David Yager is a long-time oilpatch writer and executive. Yager’s copy is provided free of charge by the Canadian Energy Centre Ltd.
It’s back to the basics, which is exceptionally good for the province of Saskatchewan.
As the global economy emerges from the mandated lockdown to battle the COVID-19 pandemic, consumers, companies and politicians are learning the hard way what people really need to survive.
In an interview on Bloomberg TV Sept. 28 about the European energy crisis, global head of commodities research Jeff Currie of Goldman Sachs explained, “Poor returns saw capital redirected away from the old economy to the new economy. It’s not unique to Europe. It’s not unique to energy. It’s a broad-based old-economy problem.”
Currie concluded, “This is the first inning of a multi-year, potentially decade-long commodity supercycle. It’s driven by the war on climate change, the war on income inequality. All of these dynamics lead to a structural rise in commodity demand against this whole idea of the revenge of the old economy.”
Here’s the interview:
What is the “old economy?” What is the “new economy?” What does this mean for Saskatchewan?
In the simplest terms, the old economy is the things we can’t live without; things that have become so ubiquitous they are taken for granted ‑ food. Heat. Clothing. Transportation.
Those things come from livestock, uranium, grain crops, flax, synthetic textiles, fertilizer, plastic, diesel fuel and gasoline. And all those come from Saskatchewan.
None of it originates from any of the massive and growing urban centres of the world that increasingly influence the political agenda. That’s who is driving the policy bus on how everyone else should conduct themselves.
In Canada, our federal elections are decided in Toronto, Montreal and Vancouver. In the United States, big cities like New York, Chicago and Los Angeles shape the direction of America. In Europe, the giant metropolises of Madrid, Rome, Berlin, London and Paris affect the policies of governments in Spain, Italy, Germany, England and France.
In 2020, 56 per cent of the world’s population was classified as urban, up nearly 10 per cent from the turn of the century. By 2050 this is expected to be 68 per cent of 9.8 billion people.
The continued migration from rural to urban is largely economic. Incomes are higher in urban centres than rural areas. Data from China shows that in 2020, rural dwellers earned only 40 per cent of their urban counterparts. In the United States, those who don’t live in cities earned 24 per cent less on average in 2019.
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This explains why the growing number of people making more money in ever-expanding urban centers are the greatest consumers of the necessities of life. They are also the growing driver of the “new economy.” But increasingly, they don’t know where anything comes from. And, until recently, they haven’t had to.
Today’s cities have electricity on demand, food on the corner, heat in the winter and air conditioning in the summer. They have mass transit, hot meals delivered by Uber drivers, high speed internet to provide previously inconceivable quantities of information and entertainment in seconds.
Doesn’t everybody have that? Who needs oilwells? Pipelines? LNG? Fertilizer? The world can and must decarbonize. Why can’t you all be like us and drive electric vehicles?
It is not intuitive to this writer that the producers of nothing should be telling the producers of everything what to produce and how to do it.
But that’s 21st century politics.
From an economic perspective, what Jeff Currie is referring to is how capital markets have redirected investments in a world that has, until recently, been blessed with plentiful supplies of commodities and low-cost energy, food and manufactured products.
But as supply chains are disrupted, people are getting a crash course in how fossil-fuel powered transportation and globalization has helped create a growing supply of continually lower-cost goods from all over the world.
There’s no question that in the recent era of plenty there wasn’t much profit in producing fossil fuels or, from time to time, even food.
And the “energy transition” to renewables looked promising thanks, in part, to continued government subsidies and support, like preferential power purchase agreements.
But as Currie commented, “In many parts of the world, you’ve overbuilt wind, you’ve overbuilt solar” while either avoiding or, in fact, discouraging investments in fossil fuels, metals and mining. “The new economy is over-invested and the old economy is starved.”
**********
Ignoring social pressure to avoid fossil fuel investments, there was substantial money to be made in the new digital economy represented by the so-called FAANG stocks – Facebook, Amazon, Apple, Netflix and Google.
Of the top 10 companies in the world in 2021 based on market capitalization, only Saudi Aramco (2) and Berkshire Hathaway (10) produce things that would be classified as “old economy.” The other eight (in descending order) are Apple, Microsoft, Amazon, Alphabet (Google), Facebook, Tencent (Chinese internet and entertainment giant), Tesla and Alibaba (China’s equivalent to Google). They are all new economy, tech-based companies.
While Microsoft and Amazon have provided remarkable technologies and systems to improve productivity, communications and distribution, a large portion of what these companies do is compete for after-tax recreational and lifestyle dollars.
The new economy has indeed assisted the growth and efficiency of the old economy in many ways. The internet’s contribution to productivity and lowering costs is incredible. A smartphone is a wonderful device that most people cannot fathom living without.
But you can’t eat it.
Turn the clock back to early 2007, the last full year before the world financial crisis of 2008-09. As the year began, the top 10 companies, in descending order, were ExxonMobil, General Electric, Microsoft, Citigroup, AT&T (formerly American Telephone & Telegraph), Gazprom, Toyota, Bank of America, ICBC (Industrial & Commercial Bank of China) and Royal Dutch Shell.
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Except for Microsoft, which developed personal and corporate productivity tools, these are all old economy companies. Most were producing energy, financing energy or building things that were powered by energy. Like automobiles and trucks from Toyota, or jet engines, home appliances and turbine powered natural gas compressors from GE.
But this year, the massive correction in the global economy driven by energy shortages, supply chain disruptions and inflation have changed investment behavior.
As can be expected, capital markets are catching on and moving their funds accordingly. After all, whatever the ESG and sustainable finance movements advise investors what they should do, it is still about making money.
Liz Ann Sonders is the chief investment strategist for U.S. investment bank Charles Schwab & Co., Inc. She posted the following screenshot on Twitter Oct. 19 with the caption, “FANG+ losing ground relative to FE (financials and energy) … most popular growth/tech companies (blue) are up 21 per cent YTD, but financials and energy now leading pack.”
According to this chart, the biggest returns so far in 2021 have been in the old economy products we’ve been repeatedly told we must plan to live without. The GICS (Global Industry Classification Standard) energy sector includes producers of coal, oil and natural gas and the service companies that support them.
The technology stocks that have been big money makers are still performing, but not like they have been. While the FAANG index is up this year, in the past five years it has risen 267 per cent. No wonder it has been so popular. Smart investors could not afford to ignore these companies or this sector.
Oil and gas companies have been dogs by comparison. Five years ago, the S&P 500 Energy Index was 15 per cent higher than today, even after the recent oil and gas price recovery. This includes legacy names like ConocoPhillips. Marathon, Chevron, Halliburton and Baker Hughes. Along the way it had plunged by 65 per cent after humanity was ordered to quit moving around in April of 2020.
But year-to-date in 2021, the S&P 500 Energy Index is up 90 per cent.
Renewables, where all the smart money is supposed to be headed, are facing serious competition. The S&P Global Clean Energy Index for the past year has been, by comparison, flat. One year ago, it was at 1,285.71. The close on Oct. 22 was at 1500.10. Still a nice return of 17 per cent.
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But avoiding fossil fuels because they have no future has been an expensive trade this year.
The world is changing fast as it experiences its first energy and inflation shocks in years. What does all this mean for Saskatchewan?
**********
While Saskatchewan does not trade on a stock exchange, the commodities it produces do. Here’s a snapshot of how five old economy essentials from Saskatchewan are performing.
This chart tracks five key commodities from September 2016, to September 2021. This year food and energy have enjoyed impressive gains. Wheat has more than doubled what it fetched five years ago. Canola is up about 90 per cent. While oil, as measured by WTI, has been the most volatile, it continues to rise with its ceiling unknown as the world energy shortage unfolds and winter approaches.
Measured by economic opportunity and insulation from energy and food shortages, one of the best places in the world to live right now, next year and for years into the future, is Saskatchewan.
Saskatchewan, where the boring and formerly fashionable-to-discredit old economy is making a big comeback.
Will it last? Although the world is back to the basics for now, will it stay that way?
The upcoming winter will be a test of the power of the voters in big cities – who depend upon others to supply the necessities of life – to continue to influence the political agenda towards aspirational views of what they think the rest of the world should do, and how their fellow earthlings should behave.
From a humanitarian perspective, we should all hope things don’t turn out as badly as they could; that shortages of fuel, fertilizer and food don’t cause suffering and dislocation on a large scale.
But hopefully, the Great Reset will become the Great Rethink, where physics, economics and common sense are again considered in the well-intentioned, but too-often emotional aspirations of so many to make the world a better place.
It would be wonderful to live in a pollution-free world where nobody is ever short of anything from energy to food to security to social justice.
But it would also be wonderful to stay alive long enough to see if this ever happens.
Saskatchewan and Western Canada are here to help.
But replacing lifestyle lectures and punitive, vote-seeking policies with recognition and support for the enormous contributions of Canada’s resource producers would be greatly appreciated.
David Yager is an oil service executive, oil writer and energy policy commentators and analyst. He is currently president and CEO of Winterhawk Casing Expansion Services which is commercializing a new way of mitigating methane emissions from surface casing vent flows. He is author of From Miracle to Menace – Alberta, A Carbon Story. More at www.miracletomenace.ca.
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