Woodside (WPL) Strategic Valuation, page-33

Pursuant to the discussion about the scope and prospect for structurally higher prices going forward, there is something quite profound happening which is making the current situation in the oil and gas market rather unique:

During previous commodity price cycles, the peaks in prices occur because capital gets attracted to these high price commodity sectors and is mobilised to create new capacity; and it is this new capacity that eases the market tightness and thereby causes the cycle to roll over.

What is different today is that cyclical self-moderating mechanism of "Capital-to-New Capacity-Causing-Lower-Prices" has been partially removed from the supply side of the global oil industry, to the extent that activists, governments, banks and even oil company shareholders are actively forbidding investing in new capacity due to ESG and climate concerns.

This is potentially a very significant development, because it removes the natural cap on prices which would occur in an efficient market, and portends prices that are structurally higher compared to previous cycles, and for longer periods, to boot.

And its not just the oil bulls like yours truly that are seeing this prospect.

Even the champions of the green economy are acknowledging that the price that will have to be paid to get to lower fossil fuel age is a period of sustained and fundamentally higher fossil prices [See article below].

The buzzword to describe this is "Greenflation".   

Get used to it, because it is a word that I expect will be around for several years to come.




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