International | Jan 28 2022
Saxo Bank is predicting a resurgence of the fossil fuel sector in the coming year amidst a global energy crisis driven by the global focus on future energy solutions. Impacts will likely be far reaching, with consumer goods pricing set to rise and shareholders in commodities producers benefiting from elevated demand.
-Future energy potential draws attention from near-term energy needs, driving a global energy crisis
-Expect consumer goods price hikes as industry looks to pass on energy price increases
-Commodity returns will likely benefit from demand to reach green energy targets
-Energy prices in Europe soar as the region relies on imports given underinvestment in available energy sources
-Investors may look to cryptocurrencies reducing energy intensity for longer-term sustainability
By Danielle Austin
As we undergo a global shift change to renewable energy sources, Saxo Bank warns a heavy focus on future energies is driving a near-term global energy crisis with far reaching impacts.
According to Saxo, the real global economy remains unprepared to meet the financial and economic agendas of governments and the green transformation. Decades of underinvestment in the energy sector coupled with an ongoing lack of financing for fossil fuel energy that continues to drive a large share of our economy’s energy input have stalled economic growth and contributed to a global energy crisis.
Saxo sees 2022 as a transformative year for the energy industry and the renewable energy transition, expecting a resurgence in fossil energy as we undergo global innovation in the search for an answer to an improved energy future.
Green energy transition driving global energy industry crisis
Saxo warns that a heavy renewable energy focus in government policy, and a lack of cohesive planning to achieve a green energy transition, is contributing to a current energy crisis. Global governmental responses to the inadequate capacity of traditionally sourced energy to meet demands has been to encourage increased investment in energies of the future rather than in improvements to currently available energy sources.
Following the steepest energy and electricity price rises in fifty years in 2021, the bank anticipates the predicted energy crisis could benefit energy stocks, and expects energy costs will remain heightened for the foreseeable future given underinvestment in near-term solutions.
According to the bank, renewable energy sources will not be enough to meet the needs of a future population alone, and looks to the development of higher-density, low-carbon energy sources, likely based on nuclear fission and fusion, as a future solution to the energy crisis.
The bank expects that a commitment to the development of this type of nuclear energy will have far greater impact on emission levels than current government backed targets given that the three countries that make up 50% of global electricity consumption – China, India and Russia – continue to generate 70% of their electricity from coal.
Costs of energy price increases likely to be passed on to consumers
With energy costs expected to continue to increase in the coming quarter, Saxo warns consumers to expect increased operating expenditure to be passed on through price hikes, while businesses will likely also feel the pressure of increased energy costs through tighter margins.
Following the covid pandemic, spending will likely be necessary to support economic recovery in reopening markets around the world, but price rises in everyday consumer goods may pose a deterrence to consumer spending that would provide a necessary economic boost.
Europe’s decarbonisation focus a cautionary tale for economies in recovery
Current fragility in Europe’s energy market should provide a warning to other regions of a solitary focus on intermittent renewables at the exclusion of other energy sources. With renewables unable to provide a constant energy supply sufficient to meet demand, consumers are paying for the effects of greenflation in elevated gas and power pricing, with the region closing out 2021 with record prices as it’s reliance on natural gas imports increases.
With gas prices in Europe in December reaching more than ten times the five-year average, Saxo notes pricing pressure runs the risk of discouraging consumer spending necessary to support economic recovery.
Commodities to benefit amidst ongoing supply tightness and green energy transition
One area that will benefit from the ongoing transition to cleaner energy sources is commodities. The drive towards an energy transition has driven up prices of commodities necessary to achieving decarbonisation in what has been coined “greenflation”. Saxo expects elevation in commodities returns given supply tightness of the materials necessary to achieve decarbonisation targets.
Commodities, including oil, industrial metals such as copper and aluminium, and precious metals such as gold and silver, all present a strong outlook for returns in 2022. Within the agricultural sector, Saxo points to crops with utilisation to support renewable fuel growth, such as corn, soybean, oil and sugar, as offering the most potential upside, noting crops requiring higher fertiliser intensity will be impacted by gas-related fertiliser pricing surges.
Energy-intense cryptocurrency may deter investors
Saxo warns investors may look to other cryptocurrencies given Bitcoin’s continuing reliance on an energy-intense proof-of-work protocol to verify transactions which necessitates the use of high levels of electricity and server capacity.
Competitor, and second-largest cryptocurrency, Ethereum, is preparing for a transition this year from a proof-of-work protocol to proof-of-stake, expected to lower its energy use by 99.95%.
Given the heightening of the energy crisis, investors may look to more sustainable cryptocurrency options, as a changing regulatory environment could see Bitcoin and other proof-of-work crytos penalised for energy usage.
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