I’ll explain the financial and geopolitical effects of the energy transition

I'll explain the financial and geopolitical effects of the energy transition

Facts, scenarios and analyzes between economics, finance and geopolitics of the energy transition. The comment by Alessandro Fugnoli, chief strategist of the Kairos funds

A malfunction is the failure of a component. Just replace it and everything works out. A dysfunction is a process defect. Here it is not enough to replace a few pieces. We have to go back to the blackboard and revise the drawing, because the problem is structural.

The transitional inflation thesis is based on the one hand on the idea that the monetary and fiscal push to demand will gradually diminish and on the other hand on the thesis that the supply bottlenecks increasingly evident in all corners of the world are simple malfunctions. temporary and not structural dysfunctions.

We will have many opportunities to follow the questions related to the demand. Today we try to make some considerations on the offer. Financial markets are not very prepared to deal with this aspect. Almost forty years of supply policies, technological progress and favorable demographics have produced an abundance of raw materials, maximum fluidity of trade flows and the availability of cheap labor. Satisfied and calm on the supply side, the markets have devoted much of their attention and concern to the problems of demand, depressed by the austerity policies and internal devaluations that have compressed private consumption and public investment.

Today, with austerity fading into memory and with private consumption and public investment once again at the center of fiscal policies, we rediscover that problems can also come from the supply side, especially if it is put under stress by a new geopolitical context and the new aggressive leadership of governments.

We take the energy. In history there has never been as much cheap energy available as today. If in the 1970s, already hit by the two energy shocks of 1973 and 1979, it was a consensus forecast that fossil resources would gradually but inexorably run out, today we know that the world floats on an immense sea of ​​gas, oil and coal. We also know, with more than 60 years of experience, that nuclear is manageable.

The energy transition towards renewables, a choice on which enormous political capital has been invested and which is to be considered irreversible, has however led to an accelerated dismantling of nuclear power and to the cut in investments in fossil fuels (of which we have seen the first effects in the shale oil) which will pick up speed in the coming years thanks to the involvement of banks and finance. The strategic decision is to cut the fossil bridges behind us to be sure of moving forward at all costs towards renewables.

This venture will ultimately be successful and will not cause, as some fear, a generalized energy crisis in the transition phase. However, the path will be bumpy and the world will be vulnerable in the meantime. A cold winter or a few weeks with no wind or sun will lead to service interruptions and rationing. To limit them, it will be necessary to have large reserves of natural gas, increasing the demand for a raw material on which, on the other hand, investments are to be cut.

There will also be a geopolitical vulnerability. If Western countries drastically cut investment and fossil production in their own home, the bargaining strength of the countries, in many cases unstable or hostile, that they will continue to produce will increase. There will also be a certain geopolitical vulnerability in renewables if large plants are installed, as Europe has in mind, in the Sahara and the Sahel.

A second front to keep an eye on in the coming years will be that of work. Here, too, as for energy, there is an abundant supply on paper which, however, finds it difficult to combine with a demand that is also rather aggressive. There are those who are starting to put forward the thesis that lockdowns on the one hand and the growing push to create a universal income at the expense of governments on the other are making some people reconsider the centrality of work. For their part, companies find that proposing higher wages to find labor is less successful than it once was. To this must be added the demographics which, with the contraction of the workforce already evident in some Asian countries (including China), will increase their bargaining power.

The third stress front on the supply side, the crisis of the single global supply chain, is the only one with which the markets are already familiar. The process had already been initiated by Trump and Biden has in no way interrupted it. The separation of supply chains between America, Europe and Asia will not only involve technology, as we are seeing in semiconductors, but will also affect the basic industry as will be evident when Europe introduces the tax on the products of energy-incorrect countries coming from the Asia.

The three stress fronts that we have indicated will put grains of sand in the great global production machine and make the flows that run through it less fluid. They will cause an increase in costs which will be downloaded downstream or, in certain cases, will compress margins. However, inflation will be endemic and irregular and will not take on the threatening traits of the 1970s.

As has been noted, the two most popular inflation theories, monetarist and the one based on the Phillips curve, are inadequate to explain what is happening. Now that we are emerging from the cocoon of forced recovery and gradually entering a new normal, we realize that from the dust that subsides, a different world emerges from the one we knew.

Supply-side problems, on the other hand, will also create great opportunities. The energy transition will involve huge investments. The transformation of the labor market will give a strong boost to digitalization, robotics and artificial intelligence. The creation of separate production chains, after a difficult initial phase, will lead to a dramatic increase in the overall offer. In short, in the end, the supply will be more than sufficient on all fronts and inflationary tensions will be kept under control. If these are malfunctions, therefore, and not just malfunctions, the system will be able to correct them.

From the experience of recent decades, central banks have learned that supply problems cannot be answered by raising rates, which are more suitable for governing demand. The fears that swirl in the markets as the start of monetary normalization materialize is excessive. Central banks will be very cautious and will continue to prioritize the needs of growth over inflation. The replacement at the top of the Fed (which could also involve Powell) will give the board an even more expansive aspect.

The markets have caught in the air the approaching end of the emergency phase. They are coming out of the incubator and are observing the new world with a more balanced gaze. Rates are slightly higher and growth has cooled somewhat. A period of consolidation and acclimatization is due. The phase of one-day dips followed immediately by new highs is over. This does not mean that a particularly significant correction phase must be opened. If this occurs, it will be, pandemic permitting, an opportunity to buy.


This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/transizione-energetica-effetti-finanza-geopolitica/ on Sun, 03 Oct 2021 06:17:45 +0000.