Fuelling Fuelling Fuelling

Fuelling the energy crisis

Steen Jakobsen

Chief Economist & CIO

Summary:  Since late 2020, the Saxo Strategy Team has held the view that the real economy is far too small for the financial and economic agendas of governments, central banks and the green transformation. This prompted our call for higher inflation throughout 2021, which crystallised with the inflation spike in the second half of 2021, capped by a 7 percent US December CPI print. In short, inflation is now a reality, but even after the significant pivot in Fed rhetoric in late 2021, the central bank is badly behind the curve. It is still slowly withdrawing from the easiest financial conditions in history, even if the sense of urgency is rising. That urgency will likely only mount from here as inflation fails to fade as it hopes.


It seems that before his re-nomination for a second term, Fed Chair Powell was read the riot act by the White House. Biden’s team likely made it clear that if Team Powell wants to lead the Fed, it needs to focus on the 150 million Americans at work seeing their pay reduced every month in real terms by the Fed’s inaction on inflation, rather than focusing on maximising accommodation to support the remaining 6 million unemployed in finding work. Both Powell and Brainard (the incoming vice-chair) complied and forcefully so. The consensus is now that the Fed will stop expanding their balance sheet by mid-March, will hike interest rates by 75-100 basis points in 2022, and even start to reduce its swollen balance sheet simultaneously with rate hikes earlier than formerly expected. This is a tall order for a central bank that has run a lower-for-longer framework since Fed Chair Greenspan and 1998 (LTCM). 

The critical chokepoint for real economic growth from here is the de facto energy crisis we are experiencing—one that will only continue due to decades of underinvestment in the space and the continued lack of financing for the fossil fuel energy that still drives the bulk of energy inputs into our economy. This lies at the centre of our “world is too small” theme. In 2021, we saw rises in energy and electricity prices that have not been seen since the 1970s. Electricity prices in Europe rose to ten times the long-term average, in part on supply disruptions from abroad, but also aggravated by the lack of baseload as Germany shutters nuclear plants and the new alternative energy sources are unable to replace critical baseload. 

In short, we have created a monster in which the policy priority—going green—is fuelling the energy crisis. The more we operate without a tangible plan for securing a smooth path to the hoped-for future of green energy, the more our economies will be disrupted in chaotic fashion due to inadequate baseload when famously inelastic energy demand exceeds generation capacity. The policy response so far has been to propose an even deeper commitment to green energy and to ignore the required improvement in grids, transmission, and better use of conventional energy. The worst oversight by policymakers is the inability to admit the reality that alternative energy alone cannot power the future at current living standards. What the world needs is a Manhattan Project 2.0, this time not to build a bigger bomb, but to find and develop new higher-density, low-carbon energy sources, most likely based on nuclear fission and fusion.

The great irony of the sacred go-to plan of ever-greater commitments to the current green agenda is that as long as China, India and Russia make up 50 percent of global electricity consumption, and 70 percent of that comes from burning coal, the number of battery EVs on the roads and Europe’s green agenda will have little or no impact. If, on the other hand, we commit to a new Manhattan Project that seeks out cheaper energy—not more expensive energy—we can put ourselves back on the road toward ecological sustainability and a growing economy.

We see 2022 as the year that will see the energy crisis changing the definition of green, bringing back fossil energy again from the cold until we can innovate our way to better energy sources. EVs charged from expensive windmills and CO2-spewing coal are a dead end for addressing climate change. The big revolution in 2022 will be to begin building our energy future on a foundation of realism, not fantasy.

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