Page 25 - ISQ Outlook 2023

INVESTMENT STRATEGY QUARTERLY

“ There are numerous ongoing reminders that energy

transition is an irreversible megatrend. ”

curve. In the U.S., for example, the cost of energy for driving one
mile in an electric vehicle is currently around one-fourth the KEY TAKEAWAYS:
cost of fuel for an internal combustion engine. Meanwhile, as • Energy remains less than 5% of S&P 500 market
the climate crisis spurs worsening droughts around the world, cap—down from as much as 13% a decade ago—
there is an adverse impact on the productivity of hydroelectric illustrating that this remains an under-owned,
power plants. This issue is especially problematic in hydro-de- somewhat contrarian sector for investors.
pendent countries such as Brazil and Canada, and thus there is
a need to expand other types of power generation that are less • We forecast that West Texas Intermediate (WTI)
vulnerable to natural disasters. crude will average $100/Bbl in 2023, ending the year
at $110/Bbl. Brent crude, the global benchmark,
Near the end of 2022, the annual United Nations climate confer- should remain a few dollars above WTI.
ence, COP27, highlighted the limitations on international
cooperation vis-à-vis climate policy. The political reality is such • Since the start of the war, Russia has slashed gas
that there definitely will not be a global carbon tax, emissions supply into the European market as a deliberate
trading program, emissions reduction mandate, or really any- policy of blackmail with the goal of pressuring Euro-
thing that is remotely binding on governments. From country to pean governments to make concessions. As a result
country, and even within countries, there is a veritable plethora European gas prices remain the most expensive in
of laws and regulations. In addition to carbon pricing, also impor- the world, and several European countries have
tant are sector-specific policies such as coal and petroleum needed to bail out utilities and subsidise consumers.
phase-outs, renewable portfolio and fuel standards, building and • Energy transition is an irreversible megatrend. The
vehicle efficiency mandates, and various incentives (‘carrots’) European energy crisis is accelerating the push to
that are more politically popular than ‘sticks.’ in the US, for diversify the energy mix: not just away from Russian
example, the recently passed Inflation Reduction Act was full of gas, but from imported fossil fuels more broadly.
tax credits and other incentives for everything from wind projects
to sustainable aviation fuel, but there is no chance of Congress
approving mandatory decarbonisation anytime soon. By con-
trast, the EU’s European Climate Law includes a legally binding
mandate for a 55% reduction in CO emissions by 2030, enroute
2
to net zero emissions (carbon neutrality) by 2050. In 2023, we will
also be watching the extent to which China reconciles its rhetor-
ical pledge of decarbonisation with the reality of producing and
consuming half of the world’s coal.

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