What the Energy Transition Is Really About

In today’s Money Morning…time to prepare for change…a geopolitical energy crisis…follow the money…and more…

While all eyes are on the US Fed and the Federal Reserve meeting, another crisis is brewing across the world.

But I’ll get to that in a moment.

First, the Fed is finally facing up to the fact that inflation isn’t transitory after all…and inflation is starting to bite.

US inflation increased 6.8% in November from last year, with prices pretty much rising across the board in food, shelter, vehicles, and energy.

The expectation for the meeting is that the Fed will start tapering quicker than previously thought.

If years of low interest rates and quantitative easing have increased asset prices, what do you think will happen if the Fed reverses policy?

Time to prepare for change.

How to Limit Your Risks While Trading Volatile Stocks. Learn more.

A geopolitical energy crisis

Movements in energy markets are getting interesting to say the least.

Oil in particular has had a crazy couple of years, with prices going negative in 2020 and then rising by close to 70% in 2021.

But things are looking calmer in oil markets after the US said they’ll be releasing oil from their strategic reserves and OPEC plus committing to ramping up production. In fact, the International Energy Agency said this week that global oil markets are back in surplus.

It’s a different story in the gas markets…the European natural gas market, that is.

UK and European gas prices are once again hitting record highs.

The main worry is a Russian invasion into Ukraine, which could cause supply shortages.

Russia has been building up its military presence at the border with Ukraine. And the whole ordeal has already led to some heated verbal exchanges.

UK’s Boris Johnson has warned Russia ‘that any destabilising action would be a strategic mistake that would have significant consequences’.

Meanwhile, Russia is threatening to use nuclear missiles in Europe.

All of this is happening in the middle of winter — and at a time when natural gas supplies were already tight, and there were hopes that Nord Stream 2 would be up and running soon.

If you haven’t heard of it, Nord Stream 2 is a 1,230km undersea pipeline for natural gas going from Russia to Germany, one that bypasses Ukraine.

About 40% of Europe’s gas comes from Russia and with the Nord Stream 2, Russia would double its annual gas export capacity to 110 million cubic metres.

The project is awaiting German regulatory approval, but last month the regulator put the project approval on hold until they meet EU requirements.

More tensions between Europe and Russia could create more delays.

Anyway, the whole thing is pushing gas prices up in the UK and EU, and these higher gas prices may even flow into the whole gas market.

But Europe is already working on a long-term solution for their energy worries.

Follow the money

During a recent speech at the European Economic and Social Committee Plenary, the President of the European Commission, Ursula von der Leyen, said Europe’s energy security ‘clearly depends on clean home-grown energy’.

She continued:

Rising energy prices concern all of us. They tell us that we are way too dependent on gas. We have seen it in the last few weeks. Rising energy prices are because of rising gas prices. This is not sustainable.

‘[Renewable energy] is better for the climate, it is better for the people, it is better for our resilience and our independence.

I am sure that you agree with me that every Euro spent on renewables is not only good for the planet, but it is also an investment in affordable energy for households and businesses, and it is an investment in the resilience of our societies and economies.

While the renewable energy transition is good for the planet, it’s about more than that. It’s about lower energy costs and energy independence.

Those are pretty big incentives to make the switch.

The European Union is already looking at spending around 500 billion euros on the energy transition.

The US is also spending another chunk, with President Joe Biden having signed a US$1.2 trillion infrastructure bill in November, committing billions to clean energy. In particular, US$65 billion is going into power infrastructure, US$47.2 billion for cyber and climate resilience, and US$7.5 billion to build a national electric charging network.

Of course, this doesn’t mean the end of energy geopolitics…but a redraw of the geopolitical energy map.

To build a wind, solar, and hydrogen energy economy, we need resources, metals, and commodities.

And Australia is definitely the lucky country when it comes to renewable energy. We have sun, wind, and land — but also many of the resources needed for the energy transition.

Until next week,

Selva Freigedo Signature

Selva Freigedo,
For Money Morning

PS: Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.

Selva Freigedo is an analyst at Money Morning. She has a background in financial economics, but what makes Selva´s experiences different to many are the places she has lived and worked. Born in Argentina, she has also lived in Brazil, the US, Spain, and now Australia. She has seen up close many of the economic phenomena that worry Fat Tail Investment Research readers, like hyperinflation, bank bail-ins and governments burdened with so much debt it cannot possibly be repaid.

Every week, she goes through each article, research note and recommendation produced by our experts around the world to give you information on how to build and protect your wealth. Selva packages the week’s best ideas into one easy to read report: Port Phillip Insider Extra.

Money Morning Australia