Dimon Highlights Need For More Oil And Gas Investment As Vanguard Bails On ESG Group

J.P. Morgan CEO Jamie Dimon probably summed up this week’s energy-related events best when he noted that “we need cheap, reliable, safe, secure energy, of which 80% comes from oil and gas” during an interview on CNBC. It was a week in which other major players, notably including management at Vanguard, appeared to acknowledge that reality.

Let’s take a look at some of the biggest energy-related events of the week just past:

The Iowa Caucuses and EPA Biofuels Mandates – The EPA rolled out new, beefed-up biofuels mandates the week after the Democratic National Committee proposed a plan to end the long reign of the Iowa Caucuses as the first presidential nominating contest on its calendar.

Since the EPA began to allow the blending of corn-based ethanol in with gasoline in 1978, voters have been treated to the quadrennial spectacle of every candidate for the presidency in both parties flying to Iowa to pledge their undying support for the practice of removing millions of tons of corn from the food chain each year to make motor fuels. That political imperative only became magnified after congress and then-President George W. Bush decided to turn the allowance of biofuels blending into a mandate in 2005.

Moving Iowa out of its long-time catbird’s seat on the nominating calendar won’t necessarily mean the end or even diminution of these mandates, but it would free up the candidates to tell us what they really think about them instead of just knee-jerking to support a controversial policy whose benefits are questionable.

Russian Oil Price Cap Produces Short-term Results – The “price cap” on Russian oil exports jointly sought by the EU, the G7 and Australia made its debut Monday. The cap of $60 per barrel was implemented at a time when prices were already on a downward trend, and prices continued the slide, with Brent crude dropping by more than 11% by the close of Friday’s trading to stand just under $77 per barrel.

Given that the slide in prices coincided with several bullish factors, including China’s rollback of many of its “zero-Covid” measures and a big drawdown in U.S. domestic crude stocks, the cap appears to have had its intended impact on global crude prices in the short term.

However, that could change once Russia announces a formal response. Markets rebounded slightly Friday when Russian President Vladimir Putin threatened a potential cut in supply, saying “As for our reaction, I have already said that we simply will not sell to those countries that make such decisions. We will think, maybe, even about a possible, if necessary … reduction in production.”

Should Putin decide to make that move, all bets will be off about the direction of oil prices in the longer-term.

Vanguard Pulls Out of ESG Coalition – One of the world’s biggest ESG-focused investment firms, Vanguard, manager of more than $7 trillion in investor assets, announced Thursday its exit from an investor alliance (Net Zero Asset Managers, or NZAM) that seeks to force the de-carbonization of the western world, in part through the restriction of capital to fossil fuels-related projects.

In a report on the matter, Reuters attributes Vanguard’s exit to “mounting pressure from Republican U.S. politicians over their use of environmental, social and governance (ESG) factors in picking and managing securities.” If that is indeed the case, then this is another example of shifting political tides having consequences, despite the GOP’s poor performance in the recently completed mid-term elections.

ESG-focused firms like Vanguard and BlackRock have come under increasing levels of pushback from Republican policymakers at the state level. In August, the Texas Comptroller’s office cited both Vanguard and BlackRock as companies that discriminate against Texas oil and gas firms in their investment decisions. Ultimately, that citation could end the ability of either big investment houses to retain positions in the assets of various state-managed pension funds.

Other GOP-led states have taken similar actions. The Treasurer in one such state, North Carolina, went so far on Friday as to call on BlackRock CEO Larry Fink to “resign or be removed” due to his anti-fossil fuels advocacy.

“Unfortunately, Larry Fink’s pursuit of a political agenda has gotten in the way of BlackRock’s same fiduciary duty. A focus on ESG is not a focus on returns and potentially could force us to violate our own fiduciary duty,” said state Treasure Dale Folwell in a letter sent to BlackRock’s board of directors.

The ESG movement’s capital denial efforts have contributed to the creation of a large and growing deficit since 2015 in adequate investments in finding and development of new reserves of oil and natural gas. Both Rystad Energy and Wood-Mackenzie issued reports in 2021 that estimated the deficit at between $400-$500 billion at that time.

The predictable outcome of that investment deficit has been rising costs for energy, regional shortages of both oil and natural gas supplies and shortages of the thousands of products made from petroleum, like fertilizers.

Exxon, Chevron Announce Strategic Plans – Meanwhile, “Big Oil” giants ExxonMobil and Chevron rolled out new strategic plans Thursday that contemplate major increases in capital spending and share buyback programs.

I detailed ExxonMobil’s plans in a Friday story linked here. Chevron also plans significant additional investments in new oil and gas projects, planning for a $17 billion organic capital budget, up by more than 25% over the 2022 budget. The budgets for both companies include significant increases in capital for oil and gas projects and also for their respective low carbon business segments.

Jamie Dimon Hits the Nail on the Head – All of the above leads to the statement made Tuesday by J.P. Morgan CEO Jamie Dimon on CNBC’s “Squawkbox” program. “If the lesson was learned from Ukraine, we need cheap, reliable, safe, secure energy, of which 80% comes from oil and gas,” Dimon said. “And that number’s going to be very high for 10 or 20 years.”

That comment is consistent with the statement Dimon made during a September congressional hearing in which he was asked if he would pledge that his firm would stop investing in oil and gas projects. “Absolutely not and that would be the road to hell for America,” he said.

The world cannot hope to have “reliable, safe, secure energy” Dimon speaks to without the ability to invest adequate capital in major new projects. ExxonMobil and Chevron understand that, and apparently the management team at Vanguard is waking up to that reality as well.