Walls of Worry, Rays of Sunshine

Stock markets rise on walls of worry. Economies flourish with rays of sunshine. The yin-yang is on full display today.

The daily news is filled with articles about our economic, political and social woes, of which there are many. Each worry generates multiple scenarios of how its future could become worse, or possibly better, but always within a range of outcomes. Currently, professional sentiment calls for these issues to get worse before getting better. Not a good outcome. 

On the other hand, despite being frustrated by current economic, political and social conditions, people are generally optimistic about their future and that of their children. Jobs remain plentiful.

Everyday living needs are being met, although they are more expensive, and the pandemic is over. Will the worries overwhelm optimism, or vice versa? 

Global Reach

The list of worries seems endless and is not U.S.-only. They range from major economic challenges such as decades-high inflation, sky-high public and private debt, inadequate wage growth, income inequality, inadequate energy supplies, weak economic growth and the ending of U.S. dollar supremacy to global political issues such as the Ukraine-Russia war, China-Taiwan tensions, geopolitical realignments in the Middle East, the rise of socialism in South America and the possibility of a China-U.S. confrontation in Asia. 

Other worries include the sticky and unsettling challenges of the energy transition, the heavy-handed actions of governments and the lack of trust in public institutions, including the media. Then there are all the divisive social issues. 

“It is tough to make predictions, especially about the future,” said Hall of Famer Yogi Berra. But forecasting the future is necessary if we are to navigate today’s challenges. We’ve forecasted routinely throughout our 55-year business career, but it requires stepping back, assessing the latest data, examining macro trends, considering historical business and economic cycles and being open to uncertainty in the outcomes. 

That last point is critical because it means embracing the saying, “History doesn’t repeat itself, but it often rhymes,” attributed to Mark Twain. Given documented business, economic, electoral, planetary, social and stock market cycles, we know history rhymes. But demanding accuracy in forecasts is foolish as trends are more important than decimal points. 

Aging Populations

What should we make of the smorgasbord of worries confronting us? And what will they mean for our energy future? To answer these questions, we must start by recognizing the most important global economic and social trend ? demographics. The aging of populations in Western Europe and, importantly, in China will impact global growth and energy demand. Rapidly growing Asian populations – especially India’s – plus those in Africa will drive energy demand for decades and fossil fuel use too. 

Aging populations create economic challenges as governments must allocate more of their resources to health and pension expenses to support their older citizens, who contribute less to economies but also use less energy. These issues are complicated as fewer workers are supporting economies and governments. Will higher taxes convince them to move, worsening government budgetary problems? 

China’s declining birth rate, which started unofficially with the one-child policy under Mao Zedong and became official under Deng Xiaoping, has the country facing a rapidly shrinking working-age population just as the government shifts its economy from an export- to a consumption-driven one.  China is no longer the low-cost manufacturer for the world, so it has elected to target growing global markets where it has cost advantages it can leverage.  

While continuing to dominate many high-tech equipment manufacturing businesses, China is expanding its renewable energy equipment and electric vehicle industries to capitalize on global growth driven by the energy transition and its control over the key minerals required. China continues to be an economic disrupter. 

Energy Markets

Demographics, aging populations, and the energy transition are broad and pervasive trends, but there are other near-term issues impacting energy markets as well. Russia’s invasion of Ukraine exploded Europe’s energy costs as natural gas and petroleum product supplies were cut, forcing nations to seek alternative supplies with new supply chains – a costly effort. 

Europe’s energy challenges were magnified by the steadfast push by governments, in response to political pressures, to eliminate fossil fuels and nuclear power and replace them with renewable energy.  These governments quickly discovered that their green-energy programs contributed to high electricity prices while reducing availability and impoverishing families. Part-time renewable energy forced the restarting of closed fossil fuel plants, which increased carbon emissions. Citizens expect their electricity systems to be reliable, affordable and clean – none of these qualities is being met. 

Recently, European electricity prices dropped as a warm winter and high prices caused consumption to collapse. Energy supplies are now adequate. Furthermore, the sanctions on Russia’s energy supplies proved less disruptive to global energy markets than expected. Fears of $150-a-barrel oil disappeared as cheap, fungible Russian petroleum supplies continued flowing through new supply routes. But the continent’s energy problems are not resolved. 

Recession Ahead?

The greatest uncertainty about near-term global oil and gas markets is whether developed economies will experience a recession in the second half of 2023 and if the recession will be shallow or deep.  The U.N. just released its latest global economic growth forecast calling for a 2.3 percent increase in 2023, 0.4 percent above its January projection. In 2024, its forecast is for 2.5 percent growth, 0.2 percent below its earlier forecast.

These projections are well below the 3.1 percent annual average growth recorded during the decade before Covid. 

Not all growth projections are as pessimistic, but forecasts can be widely different. The latest U.S. GDP estimate for the second quarter is an example. The Atlanta Federal Reserve Bank’s GDPNow model says growth in the quarter will be 2.9 percent while the Blue Chip consensus of economists calls for 0.2 percent growth. Each forecast suggests drastically different energy outlooks. 

Slower growth means less oil consumed, as oil powers the economy. The latest OPEC outlook projects global oil demand growing by 2.3 million barrels per day this year, down from the 2.5-million-barrel growth of 2022. However, consumption growth this year will exceed additional output by nearly 500,000 barrels per day, which will send oil prices higher. 

With the combination of winter’s demand lull, China’s sputtering economic recovery and global recessionary pressures, 2023’s first half oil market has been weak, leaving oil prices range-bound between $65 and $85 per barrel. Traders are bearish on oil’s outlook as they hold the lowest number of futures contracts since 2011 – no surprise given a WTI futures price curve sloping steadily downward, suggesting traders see low long-term global growth translating into weak oil demand. 

Will they be right? 

The global natural gas market confronts similar economic questions as the global oil market. However, gas has the advantage of supplanting coal use with dramatic environmental benefits. As the pressure for European buyers to secure LNG cargos last fall in anticipation of a cold winter has subsided, gas prices have retreated. However, long-term contracts to support new LNG terminals continue being negotiated, suggesting global gas demand will grow for years. 

Energy Transition Challenges

The cloud overhanging energy markets is the transition to lower carbon-intensive fuels. Driven by climate change fears, the green energy movement has energized governments to radically, and rapidly, restructure national energy systems. The problem is the technology for such a rapid transition does not exist, at scale.

To date, statistics show that most of the renewable energy is added to supplies rather than supplanting other fuels. The only meaningful fuel displacement has been cleaner natural gas for dirty coal. 

Until inexpensive energy storage solutions arrive, overcoming part-time wind and solar power can only be done with backup energy systems. These systems must deliver electricity at the precise moment renewable power disappears. Batteries are short-term alternatives. Fossil fuel power is the only long-term backup solution.

Furthermore, renewable energy generation is usually distant from where it is consumed, necessitating building new transmission lines, an intrusion for the people whose land is crossed. Renewable energy also utilizes substantial land mass, another objectional characteristic, along with outrage over the deaths of endangered birds and marine mammals. 

The mandated push to electrify everything from motor vehicles to heating and cooking appliances to battle climate change has electricity use projections soaring. However, inadequate investment, public opposition and slow regulatory approvals are limiting clean energy growth, which increases the number of blackouts, further unsettling the public. 

Consumers are finding the energy transition means less freedom and higher power costs, further pressuring family budgets as they are already being squeezed by higher inflation. 

The public’s mood is darkening and enthusiasm for green energy and a rapid energy transition is waning. Surprisingly, the public remains optimistic that a cleaner world still can be achieved. Their optimism is being hammered by the reality of the pace and cost of the energy transition. The pace is too fast (too slow?) and costs too much. But people believe technology eventually will provide us with more cost-effective solutions. 

Who’s Winning?

The struggle between the wall of worries and the rays of sunlight continues. Presently, the worries seem to be winning. However, never underestimate the long-term power of the public’s optimism.