The theme of our Sunday report (to be found here) will be inflation this week and the signs that we are seeing across multiple industries which suggest it could be more problematic and worsen in 2022. One of the focuses is energy and how the pressures to be seen as good citizens is lowering investment in oil and natural gas production, while the world is not far enough advanced on energy transition to be able to substitute for the missing hydrocarbons. We would agree with many of the recent comments from some segments of congress, which is that the answer is not to curtail exports of LNG and crude, as by doing so we will starve the rest of the world of hydrocarbons and create worse shortages than Europe and China are seeing today. The better solution would be to support “clean” US production of the lowest emission fuels possible – especially for natural gas. As we have noted in prior research, with a global solutions hat on, the relatively low costs of natural gas F&D costs in the US, when combined with what we expect to be relatively low costs of emission abatement in the US, should drive more investment in the US, creating jobs and export income.
EIA forecasts that U.S. natural gas production will increase in 2022. We also highlight an Natural gas intel article titled, “U.S. E&Ps Poised to Lead Global Spending in 2022, with 23%-Plus Hike in Capex.”
Source: EIA – Natural Gas Weekly Update, December 2021
We see a mounting problem in coal in the US also, as the sentiment on the fuel is so low that it is hardly surprising that inventories are at more than a 40-year low. As we saw in Texas early this year, the power grid is not stable with the levels of renewable power that we have today and the lack of power storage capacity. Another unusual freeze in the US this winter could require higher operating rates on coal units to meet demand, and with current low levels of inventory it is possible that the inventory could be in the wrong place at the wrong time. This would lead to spikes in both coal prices and power prices in the regions impacted. We see trends that are happening too fast in multiple industries today, but some of the most compelling examples are in the energy space. Power and natural gas price spikes in Europe have shocked the region this year and have caused some proposed EU policy changes that are more favorable for both natural gas and for nuclear. The US needs some high level practical regulatory guidance at this point or the same shortages that have caused energy inflation in Europe could make things worse in the US. Note that in the headlines attached to the chart above, which discuss higher natural gas E&P spending in the US in 2022, we are coming of a much-reduced level of spending in 2020 and 2021 and while the growth may look impressive, it is off a low base.