France's 'Gilets Jaunes' And The Future Of The Global Energy Industry

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Includes: ALB, CVX, OGZPY, RDS.A, RDS.B, SU, TSLA
by: Zoltan Ban
Summary

After decades of increasing pressures on Europe's population by a militant green agenda of unilateral self sacrifice for the greater global good, we finally saw widespread public revolt in France.

The net political effect of the Yellow Vest protests aimed at a further increase in already high motor fuel taxes is the birth of a new electoral demographic in Europe.

The events will serve as a reminder to leaders worldwide of the need to balance needs of the economy with the desire to contributing global environmental wellness.

Natural gas will be the big winner of the new political situation, given that it is the easiest political response to the need to balance interests. Oil and nuclear will also do well.

Coal remains the odd one out, which will see further declines in demand, but only for as long as relatively affordable natural gas remains widely available, after which we could see a comeback.

With coal companies going bust, electric cars seeing exponential growth in most major markets around the world, the green energy revolution has been assumed to be fait accompli by large segments of the population and in the investment world. There has been no shortage of opinions expressed along the lines of "Oil producers better get all their reserves out of the ground now, because in two decades those reserves will be worth nothing and they will be stranded in the ground forever". It is the irresistible lure of the concept of constant human progress, which made this story so irresistible, causing people to bet parts of their investment portfolios accordingly. Just to be clear I am myself betting on such green technologies indirectly. I own Albemarle (ALB) stock, with a longer-term time frame in mind, betting on lithium demand exploding as demand for green energy products such as EV car batteries, energy storage capacity and other technologies continue to be implemented. Having said that, I also own plenty of oil & gas producers in my portfolio for the long term, such as Chevron (CVX), Shell (NYSE:RDS.A) (NYSE:RDS.B), Suncor (SU). So I am clearly not betting on the end of the oil & gas era. The "Yellow Vests" protests in France, which are also spreading to other places like Belgium, may be an early indication of why it might be a mistake to assume that the green revolution has already been won.

The French fuel tax and the resulting popular uprising

It was really not a huge burden on French motorists that was being proposed. It was a relatively modest increase in taxes of about 25 cents/gallon. But France is already the most taxed economy in the EU by Eurostat's reckoning.

EU members tax rate as percentage of GDP

Source: Eurostat

As we can see, the government takes away about half of all of the economy's output in the form of taxes and contributions. It is true, the French public also gets back a lot more than most Americans are accustomed to getting, in terms of a far more robust social safety net, with free healthcare for all who need it, maternity leave and so on. It is nevertheless making it increasingly hard for people to make ends meet, especially in the last few decades, with stagnating wages at the lower end of the income spectrum, and atrociously high youth unemployment rates, which has been over 20% in France for most of the past decade.

For most motorists, the tax would have meant an increase in yearly taxes of about 100 to 150 Euros per year. Some residual effects, such as a slight increase in transport costs, would have led to some inflation in grocery and other essential goods prices. While unpleasant for sure, I think the increase would have been bearable for most French households. Evidently, it was not a revolt of desperation against this particular tax, but rather more widespread desperation in regards to policies pursued throughout Europe in the past few decades. Interestingly, public support for the protesters has been widespread, with as many as three quarters of France's voters in favor of their position.

The Green Tax

While much of the money that European governments collect from taxpayers ends up providing services, such as transport infrastructure, education, public safety, as well as a mostly decent social safety net, there is also a great deal of money that is increasingly going towards green initiatives. With EV sales in Europe assumed to reach as high as 350,000 units this year, we are looking at total EU-wide subsidies of about 2 billion Euros that governments will pay out in rebates this year. This is nothing compared with some of the subsidies being collected for renewable electricity. In Germany alone, over $220 billion in subsidies were spent on helping wind & solar since the year 2000. Then there is the UN climate initiative fund where developed nations are supposed to subsidize green energy in poor nations. The motor fuel costs are also a huge tax on all European consumers.

gasoline tax by country

Source: Office of highway policy information

As we can see, Europeans are already paying almost ten times more in fuel taxes compared with their US peers. We should keep in mind that unlike income taxes and some other revenue-raising initiatives where progressive tax rates are in place, the poor and lower middle classes tend to experience the same flat tax rate that all others will experience when it comes to green taxes on energy consumption.

In addition to the taxes, there has also been an economic cost due to high energy costs, with manufacturers not only facing restrictive labor laws, and high labor costs, compared with developing nation peers, but also higher energy taxes. The EU managed to cut emissions by 20% since 1990, being the only major entity to fully implement the Kyoto accord, and they recently pledged another huge cut in emissions from current levels. The target for 2030 is set for a 40% cut and a net zero emissions environment by 2050. EU lawmakers are pushing for a 55% cut by 2030, which seems to run counter to at least some significant segments of EU public opinion, with EU citizens seemingly increasingly unwilling to continue shouldering the related hardships.

It is impossible to attribute the level of industrial outsourcing that occurred in Western Europe already, which can specifically be linked with higher energy costs imposed on the economy in the name of the greater global good. One thing that is certain is that in addition to labor costs, energy costs are also significantly lower in Eastern Europe for instance compared with Western Europe. When it comes to parts of Asia in this respect, it leaves us often wondering why we did not see most manufacturing move away from Western Europe already.

EU electricity prices by member state

Source: Strom-Report

As we can see, there is a very significant difference in electricity prices within the EU, making it logical for European manufacturers to seek

Gilets Jaunes protests may lead to push back against existing green burdens in Europe

As I already pointed out, it would be a mistake to dismiss this public revolt in France as something narrowly aimed at this specific green tax. It is accumulated frustration we are looking at, where general discontent with government policies, and the results felt by ordinary people are starting to bubble to the surface. The green energy policy that the EU has been implementing, which was meant to lead the world by example, has been a significant factor in the overall resulting economic and social outcome for the past three decades or so. It should not surprise us to see political voices emerging within the EU, calling for a roll-back of some of these green initiatives, perhaps attacking the high cost of motor fuel, as well as the huge green electricity subsidies. There is evidently an emerging voter demographic which would be receptive to the message, which seems to be very significant, therefore I do believe we are seeing the emergence of a resistance movement to the previously largely unopposed greens in Europe. What this means is that mainstream centrist politicians can no longer simply give in to them as they have done for decades now.

EU wanted to lead by example. An examination of the example provided suggests that some fossil fuels and nuclear energy have a bright future for decades to come.

Since the EU wanted to lead by example, we have a great opportunity here to examine the example and draw appropriate conclusions. Yes, the EU managed to reduce emissions by 20% compared with 1990. But the devil is always in the details. When we look at those details, the inevitable conclusion has to be that EU politicians sold the public and the world two "miracles", which as it turns out were no miracles at all. The first one was the diesel engine efficiency miracle. It was a great story, with small compact diesel cars in Europe delivering the kind of efficiency we see in most hybrid cars. Fuel taxation, which I already highlighted, helped ensure that cars remained compact, even as engines became more and more efficient. The taxes are still in place, but the diesel miracle turned into "Dieselgate", and the rest is history.

The diesel miracle was easy to sell, partly based on fraud, while the fuel taxes were swallowed by most, in the absence of any significant political voices taking up the cause. With the diesel fiasco now behind us, and only the leftover mess lingering, the next seemingly acceptable solution is the electric car, with more and more European car makers pledging to eventually go to 100% electric car sales. Presently, those car sales are supported by public sector subsidies, amounting to about 5,000-6,000 Euros per unit. The private sector subsidy is less talked about, but by most indications, it may be as high as 10,000 Euros per unit sold for some EV models. It comes in the form of losses that car makers swallow on each unit they produce and sell. The total subsidy is therefore as much as about 15,000 Euros per unit, which the EU economy is paying for one way or another. I have no doubt that with up-scaling of production, as well as some technological improvements, the gap will be cut in time, but as things stand right now, the EU is committing to doing something which in my view played a significant part in helping collapse the system I was born into, namely engage in mass production of a product at a very deep loss. It is simply not sustainable and can lead to increased net misery among already increasingly disgruntled Europeans.

The second grand miracle was the large-scale substitution of coal use in electricity production with other sources of energy. Here, as I have been pointing out for many years now on SA, we are talking about a wind & solar face of the miracle, with the real miracle, mostly known as Gazprom (OTCPK:OGZPY), hiding behind that face.

gazprom exports to Europe

Source: Gazprom

Using an energy conversion from gas to coal, the extra 80 Bcm that Europeans are importing from Gazprom compared with 1990 is equivalent with about 125 million tons of coal taken off the grid.

Europe brown coal demand

Source: Eurostat

As we can see, demand for brown coal in Europe declined by just over 100 million tons for the same period, which is more or less equivalent to the increased imports of Gazprom natural gas on an energy equivalent basis. It is true that there has been a 30% increase in electricity demand in the EU during the same period, but not all of that extra demand was covered by renewable energy such as wind & solar. A lot of it came thanks to improved power plants burning coal and natural gas more efficiently, as well as a number of other sources, such as burning biomass, which did not help at all with that 20% emissions reduction, since biomass burning is worse than coal. So, when it comes down to it, it seems clear that natural gas has been the real miracle.

In this respect, I fully expect the EU to continue increasing imports of natural gas from Russia and elsewhere. It will play a role in further reducing coal demand, as well as making up for declining domestic natural gas production and any further growth in electricity demand. We still hear a lot of noise in regards to further cuts in nuclear power in the EU, but I think that will not happen to the extent that people seem to think it will.

As far as cutting emissions from cars, I think it will be difficult to continue relying on the public-private subsidy of EVs, even as sales volumes continue to surge, therefore something will have to give on this front as well. If there will be a significant reduction in the production cost to sale price gap, things should be alright, but as things stand right now, more efficient diesel engine production is ceasing in the EU auto industry, mostly being replaced with gasoline powered cars, which will actually push the average efficiency of Europe's car fleet down, thus oil demand will likely edge up in the absence of an economic slowdown.

The world is watching and learning

As world leaders gather in Poland for another climate change meeting, we are learning that after a brief pause in emissions growth, in 2018 we have seen a 2.7% increase. In the meantime, the host country is being accused of promoting coal. Poland wants to be relatively free of over reliance on Russian gas, so it is using more coal. And of course, I doubt Poland's current government would dare to impose the kind of cost that Germany did on its economy with its ambitious renewable energy program. One of the thoughts weighing on everyone's mind will most likely be the French fuel tax rebellion, and how to balance demands for more climate action with making sure ordinary people do not rebel against the negative side effects. Latest news is that France is preparing for the next weekend wave of protests with 65,000 security personnel being deployed in response. This is despite the fact that the French government partially backed down by postponing the tax by six months. The lesson to draw here is that once discontent over such measures builds and then erupts, it is hard to quell the mood of those who finally decide to speak up.

China seems to have learned the EU lesson rather well. It embraced the Gazprom miracle concept, with the first pipeline named "Power of Siberia" due to be completed and operational by the end of next year. Apparently a second pipeline is also being negotiated at the moment. It is not so much that China is shunning renewable energy, but rather it clearly looks to secure large volumes of natural gas as a way to stem the continued increase in coal demand, and perhaps even cut back a little bit on its use, as its own citizens are increasingly feeling the need to breathe. At the same time, it is looking to balance environmental needs with the need to ensure that the economy is not harmed in the process. Natural gas seems to be by far the best answer to these competing needs, at least for as long as it will continue to be available at a reasonable price. Nuclear power can be seen as a good alternative as well. It comes with its own environmental headache, but it helps curb greenhouse emissions, and it can prevent the kind of air quality issues from developing that China is currently experiencing. Coal seems to be the odd one out here, but I think it is only the case as long as natural gas supplies continue to increase world-wide, providing an adequate level of supply at a reasonable price.

I do not believe that it is the end of the oil era either. Global air travel continues to increase and there is no threat on the horizon to oil losing its monopoly on powering it. EVs are currently a subsidized alternative, both in terms of actual subsidies paid for by governments as well as industry subsidies in terms of losses they tend to take on each EV they sell. I know that Tesla (TSLA) finally managed to record a quarterly profit, but it was done based on sales of cars that averaged about $70,000/unit. When automakers can turn a profit selling EVs in the $20,000-30,000 range, with a decent driving range, preferably without government subsidies, then we are there. Right now, we are far from it, while demand for personal vehicles as well as commercial vehicles for transport continues to grow. Will there be a popular revolt against such subsidies, as we saw with the French fuel tax proposal? I think the more governments spend on such subsidies, the more resistance we will see from taxpayers. I do believe that EV sales will continue to increase at a robust pace, but it will only help slow down oil demand growth, not reverse it. The only thing that can do that, as was always the case, is an economic slowdown.

The French Yellow Vests protests continue to be an ongoing event, with political and ultimately economic consequences that should not be under-estimated. This is a historically significant event within the modern Western World context. To my recollection, there has never been such a widespread public revolt against environmental measures taken in Europe, meant to promote the greater global good, at the cost of local self-sacrifice. And this revolt came as Europe's leadership just agreed to promote even deeper cuts in fossil energy use going forward. I have a feeling that it will not take long for political forces within the EU to start taking up the cause of this revolt, while politicians across the rest of the world are also taking note. What this means is that while it may be bad for the world's climate, it is looking increasingly good for oil but especially natural gas producers.

Disclosure: I am/we are long ALB, CVX, RDS.A, SU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.