A certain reality thwarts many good intentions in terms of energy transition.
Caught in the trap of Russian gas blackmail, the Netherlands in turn announced on Monday the lifting of restrictions on coal-fired electricity production. Similar announcements came the day before from Germany and Austria. Dutch coal-fired power plants can now “operate at full capacity instead of the maximum of 35%”, in force since January 2022. On Sunday, the German government stressed that it was forced to use its so-called “reserve” coal-fired power plants, which currently used only as a last resort, in order to guarantee the country’s energy security. Also dependent on Russian gas, Austria has taken the decision to relaunch a disused coal-fired power station, in order to protect itself against a possible shortage.
Before them, China had announced, on April 28, the abolition of customs duties on its coal imports. Struggling with power shortages last year, Beijing also ordered its miners to produce “as much coal as possible” to meet its energy needs and support its post-pandemic economic recovery, it said. in a text from Agence France-Presse (AFP).
Then, India followed, on May 6, with the rental of a hundred dormant coal mines, all in response to an unprecedented heat wave, but also in order to support its economic growth.
ESG criteria and performance
On the investor side, the inflationary shock pits environmental, social and governance criteria against the stock market performance of companies offering commodities. The appetite for yield growing with the correction of financial markets, Bank of America (BofA) in late April returned to its study conducted in June 2021 by reiterating its enthusiasm for a Canadian stock market trading at a discount to the S&P 500, Wall Street’s benchmark index. The institution’s favorable bias essentially reflects the weight of oil and gas in the index and in the Canadian economy, but also that of raw materials and other commodities currently in short supply, in particular due to the Vladimir Putin’s war against Ukraine.
Calling for a “new world energy order”, the BofA analyst points out that “Canada exports what is rare in the current context. It is the fourth net exporter of crude oil (mainly to the United States) and the fifth agricultural exporter (third for wheat). It also produces gold, potash, aluminum, uranium, coal, lead, zinc, etc., most of which are in short supply,” summarizes the uncommonsenseinvestor.com site.
National Bank analysts also carried out a historical overview last year to recall that the influence of the weight of commodities and the oil and gas sector in its benchmark index favored the S&P/TSX in an inflationary environment.
BofA adds that rising commodity prices mean more growth for Canada, but also higher inflation. And that the rest of the things will depend on the Bank of Canada. The extent of the firmness of the tightening applied in an economy sensitive to interest rates having to deal with both overheating real estate and high household debt. It would then take a recession for a tipping effect to occur.
Destruction of the request
Some will argue that the surge in oil prices on economic activity and inflation could lead to a “destruction of demand”. Black gold producers fear that such a contraction in demand will accelerate the withdrawal of fossil fuels and fuel a race for other energies. According to recent estimates, this risk of “destruction” could become real if the benchmark crude oil prices, currently around 110 US dollars a barrel (143 Canadian dollars), exceed 150 US dollars (195 Canadian dollars) and maintain. A full-scale embargo on Russian oil would have the potential to push the price past this inflection point, it was said.
However, Russian oil easily finds buyers. Especially since it is offered at a discount on parallel markets. Imports of Russian oil by China increased in May by 55% year on year, according to official figures published on Monday taken up by AFP. Last month, the Asian giant bought some 8.42 million tonnes of oil from Russia, according to Chinese customs. This is a much higher quantity than oil imports from Saudi Arabia, usually China’s largest supplier, we can read.
Earlier, data compiled by Refinitiv showed that from February 24, the day Ukraine was invaded, to April 18, 380 tankers had left Russian ports, up from 257 tankers over the same period. last year. Of the number, 115 were heading or were to go to Asia, mainly to China, South Korea and India, we have already written.
And it is also necessary that the availability of substitute products is not subject to the constraints of the supply chains. Not to mention the fact that the development of renewable energies is strongly affected by the inflation of input costs, to which is added a higher cost of financing.