As investors continue to press for reduction of carbon producing activities in the companies they buy, it is worth reflecting on the potential transition costs. Sky high natural gas prices in the UK have exposed the many applications of coal, oil and gas commodities. Merryn Somerset Webb recently penned an editorial in the FT “Gas crisis shows why we must stop demonising fossil fuels” and quipped that a shortage of ice cream can be tracked back to soaring gas prices. On a more serious note, she notes that coal, oil and gas make up about 80% of the world’s energy mix – roughly the same as ten years ago. Despite growth in renewables, steadily increasing consumption of energy contributes. Citing a BP review of world energy in 2019, consumption growth in the U.S. was surpassed only by China in 2018. The U.S. consumption grew 3.5% in 2018, compared with a decline of 0.4% during the prior ten years. China’s consumption grew 4.3% in 2018 vs. 3.9% over the prior decade.
Renewables plus hydro-electricity (the BP study breaks these two fuel sources out) comprised 7.4% of total US consumption in 2018 and 12.7% for China. Adding nuclear energy, a carbon free source, raises non-carbon producing energy consumption to 15.7% in the U.S. and 14.7% in China. This winter is likely to present hard choices for low and moderate income people (“heat or eat”), according to a sobering editorial from Thomas Friedman on Wednesday. On the plus side for the environment, major countries have signed on to reduce carbon emissions and are making progress. On the negative side, the growth of renewable energy is not matched to the reduction in fossil fuels, further affecting supply chains for “ceramics, steel, aluminum, glass and cement suppliers in China”. Global power could shift as well, this winter, Friedman points out. While we hope this is an overstatement, Friedman concludes with “Little darling – it’s gonna be a long, cold, crazy winter.”
