COP26 & New Economic Policy

Could Joe Biden's recent "talking but not doing" on carbon emissions deeply disappoint Queen Elizabeth and other commentators but ultimately be better for the climate?

Hard not to be more contrarian than that!

Since its inception, one of the biggest themes of this newsletter has been that sloppy policymaking and political virtue signaling risks delegitimizing very worthy causes or goals for our society and the wider planet.

We have covered this twice in depth as it relates to both the energy transition and the pitfalls of the shift towards ESG for the financial industry.

The overall point is pretty simple:

No matter how virtuous your policy or aim, execution matters and we better get things right or we risk undermining popular support and achieving the very opposite of the outcomes we desire (and the climate requires).

Trust is a precious thing and, once squandered, very tough to recover.


This brings us to the crossed signals in the energy market and the climate transition during and after the COP26 conference in Glasgow.

The sight of the US President - any US President, of any party - going to the COP26 Climate Conference and outspokenly asking the OPEC+ oil cartel to pump more fossil fuels is pretty bizarre.

It did happen, in case you missed it.

Furthermore, just like the summer's episode, the OPEC cartel of petroleum producers told the US President to kick rocks.

This wasn't very surprising. The group isn't known for doing favors for US Presidents.

Following up thereafter, the White House issued the following statement:

“OPEC+ seems unwilling to use the capacity and power it has now at this critical moment of global recovery,”

No, you are not wrong, this is pretty strange!

And it isn't the first time. We wrote about this phenomenon when it first happened and suggested:

  1. This was a very, very bad idea.

  2. It provided some solid evidence in favor of the argument that, very regrettably, the current US Administration was discouraging investment in fossil fuels domestically but encouraging it abroad.

Adding it all up and this policy didn't make a lot of sense.

It also suggested that oil would head higher.

Anyway, that worked out very well if you listened but more importantly, it was an open question as to whether the intervening 5-6 months - how time flies! - had changed very much.

Since then, however, the situation has suddenly changed. How? Well, there have been 3 important shifts.

  1. After talks between their leaders, the US and China have both announced that they are "working on" a coordinated release of petroleum from their strategic reserves.

  2. President Biden then reversed a very public promise and infuriated some allies by holding an auction for oil and gas leases across 80 million acres of the Gulf of Mexico.

  3. He then directed the FTC to investigate "immediately" whether oil and gas companies were engaging in "illegal conduct" to drive up prices.

Big week!

Let us be clear about why these moves are positive:

  • International coordination rather than international pleading to a bunch of unfriendly-to-antagonistic regimes.

  • Domestic political action that is unpopular with many but takes ownership of the fact that, short term, fossil fuels will remain necessary and can determine a lot for regular people and the economy.

  • A likely empty symbolic gesture but one that signals to the American consumer (and voter!) that he understands their problems and is doing everything he can to improve the situation.

To summarize: impressive stuff from the US President.

This is what leadership should look like and it is this sort of empathy combined with pragmatic problem solving that the American voters hoped to see from Joseph Robinette Biden Jr. when they elected him.

And the best part? Oil prices have come down! Voila! As if by magic.

Oil fell from over $85 before the above to below 80 purely because with the above actions he was able to shift the narrative about what was possible.

  • In other words, the President forced oil traders and investors and salesman to start to think about how exposed they could be if more oil - from OPEC, from China, from anywhere - appeared in the market.

And just like that, the narrative shifted and the rally was halted in its tracks. At least for now.

In fact, we lied earlier.

The best part is actually that he hasn't actually done anything yet. Not really:

  1. The release hasn't happened,

  2. The leases are years away from producing any crude (and there will be endless litigation as well),

  3. The FTC gesture is likely to turn up little to no collusion and will certainly struggle to prove it legally.

And therein also lies the rub:

So far, the Biden administration has followed Churchill's apocryphal dictum that "Better to jaw-jaw, than war-war" and the mere threat of action has stopped the march towards $100 a barrel.

That is, once again, impressive and overdue that it is also a strategy with limits. At some point there will actually have to be more oil (or less growth) to alleviate the tight supply side of the market.

But Biden and his team are likely trying to buy time.

  • By the new year the seasonal demand cycle for crude starts to turn over and there is less consumption and hopefully more supply from OPEC+ and the slow but steady accretion of new wells and capacity from US producers.

We have spoken about the latter before.

Will it work?

It might. It certainly isn't dumb. And like all good strategies it has gotten a little lucky as well. Some of crude's decline has been at least partially driven by less demand thanks to yet another round of Covid shutdowns in Europe and elsewhere.

It may yet be just a momentary swoon before the resumption of the upward march of prices but suddenly the question about energy prices is double sided. That may keep prices both muted and capped, at least through the end of the year.

Whether that will show up at the pump, however, is another question!

A final market oriented thought:

As we have covered before, all political minds in the US will be turning to the midterm elections in the new year.

The Democratic party will be laser focused on doing everything to keep consumers feeling positive and at least so-so on their party's performance on the economy.

That suggests more big announcements, more jaw-jaw and more attempts to keep supply chains functioning, inflation in check and economic growth strong.

  • Energy prices will be front and center to this effort and, after a record run it may be worth taking some profits here and waiting and seeing what a determined political party, yet another Covid-19 winter and, always the wildcard, what global growth will do.

And now let us turn to another wildcard..….


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