Monday, 11 September 2023

By Brian Chu Editor, Fat Tail Commodities

[5 min read]

Dear Reader,

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Everywhere you go you’ll hear about ‘going green’ and the Net Zero agenda aimed at reducing carbon emissions. This includes getting us to consume less, ditching your petrol-guzzling car and replacing it with an (overpriced) electric vehicle, eating less meat and using paper or wooden cutlery, plates and straws.

Failing to make these changes could run the risk of you being condemned by others as being selfish for not doing your bit to slow the ‘boiling’ of the earth (it ain’t global warming anymore, people!).

Now I’m not a nihilist or an environmental saboteur. I want the world to become cleaner and more sustainable for future generations. But I think commonsense should prevail in how we go about this.

For one, it should account for the current economic and social conditions.

We can’t rush changes or set unrealistic goals or timelines. Doing so would cause imbalances and unintended negative consequences.

At the minimum, we should consider the current financial system and its reliance on fossil fuels, the prevailing world order and geopolitical conditions. When we fail to carefully factor these in, we risk harming the most vulnerable — like the under-developed countries and those who are least protected (the poor, the children and the elderly).

Let’s explore this in today’s article. I promise to end with a brighter note on how you can avoid being a victim to the crisis that is unfolding, and actually be part of the solution.

The unbreakable bond of fossil fuels and modern society

Former US President Richard M. Nixon officially took the US dollar off the peg to the price of gold on 15 August 1971. Doing so effectively ended the gold standard.

The following year, the US Secretary of State Henry Kissinger went to Saudi Arabia and negotiated with the royal family to lead the Arab petrol-exporting nations to use the US dollar to trade in oil. This created the petrodollar system and the US dollar became the de-facto monetary standard.

Our modern economy runs on oil. In fact, oil has a more pervasive role in our society. Since the Industrial Revolution, fossil fuels have been in almost every aspect of our lives.

Few are aware that oil gave birth to the petrochemicals industry from which we get our pharmaceutical and cleaning products, fertilisers and chemicals, plastics and consumer goods.

Despite spending over US$5 trillion in the last decade on developing renewable energy, we’ve only managed to reduce the global reliance on fossil fuels as an energy source by less than 5% (from 86% to 81.8%).

Fossil fuels still make up over 80% of our energy source as of 2022, according to Our World in Data as you can see in the figure below:

Looking at the trend, it seems the only way to reduce the proportion of fossil fuels use is to force a shutdown on our global economy. And it looks like this is what the authorities around the world are trying to do.

(Editor’s Note: believe it or not, there could be another way around this — a viable alternative energy source that won’t bring our economy to a standstill. Scroll down to the bottom of this article for a special interview on this potential solution).

Creating a global depression amidst a recession

The global economy went through an exceptionally difficult period these last three years. Lockdowns, border restrictions, a trade war between the Western economy and the BRICS nations, and aggressive rate rises crippled many industries and households. As much as countries try to push the idea that there isn’t an economic recession using their official economic statistics, Main Street is feeling the brunt of it.

Given the conditions we’re living through, you’d expect policymakers would stimulate the economy with more accommodative trading conditions and monetary policies.

It’s gone the other way.

Now they’re pushing hard towards Net Zero to suffocate the remaining sparks in the engine. Meanwhile, the impact of the production cuts announced by OPEC almost three months ago is beginning to take effect. You can see how the price of crude oil has picked up pace in the figure below:

Call it a manufactured perfect storm.

What Net Zero has achieved so far is giving China more capacity to refine and buy oil as Western nations pledge to cut carbon emissions.

The irony is that China never committed to the emission targets. It currently holds the dubious honour of having the highest total emissions in the world. To be fair, it doesn’t have the highest per-capita levels, but that’s hardly a consolation.

Another perverse outcome is that the mining sector is facing rising operating costs. This came just as a glimmer of hope appeared in the June quarter when the price of oil traded at US$60–75 a barrel.

Many business leaders foresee challenging conditions will continue. Mining companies are again under pressure with companies going back to market to raise funds to shore up their balance sheet, just as market sentiment is weak.

The boards that moved earlier to raise cash in March and April — when conditions were more bullish — dodged the bullet for now. Sadly, those that’ve tried to delay doing so in the hope of raising cash in a stronger market are now forced to raise at a much deeper discount, raising the ire of shareholders wearied by a protracted bear market.

As a result, those invested in mining stocks are feeling the pain. This is the case especially for gold, silver, copper and certain base metals such as zinc, lead and aluminium.

But without the mining sector increasing production, I can’t see how Net Zero has a chance of succeeding.

And this is why there are opportunities for you, despite the gloomy tone of this article.

Buy in gloom, rejoice in the boom

I believe despite Net Zero picking up speed, it’s going to hit a brick wall very soon.

There’s increasing discontent among the people. They’re living through this as reality bites them hard and they’ll force the governments to backtrack. We’re seeing it in many European countries, including Germany and the Netherlands.

Fossil fuels will be here to stay and Western countries will return to more drilling. This should create a renaissance for the mining industry that’ll deliver more production. Hopefully this will solve the problem of accelerating inflation.

I’d suggest you get ahead of this. And here at Fat Tail, we have a plan for you.

Our Editorial Director Greg Canavan has been buried deep in the energy sector since early 2021, reviewing the political rhetoric around Net Zero, and seeing what effect it has on the markets.

What he found surprised even him…and has led him to make several successful recommendations in fossil fuel stocks.

He now has three more lined up that he’ll tell you about in our controversial new video, ‘NOT ZERO’, set to be released later this week.

Be sure to keep an eye out in your inbox. Trust me, you won’t want to miss this one.

God bless,

Brian Chu,
Editor, Fat Tail Commodities

PS: In the meantime, we have something else to share with you…

In this video — a bonus episode of our podcast series What’s Not Priced In — Greg Canavan talks to Rob Parker, founder of Nuclear for Climate Australia. Rob uses the example of Ontario, Canada, as a model for Australia. The province has significant nuclear energy, no coal, and lower retail electricity costs than Australia.

It’s an enlightening conversation and one you certainly won’t hear in the mainstream media.

Check it out.