consumers and the global economy.

Surely, there is a far better way of coping with the harmful aspects of fossil fuel-based energy than this scorched earth (literally, in the case of Mr. Malm) approach, which includes efforts to block new pipelines, shut existing ones, and severely restrict US energy production.  In America’s case, the result will be forcing us to unnecessarily and increasingly rely on overseas imports.  (For example, per the Wall Street Journal, drilling permits on federal land have crashed to 171 in August from 671 in April.  Further, the contentious $3.5 trillion “infrastructure” plan would raise royalties and fees high enough on US energy producers that it would render them globally uncompetitive.)

Such actions would only aggravate what is already a severe energy shock, one that may be worse than the 1970s twin energy crises.  America has it easy compared to Europe, though, given current US policy trends, we might be in their same heavily listing energy boat soon.

Solutions include fast-tracking small modular nuclear plants; encouraging the further switch from burning coal to natural gas (a trend that is, unfortunately, going the other way now, as noted above); utilizing and enhancing carbon and methane capture at the point of emission (including improving tail pipe effluent-reduction technology); enhancing pipeline integrity to inhibit methane leaks; among many other mitigation techniques that recognize the reality the global economy will be reliant on fossil fuels for many years, if not decades, to come. 

If the climate change movement fails to recognize the essential nature of fossil fuels, it will almost certainly trigger a backlash that will undermine the positive change it is trying to bring about.  This is similar to what it did via its relentless assault on nuclear power which produced a frenzy of coal plant construction in the 1980s and 1990s.  On this point, it’s interesting to see how quickly Europe is re-embracing coal power to alleviate the energy poverty and rationing occurring over there right now – even before winter sets in.  When the choice is between supporting climate change initiatives on one hand and being able to heat your home and provide for your family on the other, is there really any doubt about which option the majority of voters will select?

Tyler Durden
Tue, 10/26/2021 – 19:30





Author: Tyler Durden

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Why You Shouldn’t Hop on the Tesla Train… and What You Should Do Instead

Yesterday, Hertz Global Holdings Inc. (HTZZ) announced plans to buy 100,000 electric vehicles (EVs) from Tesla.

Investors seized on this unexpected news…

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Yesterday, Hertz Global Holdings Inc. (HTZZ) announced plans to buy 100,000 electric vehicles (EVs) from Tesla.

Investors seized on this unexpected news to boost Tesla’s market cap over the $1 trillion mark. As I write this, the stock price is also still strutting its spectacular trillion-dollar valuation.

“[Hertz’s purchase is] the single-largest purchase ever for electric vehicles… and represents about $4.2 billion of revenue for Tesla,” yesterday’s Yahoo! Finance report read.

Project Mastermind Is Here!

Despite this impressive achievement, I’d caution against making a brand-new investment in Tesla shares.

For all of Tesla’s innovative prowess and creativity, the company cannot escape mundane issues like rising input costs.

Elon Musk admitted as much when he said that Tesla would be hiking its prices for the fifth time this year, “due to major supply-chain price pressure industrywide… Raw materials especially.”

The price of a Model 3 Standard Range Plus, Tesla’s cheapest vehicle, has jumped from $37,000 back in February to $41,990 today.

Surprisingly, that steep 13% price hike may not be enough to compensate for rising input costs. As I have noted previously, the prices of the main metals that make up a battery-electric vehicle (BEV) are soaring. The chart below tells the tale. It shows “back of the envelope” estimates of the raw metal costs of a Model S.

When I created the original version of this chart in February, it showed that the approximate metal costs of a Model S had surged from $2,800 in May 2020 to $4,300.

Since then, that metal input number has jumped another $600 to $4,900 per Model S.

The “Secret Ingredient” Behind My Biggest Stock Picks

That $2,100 year-over-year cost increase may not seem like a big deal for a car that retails for $80,000. But bear in mind that Tesla effectively netted just $1,442 per vehicle last year… and that net profit included regulatory credits equal to $3,160 per vehicle.

Over the next couple of years, Tesla’s income from regulatory credits will probably dwindle to almost nothing. So, if we removed those credits from the income statement and then added in the rising prices of battery metals, Tesla’s approximate $1,442 profit per Model S would flip to a per-vehicle loss of more than $2,300.

In other words, rising metals prices could squeeze Tesla’s margins enough to wipe away the profit completely.

So, sure. Tesla might be a font of creativity, and one cannot deny the appeal of its cars. But when it comes to the best place to put your money… look elsewhere.

Instead, think of it like this: Hertz’s purchase of Tesla’s EVs will certainly pave the way for other such companies to do the same… and directly contributes to the emerging green energy and battery metals megatrends I’ve written about before here.

At the epicenter of both of these trends is copper – and here are a few reasons why:

Flying on Copper’s Wings

The average EV uses almost half as much copper as the average American house. And EVs aren’t the only “green” products that are “metal hogs.”

  • Wind energy uses five to 10 times more copper per unit of electricalenergy than does the conventional burning of coal.
  • Photovoltaic solar power uses six times more copper per unit of electrical energy.
  • A Tesla Model 3 requires 240 pounds of copper, which is nearly four times what a midsized internal combustion vehicle requires.

Therefore, as the renewable energy boom gains momentum, it will produce an echo boom in demand for key battery metals like copper.

Because EVs require large quantities of metals like copper, nickel, lithium, and manganese, mining companies have become the newest heartthrobs of the global auto industry.

The car companies are realizing that if they wish to ramp up EV production, they must secure long-term supplies of the “battery metals” that make their new ecofriendly autos possible.

Mining companies are delighted by the trend – and I have my eye on one of them in Fry’s Investment Report. You can learn how to get access to that play, and the full suite of recommendations that bloom from the other megatrends I’m following, by clicking here.

The post Why You Shouldn’t Hop on the Tesla Train… and What You Should Do Instead appeared first on InvestorPlace.

Author: Eric Fry

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