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The Perfect Storm – Opinion

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Opinion

As an CTRM market analyst, I must stay on top of the news every day, reviewing and analyzing developments that impact the commodity trading sector and the buyers of technologies that support those trading activities.  Prior to the last few months, there was a bit of cognitive dissidence in this exercise…rarely did market developments impact me personally (outside of the pandemic of course).  Even as the “energy revolution” emerged and continued full throttle, I could assume that the forces pushing an ill-conceived total and rapid de-carbonization of energy production would start to wane as the reality of the imbalances that were being created would cause more rational voices and strategies to move to the forefront.  Unfortunately, the rational voices have been largely snuffed out and today I sit at my desk reviewing the news and I can’t help but feel that I am watching the slow but inevitable collapse of everything around me.

Inflation is running rampant.  Here in Czechia it is 17.5% – one of the highest in the EU. The EU inflation rate is now officially 9.1% in August and rising. The Euro is in the tank and continues to weaken (I am glad we still have the Czech Crown here – though it isn’t doing so well either!) The pressure is on the European Central Bank and other central banks in the region to start ratcheting up interest rates in an attempt damp it down.

Unfortunately, at the heart of this current economic crisis are energy prices, which were already rising at pace in the second half of 2021 and were driven to new records after the start of the Ukraine conflict. Food prices have also been impacted, not only by the loss of Ukrainian grain production, but also due to the increased costs of fuel required for food production.  This also looks as if it will worsen as farmers are driven out of business and crop yields decimated by politicians seeking to reduce nitrogen fertilizer use. Despite the political fallout as consumers vent their ire at the ruling parties across the continent, there is little that can be done in the near term and the situation is expected to continue to grow worse as winter nears. Worse impacted now appears to be the UK where energy prices are a disaster, with consumers looking at 80% increases in their energy bills gas prices, but it is a rolling disaster and the rest of continent is, or will be, facing similar increases including an estimated 21 million Germans facing massively rising natural gas bills.

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As this whole energy transition began rolling, anyone with a fundamental understanding of the energy markets and their underlying infrastructures (and without a financial incentive to hop on the transition train) could see the potential for calamity was high, if not inevitable (I ranted about this myself for several years in my personal blog).  The Europeans politically driven headlong rush to decarbonization ignored the fundamentals of energy production and its economics by shutting down cheap base load and relying prematurely on unpredictable and now proven unreliable renewables, and in the process created multiple points of potential failure, from unfavorable weather patterns to reliance on unreliable Russian gas supplies, to bridge the gap between energy production and demand.  As the saying goes, “hope is not a strategy”.  Unfortunately, the politically driven regulators based their entire strategy on hope. Hope the wind would be favorable, the clouds would rarely block the sunshine and the Russians would never interrupt the critical flow of natural gas to the continent.  Ultimately, this is a situation where politicians have pushed an agenda, ignoring the fundamentals of thermodynamics and energy production, and in the process they cast aside the once sacrosanct security of supply basis for power markets in favor of net zero at any cost.

Don’t get me wrong, I think there is a place for renewables and even net zero, but it’s impossible to achieve that overnight, or even a few years, without significant shocks to the system. And unfortunately, the push to net zero doesn’t stop there.

These same politicians have doubled down by pushing the electrification of everything, including cars, across the entire complex of modern life. Again, they seem totally unaware of the facts – as of today, there isn’t enough copper, lithium, or any other metal to achieve this goal (not even close) and shortages are aggravating an already dire situation in power. And, though there may be potential undiscovered reserves of these critical commodities, what will be the financial and environmental costs of exploiting those resources that are most likely to be found in the most remote, and most environmentally sensitive, parts of the globe?

Back to the short-term…its only September and I sit here sweltering in some nice, seasonal weather.  By February, it will be subzero across the continent, and it could well be dire as untold numbers of consumers are faced with the choice between heat or food.

Putting back on my analyst hat, the good news in all of this – if there really is any – is that CTRM and related software markets are booming, and we expect this to be a good year for most vendors and consulting firm. However, beyond this year, stagflation and/or deep recession lie in wait ready to pounce and it’s harder to predict what will happen in our industry then, particularly as the politicians that, in my opinion, created this mess want to interfere further in the markets by imposing price caps, windfall profits taxes and are even talking now of nationalization. I have little faith in them. In our recent analyst briefings, we have been unapologetic in noting the political influences that have created this mess, even though we are mindful that not all will agree.

We do appear to be in what could be rightfully called the Perfect Storm. Rampant inflation, rampant politicization of well…everything, energy and commodity shortages, supply chain disruption, pent up demand from lockdowns, war, a politically driven paradigm shift in technologies via ‘net zero’, labor shortages, rising interest rates and pending recession (or already present if one relies on the nonpoliticized definition of recession).   Most troubling, it seems as though we are headed straight into the storm without any rational plans on how to avoid its worst impacts.

It seems we are headed back to the worst of the 1970’s…though at least the music was good then!

What do you think? Send us your comments and thoughts….