Is the Climate Change Tax Here?

What a change a year makes. At one point last year early in the global pandemic, oil prices plunged into negative territory! The S&P 500 Energy index was down 50% in Q1 2020 and finished the year down 34% even as the broader market rallied 18%. This year the story is very different as synchronized global fiscal and monetary stimulus has jump-started the global economy. Oil prices have risen sharply YTD from ~$43/bbl to ~$73/bbl and Energy is, by far, the best performing sector.

While there's always noise around Energy prices, Goldman Sachs notes the seeds of the current spike in energy prices can be traced back to years of under investment in long-cycle projects. Large scale oil & gas investments were shelved due to a combination of poor energy returns and ESG concerns for nearly a decade, as shown below. 

Instead capital flowed more to short-term investments in shale and renewables. Solar and wind are great, but the technology hasn't really caught up with the demand. The basic issue of intermittent power supply remains--what do you do when the sun doesn't shine and or the wind doesn't blow? So, you still need oil, natural gas and coal, and a lot of it, to keep up with growing energy demand.

Environmentalists have long pined for an explicit carbon tax to reduce fossil fuel consumption. At least 27 countries, including many EU countries and even China, have one. But here in the U.S., Congress has never seriously considered it. Rather the movement for clean energy has been driven by the private sector and individual states with sometimes very aggressive mandates. All good. But going green and also not paying more at the pump during the transition phase was always going to be difficult. And as energy demand is rising the structural supply constraints are becoming clearer. The likely result is more volatile energy markets in the future. In effect, a unintended carbon tax?