It is no surprise to anyone’s bank account recently that energy prices have increased. When this happens, there is a natural tendency for most people to overemphasize the impact of energy on the economy and capital markets. The fact is global energy intensity (total energy consumption per unit of GDP) has been falling for more than 50 years in the United States, Western Europe, and globally due to a continuing shift from industrial to service economies and society becoming more energy efficient in its production of goods and services. It is even happening with emerging market giants like China and India.
Total global energy consumption will continue to increase as our economies increase, but the impact of energy GDP will continue to diminish. Energy has less impact now than it did ten years ago and even less influence than it did 30 years ago. Coupled with the growing use of renewables—a trend with the potential to flatten the primary energy demand curve and utterly change the way we think about power. Additionally, as energy becomes a smaller and smaller component of GDP, we will continue to see more diverse energy streams in the ecosystem.
What Caused the Current Situation
We are witnessing the aftermath reaction to an economic comeback from the Covid lockdowns. During the lockdowns, a lot of energy capacity was shut down, not expecting to come back online so rapidly, creating fear from the short-term supply constraint. Europe experienced the lowest winds on record (for several decades) in regions that had become ever more wind-dependent, leaving them in a shortage position demanding energy to come from elsewhere. Along with geopolitical factors regarding fuel flows from Russia into Europe, that will take some time to iron out.
Overall, turbines in Europe will find wind again, American fossil fuel producers will increase production (active rig counts have already doubled), and Europe will reach a deal with Russia.
There are also US political concerns of Green New Deal forces impacting fossil fuels, but that is not likely to affect the short to intermediate-term. All someone needs to do is look at the recent 2021 reconciliation bill and remember that the US Senate Energy Committee Chairman is Senator Joe Manchin from West Virginia—a coal state. That isn’t to say nothing gets changed, but many of the items people hope or fear will happen will likely get watered down because Joe Manchin appears to have a pretty strong determination to do what he thinks is best for West Virginia.
All of the above features point towards our current energy turbulence amounting to fewer problems than people anticipate, ending sooner than most expect, and having less impact on the economy than most realize because energy is less impacting to GDP each year.
Impact, but this will not be a significant enough factor to cause a recession or sour the economy. The economy might subside a little, but that is okay and expected as we move into slower growth, and back to the typical trends we experienced before Covid lockdowns.
No, I am not Pollyanna. I understand higher energy prices are unfavorable to our economy and value stocks. Yes, we will likely see some slight negative impact, but this will not be a significant enough factor to cause a recession or sour the economy. The economy might subside a little, but that is okay and expected as we move into slower growth, and back to the typical trends we experienced before Covid lockdowns.
In closing, remember the stock market prices in all widely known information and fears over the next 6-24 months. So, all of this will be old news in a year, and we will be ready to discuss new fears.