Energy Crisis: What is Different this Time? - Barış Sanlı


We may safely claim that we are already inside one of the major energy crises of our generation. Before it loomed over us, the resemblance was the 1970s. Now, however, there are minute but fundamental differences.


The 1970s were the product of producing or oil-exporting countries’ policies based on geopolitics. 2008 price peaks were due to China’s demand growth. Now there are two parts to the recent events. One is the already continuing commodity market tightening, and the other is the additional effect of a war.


This is easy to understand. But there are other forces. Starting before the Gamestop-Robin Hood events and the rise of options trading, the world has known the Financial Weapons of Mass Destruction. The 2008 crisis was claimed to result from excessive speculation on the financial side. This one is an upgrade to 2008 dynamics.


So the leverage in the markets can be higher than before. But this leverage needs fundamentals to become a destructive machine. For the recent crisis, the major fundamental is the “volatility trap,” as Jeff Currie from Goldman Sachs has labeled it.


The volatility trap is the impossibility of investment in a volatile environment, feeding into more investment deficits and volatility. He offers to use carbon prices than the failed ESG rules. You can print money overnight, but you can not print oil, gas, copper, or aluminium.


The current energy transformation is a big change in the minerals used. Instead of oil, gas, and coal, we are talking more about copper, aluminium, lithium, and other clean tech minerals. Technology is fundamentally different, but the reliance of this technology on minerals is more than ever. This transformation is a big CAPEX (capital expenditure) transformation. Like a bridge, we are traveling from one CAPEX-hungry realm to another. The balance will be difficult.


A geopolitical premium of the whole event had not been realized yet. The food and fertilizer price problems are more fundamental than the energy dynamics. Previously we have seen underdeveloped governments limiting fertilizer imports for the trade deficit, resulting in ever-higher food prices. Food prices are the root cause of all evil instabilities. So this process will be ongoing until 2023 and probably 2024.


What is to happen next? No one knows, probably will never know until we live the day. But every generation has its own problems, tests, crises, mistakes, failings, innovations, and victories. This is the norm of civilizations. The early signs are not optimistic for the next six months. Afterward, the resilience of the world will be the judge. Absent an economic recession, and investments may not realize in 1 or 2 years. This means the volatility trap may last longer than the 2022 crisis. The only way out is more investment in minerals. Financial markets should be ready to reorient their goals to save the world from a different perspective.