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The war in Ukraine has roiled commodities markets, highlighted fossil fuel dependence, and accelerated the low-carbon transition. It has also exacerbated inflation and global geopolitical risks. Host Thomas Mucha welcomes Commodities Portfolio Manager David Chang and Global Industry Analyst Tim Casaletto to discuss these interrelated dynamics and the challenges they pose for ESG investing and analysis.
THOMAS MUCHA: Today’s topic is how Russia’s invasion of Ukraine has roiled global commodities markets and accelerated the global focus on fossil-fuel dependence. And of course, what all this means for the world’s green energy transition in the face of climate change. To sort this out, I’m joined today by two Wellington colleagues: David Chang, portfolio manager and one of the firm’s top commodities experts; and Tim Casaletto, a global industry analyst and member of Wellington’s energy and utilities team who specializes in Europe, decarbonization, and lots of other topics. Gentlemen, welcome to the Well Said podcast.
DAVID CHANG: It’s great to be here, Thomas, thanks for having us.
TIM CASALETTO:Yeah, it’s a pleasure, thank you, Thomas.
THOMAS: Let’s start with the commodities impact, and with David. Clearly, Russia’s invasion is a geopolitical crisis of the highest order, bringing with it untold suffering and tragedies inflicted upon civilians, massive infrastructure damage, elevated risks across the board, and from a markets perspective, a new and intense focus on commodities, and the flow-through to inflation to energy security, to global growth. David, what’s your long-term view here on the impacts to energy, oil, and natural gas? And then, the factors that have led to this position.
DAVID: Let me just back up and really highlight what has been one of the most positive environments for commodities, even before any of this began. Coming into the year, we were looking at the lowest inventories in several decades across not just energy, but also metals and agriculture. And importantly, those inventories were continuing to fall, which really highlights that demand has been outperforming supply now for the better part of the last two years.
THOMAS: So we’re coming at this from a very challenging dynamic?
DAVID: Very challenging, and it’s tempting to think that this is cyclical, that it is demand rebounding from the depth of COVID. But it is much more structural. It is really the product of underspending on supply for the last five years, the last 10 years, depending on the commodity. So now let me get to your question, which is, what is happening in the world of commodities as a result of this conflict? Russia represents the second-largest exporter of commodities, behind the US, the largest net exporter. And importantly, it’s not just energy, but it’s really across all three major commodity sectors, energy, metals, and agriculture. So there’s a long-term effect as you highlighted, which is really having to deal with replacing one of the lowest-cost producers of commodities over time. And, there’s also a short and medium term effect, which is increased volatility, having to replace a very large source of supply and essentially having to deal with prices that could rise to levels that destroy demand.
THOMAS: Let’s dig into the short- and medium-term prospects right now. One of those areas of potential disruption obviously comes from the policy side. How are you thinking about the likelihood, and then the market impact, of potential European and Western sanctions on oil and even a possible embargo on Russian energy?
DAVID: It’s very tricky. And I don’t envy politicians having to navigate this environment, because again, we’re coming into this with prices already being at about decade highs, and inventories being very low. So, you’re seeing an inconsistent response across different regions because some regions like North America can afford to impose sanctions much more easily than Europe because of Europe’s dependency. Europe is having to deal with an energy crisis, again, before any of this began that spans across not just oil, but also it’s the electricity sector. So we’ve seen so far sanctions being imposed by the US government. It’s, again, easier because the US imports much less oil and oil-related products, from Russia than Europe does. Russian exports to Europe account for about a quarter of the supplies of natural gas in Europe. And then we’re seeing other regions that are also lagging in their response. Now that’s the government response. What we’ve seen is a number of corporates, corporations really take action in self-sanctioning, in essence, and essentially not waiting for governments to impose sanctions, but doing so themselves. And that’s disrupting the flow of energy, even before those government sanctions take effect. And we’re seeing insurance companies, not insure cargos as well as tankers of oil. We’re seeing refiners pull away from importing Russian crude oil, and essentially that having to be rerouted to other regions.
THOMAS: So Tim, obviously there’s, there’s geopolitical implications here, there’s policy implications. Let’s bore in a little bit on Europe and the political dynamics behind the sanctions and embargo issue. How are you thinking about this and, and what do you think the likelihood here is of Europe coming together and taking a more stringent view towards Russia?
TIM:It’s really difficult Thomas, because as much as Europe would love to just end energy dependence on Russia right now, it is not in their best interest to do so. I was meeting with the CEO of a big German utility two weeks ago, and he said to me, Tim, if Russian gas stops flowing into Europe, Germany will experience its worst recession since World War II. I mean that is just a striking statement, and I think he’s right. It’s because David said, Europe is so dependent on Russian natural gas, and there is no short-term solution to get off of that dependence. And so what we’re seeing in Europe in the short term is the European politicians doing everything they can to prevent against that tail risk that the Russian gas stops flowing. So, we’re seeing coal facilities increasing production. Now that’s crazy, right? We take a step back and we say, we’re increasing coal production in this world of decarbonization? But that’s what they need to do in order to make sure that we have some security of supply. We’re also seeing more LNG infrastructure, so there are countries like Germany that have little to no LNG import facilities. That makes them very, very vulnerable to this idea of a world with no Russian gas into Europe. So, in the short term it’s really, really difficult, and that’s why I don’t think that Europe will sanction Russian gas. It would be terrible for them to do so. Now the risk though is, of course, that Russia decides to turn off the Russian gas. So that’s why Europe is doing everything in the short term to, uh, to avoid this, this tail risk. I will tell you though, I have very high conviction in the long term for European energy and the electricity sector. And that’s that we will have more and more renewable energy, more than we ever thought we would have. And it’s the only way that Europe can produce power domestically without having to worry about energy, fossil-fuel imports from other countries is if you produce it domestically with renewable energy. It doesn’t matter if we were to have a ceasefire tomorrow between Russia and Ukraine or if we were to have continued escalation. Europe has already made up their mind that they will wean themselves off of Russian fossil fuels. It’s just a matter of time. Now, I personally hope for Europe’s sake that the Russian gas continues to flow, and that they can reduce that dependence in a more orderly fashion, versus scrambling in the short term, forcing industrial facilities to curtail gas, etc. The short term is very uncertain, but the long term is very clear. We will have more renewable energy, and more energy infrastructure in general in Europe, just to avoid this situation in the future.
THOMAS: So that might be one of the only silver linings here of this crisis is that it accelerates the focus on renewable energy and gets us there maybe a little bit faster. But let’s talk about the bumpy road between now and that moment. This brings up the topic of US production, energy production; other regions and countries that might try to fill in the gap. How are you guys thinking about who steps up here, and what does that look like? And we’ll start with David.
DAVID: Again, this is tricky, because if we think about the last 10 years, there’s really been a pressure on the energy industry to be more disciplined about its production. And we were facing a situation where oil production, gas production, was far from scarce, it was abundant. And the world got used to cheap and abundant energy as a result of that. Now, this is the ultimate test for the industry and so far, we have seen a complete lack of production response from US producers. And that’s where really a big source of potential exists for closing this gap. In speaking with the CEO of one of the US exploration and production companies a couple of weeks ago, he made a very clear statement. It’s very easy to be disciplined when prices are low, but really, the discipline has to show when you are in an up cycle for the commodity price. And so far, they’re showing that discipline. So who else can close the gap? Well obviously, OPEC. And so far, OPEC is very much sticking to their stated production plan of bringing on 400,000 barrels a day per month through September. And by not deviating from that, they’re really showing, again, their own discipline. Meeting with the secretary general of OPEC about a month ago, there was no intention to accelerate anything, to have an emergency meeting really to fill this gap. And it was also clear that because this conflict involved one of the members, if you want, of OPEC+, in Russia, other members of OPEC+ did not want to take share away that they might be losing. So you’re not seeing any response so far from these two, which leads to the response that we saw, which was a government response with the release of oil from the Strategic Petroleum Reserve. It was a historical release in terms of its size, in terms of its pace.
THOMAS: It feels like a band-aid though.
DAVID: It is a band-aid, it’s a very large band-aid, but it’s a very large band-aid against a wound that is historically large as well. And, and so it can buy some time, but if anything, it doesn’t fix the structural situation.
THOMAS: So if energy is seen as more strategic right now, given the geopolitical backdrop and OPEC isn’t playing ball, what’s the outlook for incentives from the US government first to try to create more production?
DAVID: So the US government has to be creative at this point, because the SPR release, the Strategic Petroleum release, if anything is further discouragement to the E&P industry to accelerate. And there’s also this concern, because of what happened two years ago with prices going to extremely low levels, negative levels. I know only for a day, but it’s a day that will always be remembered in the energy industry. That type of volatility and that down cycle is still a concern to the industry to ramp up production at a time where prices might roll over. I think it’s on the US government and other policymakers to think about how to provide some long-term incentive, and it may be guaranteeing a higher price. There’s also the idea that the SPR release today will have to be filled in the future, and so can it be filled at a price that incentivizes the industry to start spending again? But I think what’s important is we’ve been conditioned to think prices rise, response from producers happens immediately. And it’s not the case at the moment. There’s a lag in time. There’s a shortage of a lot of the key inputs, whether it’s labor, or whether it’s sand, whether it’s pressure-pumping equipment, rigs themselves. And the idea of bringing on all of these inputs at once is very inflationary for the industry.
THOMAS: And it takes time.
DAVID: And it takes time. So it’s not a question of three months, but it’s a question now of six months, of 12 months, before that production can respond.
THOMAS: On this question of timing, Tim, you said you’re very confident that we’re going to have a renewable future here and this accelerates this. what is the timeframe for this? Are we talking five years, 10 years, longer? Or does the Russia situation measurably impact that time horizon?
TIM:I think that Europe is doing everything they can to accelerate the green buildout as quickly as possible. But there are still just some natural bottlenecks in accelerating it too quickly. For example, David mentioned, you have labor, you have raw-material inflation. And the big issue in Europe is permitting. So again, to use Germany as an example, to build a new onshore wind facility in Germany, I’ve been told by the renewable developers that it can take up to eight years from the time that they decide they want to build an onshore wind project to the project actually being operational. It should not take that long. It only takes a year to build a big onshore wind facility once you start construction. So it’s seven years of logistics and planning that Europe really needs to accelerate that. And the EU has said that they’re going to try, that that’s going to be a key priority. But they’ve been saying that for a while now and we still haven’t seen evidence of it. So I’m a little disheartened of how that will actually play out, we’ll see. Another potential solution is offshore wind in Europe. And that’s a great solution. Again, the problem is it takes from start to finish, even if you have all the permitting in place, it’s very complex to build an offshore wind facility. It can take three to four years to build it. And we need the energy now, not three to four years from now. Some people are calling for the nuclear renaissance as a result of all of this. The problem with nuclear, as David knows very well, it takes over a decade to build a new nuclear facility. And so, it’s not a short-term solution. The other thing I just wanted to mention, it’s not just building the actual upstream part of the energy mix that’s, that’s the issue, it’s also the midstream. So for example, in the U.S., we have a huge problem with not enough midstream, not enough oil and gas pipelines. So even if the US does decide to increase oil production, or gas production, it’s not obvious that we can get that molecule from point A to point B. Europe is also facing that issue, because they have all of this infrastructure set up to pipe gas from Russia into Europe. Well, if we’re trying to wean ourselves off of Russian gas in Europe, how are we going to get the molecule? LNG facilities, of course, is a solution, but we don’t have enough LNG facilities in Europe currently to do that. So, this all takes time. So you asked about the timeframe, I think it’s really hard to see any material change in the next five years, I think five to 10 years could be the sweet spot. And then of course, years 10-plus I think we’ll be in good shape. But I am really worried for Europe’s sake, and really for the world’s sake, from an energy standpoint, over the next few years.
THOMAS: That sounds inflationary for the foreseeable future. We’ve been talking a lot about the supply-side challenges, and clearly there are many. I want to focus for a bit on two key countries that are on the demand side: China and India. Major consumers of energy, major players in the geopolitical environment. Let’s start with China. And David, how do you think about China’s energy needs, and its commodities needs more broadly? And it’s role in the Ukraine crisis.
DAVID: So I have two thoughts. One, one is a very tactical thought. And then one is more medium term. But certainly in the short term, the zero-COVID policy has actually eased the situation in the energy market to a large extent, I would say.
THOMAS: They’re using less of it.
DAVID: They are. The estimates around how much Russian oil is not finding a home today is somewhere between one and two million barrels a day. You might argue that’s being fully offset by lower oil demand in China because of a number of cities being on lockdown. This oil will ease on the China side while I think it will get harsher in terms of how much oil will be lost out of Russia over time. In a way, we haven’t experienced a full physical effect in the market of what these lost Russian oil barrels, molecules, and natural gas are going to have on commodity markets more broadly over the next six, 12 months, and maybe several years. Now in the medium term, this is a very important theme, the theme of deglobalization. And I think we should expect markets to become more bifurcated across commodities, where certain countries will still be taking oil from Russia over time, and so that could create a situation where oil pricing becomes very dislocated. You’ll see essentially very cheap oil flow to certain parts of the world, and other parts of the world consume oil at a $20, $30 premium as a result. That’s actually what we’re experiencing already today. But the other part of deglobalization, related to climate change policy, and net-zero policies over time, is China is actually rich in terms of its coal production. And my belief is over time, they will look to really contain any exports of energy-intensive goods.
THOMAS: Just to keep it for themselves?
DAVID: Keep it for themselves, exactly. And a good example is aluminum. China is one of the largest exporters of aluminum in the world, and they’ve gone from essentially subsidizing those exports to putting quotas on aluminum exports. And why aluminum? Aluminum is essentially solid energy. Most of the cost of producing aluminum is the energy cost that goes into it. So I think deglobalization means sort of a rupturing of some of these export flows out of China that we’ve been conditioned.
THOMAS: That’s really interesting. And this bifurcation of the energy market is consistent with this geopolitical view that I’ve had for a long time that the world is splitting up into two different poles. And I think that will be reflected in specific markets, in strategic sectors. Energy and commodities now [are] clearly [two] of those sectors, so thanks for bringing that up. What about India?
DAVID: India is one of the fastest growing sources of demand for oil, for coal, for natural gas, and many other commodities. Not self-sufficient. And if anything, commodities are the largest source of the trade deficit that India experiences. So, the two effects, one is India is continuing to import, for now at least. Other governments are not imposing any pressure on the Indian government to ease its imports of Russian oil because of its importance. But second, is really thinking about the inflationary impact that this will have. And this is a much broader theme that Tim and I are often talking about, which is the social impact of higher energy prices, higher food prices, because there’s such a more direct flowthrough of higher energy costs and higher food costs to poorer parts of the population globally than there are in many developed markets. But even within developed markets, the lower income parts of these countries are experiencing this stress of higher food and energy inflation, disproportionately. Going forward, I think it’s really important for us to think that restoring energy security, restoring food security, is going to take time, and is going to be very expensive. In other words, highly inflationary.
THOMAS: Listeners of this podcast will know that I harp on this point, this correlation between food inflation in particular, and revolution. We’ve seen that over and over in history, recent history from the Arab Spring to longer history, the French Revolution. But really, there is a concern in geopolitical circles about inflation roiling domestic politics. Tim, I’m curious about what this dynamic might mean for politics in Europe.
TIM:It’s a really interesting topic, and maybe just to give some numbers to the inflationary impacts of the energy crisis that it’s having on European households. I think the UK is a good example. So one year ago, the average household electric-plus-gas utility bill was just over £1,100 per year. And that £1,100 per year represented about 4% of the average household income in the UK. This bill has increased over the past year, from that £1,100, to close to £2,000 a year. So a 75% increase versus a year ago. And the problem is that these utility bills, electric and gas bills, they’re on a lagged basis. So even that £2,000 a year is not reflecting the current prices that we’re seeing. And so when I estimate what that bill is going to do in the future, I think that in six months’ time, it’s going to increase to £3,000 per year. I mean that’s a £1,900 per-year increase in the annual electric plus gas bill from just, from the middle of 2021. That’s going to go from representing 4% to 10% percent of the average UK household income. It’s not unique to the UK, all across Europe, households and industry are going to be feeling this massive energy inflation. They’ve felt it a little bit already, but it’s not going to stop. After a year’s time, it will depend on how energy prices evolve. But because of that lagged effect, I don’t think that Europe’s economy has felt the full impact quite yet, and I am worried about that. Your question, Thomas, is on the politics of it. I think it has the potential to get really scary. I do think that as we see this inflation manifest itself through, it’s very regressive in nature, as David said, it really impacts the lower class much more, and I think we could see some interesting political outcomes because of this. Because if people, especially the lower class, the middle class, they start getting desperate just for a better, higher quality of life, they just want change. And I think that politicians, especially more extremist politicians, can promise that change. So, it’s something that we’re watching quite closely. As it relates to the stocks, it’s tough to know what the impacts will be in the short term, but the way I think about it is it just increases the risk premium that we demand from places like Europe. And so as discount rates go up, you could argue that valuations should come down to reflect that higher risk. That’s the framework in which I’m thinking about it, but it’s absolutely a risk, and it’s not something we’ve seen in recent years, because we’ve been in a deflationary environment, and this has the potential to really change that landscape.
THOMAS: It has sort of a 1930s vibe to it. So, let’s talk about these investment opportunities, as we move away from fossil fuels into renewables. Clearly, it’s going to be bumpy. How do you guys think about where to allocate capital along this line of transition? And I’ll start with Tim.
TIM:The way that we’re thinking about it from the investment side is again, you’re going to need a lot more domestic energy infrastructure. And so, these are companies that are building renewable energy, wind and solar; companies that are building electric networks. And essentially, if you want to transport this renewable energy from point A to point B, you’re going to need a whole lot more electric grids, so it’s a huge tailwind for the electric network sector. And one thing that’s changed, even the gas networks, so gas pipelines, transporting gas long distances and the smaller gas pipes going into people’s homes, I used to think that was an area of no growth. This has changed that. It won’t be massive growth, but you should have low-single-digit growth, even in the gas infrastructure space. So in the long term it’s quite clear, we’re trying to align ourselves with companies that have a lot of gearing towards these growth opportunities, and we’re also trying to invest in the companies that have very clean balance sheets. Because as I said, the short term it’s uncertain. I want to make sure we’re investing in the businesses that have the ability to ride out that short term in order to capture those longer-term opportunities.
TIM:And I think the US has a huge structural advantage. Of course the US is also feeling this inflation to some extent, but the price per molecule of gas in the US is a fraction of the cost that it is in Europe. And that just puts the US economy, in my view, at a much more favorable starting point versus Europe.
THOMAS: David, what’s your view?
DAVID: Just to put a number to this, you’re looking at natural gas prices in the US that are probably around a quarter, maybe less, than natural gas prices in Europe, even though natural gas prices have doubled already over the course of the first few months of this year. This is controversial, but energy is a huge beneficiary. This is sort of the paradox of all of this renewable energy, is it takes a lot of energy to build it. It takes a lot of highly emitting metals to build that renewable energy. And it also takes a lot of agricultural commodities away from food towards biofuels to be able to supplement some of the gap that we’ve been talking to already. And I think this is the constraints still are there that make it very difficult to invest in traditional energy, to invest in metals and mining, and even to invest in companies that are linked to fertilizer production. This is sort of a return of this old economy sectors and their importance, even though we’re talking about new economy.
THOMAS: You’ve both been hinting at this, but I want to address it straight on, which is the broader ESG, environmental, social, governance impacts here. Not only of the, of the broader energy transition, but also what the Russia invasion of Ukraine is doing to this. How are you guys thinking about the ESG impact? So I’ll start with Tim.
TIM:So this is one of my favorite, favorite topics, so thanks for asking the question. I think this is a real good example of what I call the E and the S colliding. So the environmental and the social really colliding. And so let me just unpack that statement a little bit more. You have utility bills across Europe skyrocketing and that’s really because power prices in Europe have skyrocketed. What sets the price of power in Europe? There are two main things. The first is the price of natural gas, and the second is the price of carbon. So natural gas prices, they were really, really high before the invasion because of a tight global supply market, which David talked about at the beginning of our discussion. You could reasonably argue that part of that low supply growth is because the financial markets and politicians have been disincentivizing production growth. And so we have less supply; that causes prices to go up. Higher natural gas prices, higher power prices. Then you have European carbon prices, which have quadrupled over the past two years, and this is purely driven by policy. The EU is essentially gradually reducing the number of carbon certificates in an effort to boost decarbonization. So, clearly there were good intentions by politicians, all meant to promote the E and help decarbonization. We want to produce less oil and gas. We want to raise the price of carbon to disincentivize fossil-fuel combustion. All very good intentions, but it’s terrible for the S. Because again, it’s caused prices to skyrocket. And I said this earlier, but what’s disheartening is, it’s really regressive in nature. It’s not impacting the upper class. It’s really having a massive impact on the lower class. Somebody explained it to me a little bit by looking at Maslow’s Hierarchy of Needs. At the very bottom of the pyramid you have physiological needs and at the top of the pyramid you have self-actualization. And I think that when we think about the social aspect and having a reasonable price for, whether it's energy or food, you really need that in order to satisfy the bottom of the pyramid. And so that’s the basic need for food, shelter, water, etc. I think the environmental goals and decarbonization, that’s not on the bottom of the pyramid, that’s somewhere further up. So I do think that what we’ve seen throughout this crisis is that the S is more important than the E in the short term. We need to be able to provide households with affordable energy, affordable food, etc. And I do think that all the environmental goals of the world, that comes after the fact. So, it’s this real big tension between the E and the S, and I think the S’s will win over the long term, and I think that’s the right thing for society. The E, we will tackle, but it’s not going to be in the next few years. I think that’s going to be closer to the end of the decade.
DAVID: We have to rethink ESG. It’s that simple. And Tim provided exactly the right reasons why. The pendulum has swung far too far towards the E, the environmental side, at the expense of the S. And I couldn’t agree more, and when we think about the social side, it tends to be very micro themes that we’re looking to address. Whereas the environmental side is something that’s very macro, it’s climate change, it’s something that’s affecting every person on the planet. I think we need to rethink the S especially and bring to the fore what Tim just explained, which is how do we resolve this issue of energy security and food security in the longer term, and in the shorter term as, as well, of course.
THOMAS: I agree that the ESG frameworks are certainly coming under, under challenge. Not only in commodities and energy, but also in defense spending. There’s a debate out there now that defense as a public good, is now a much more saleable argument, given what’s been happening in the Russia/Ukraine situation. I agree, from my perspective I think there are changes afoot
DAVID: I think the tensions are starting to build, uh, for investors. If you look at what was the best performing sector last year, energy. Energy is off to one of the best starts again this year amongst the different sectors. This is going to put pressure on investors to reconsider whether this persistent underweight to energy can be maintained. I think it should be a compromise. Especially when you think about the capital intensity of the energy sector, of the mining sector. And if we are heading into this world that becomes more and more deglobalized, and we have to bring supply chains onshore across regions, as opposed to being able to depend on supply chains halfway across the world... That’s going to be very capital-intensive and also emissions-intensive, so we need to be able to compromise going forward on this, on this part of things.
TIM:And I think there’s some parts of the investment community that feel that being positive on the conventional energy sector and also the clean energy sector are mutually exclusive, and I don’t think they are. I think that you’re going to need all the clean energy that you can get, in order to satisfy the E. But I also think you’re going to need more and more conventional energy supply to satisfy the S. So I don’t think that owning both sectors are at odds with each other. I actually think that it’s much more consistent than only being on one side or the other, I think they really need to come together. So to David’s point about the investment community needing to rethink ESG, I think he’s spot on. And I think that you need both conventional energy and renewable energy to get through this crisis.
THOMAS: So it’s not an either/or; it’s an and.
THOMAS: All right, I’d like to wrap up this conversation, or begin to wrap up this conversation, with a few questions on both of your research process and philosophies. On this Russia invasion, which is likely to be so transformative on so many different levels, how has this event changed your long-term views on how you approach your research? Let’s start with you, David.
DAVID: A much wider range of outcomes. I think it’s very tempting to come up with target prices for commodities, for stocks. But we have to be open to the uncertainty and the very wide range of outcomes and also the irrational nature of…
DAVID: There you go, that’s the best way to put it. This has been two years, three years where we’ve had to deal with so many unexpected, unprecedented events. Is this going to be the norm going forward? And it’s really approaching our process with a lot of humility, and humility means a wide range of outcomes, wide range of scenarios, and being open to a lot higher volatility in commodity prices going forward.
THOMAS: Not only in commodity prices, but in life in general.
DAVID: Outcomes of any sorts.
THOMAS: Tim, how has this changed your views?
TIM:I think the main thing is that it’s made me put an even greater emphasis on having alignment between the companies I invest in, and regulators and politicians. And what I mean by that is that in the utilities sector, these companies are regulated monopolies. And so, to make sure that the utilities are carrying out a strategy consistent with what politicians want is incredibly important, and it’s also important to make sure that the utilities aren’t earning excess profits as a result of this crisis. So, if we were to rewind two years ago, if you had a utility that benefited from higher power prices, I would say oh, that’s great; they’ll be able to keep those extra profits. Now I’m thinking, I’m not so sure about that. Because if a utility, a regulated utility, is profiting because of this crisis, that’s really coming at the expense of citizens. And I think that those businesses will be more vulnerable to windfall taxes and just to adverse political intervention. So, making sure there’s that clear alignment between what the companies are trying to carry out from a strategic standpoint, with what the regulators and governments are asking, and doing so in a way that customer bills are, are going down and not up. I think that’s incredibly important. So that’s where I’m putting even greater emphasis. And it’s not so much because I think there will be opportunity for upside by following that, it’s really that there will be less opportunity for downside. That is, if you’re a utility and you’re earning crazy profits in this environment, good luck trying to keep those profits. There will be some policy that comes out against that. So that’s really where I’ve been thinking is really making sure there’s clear alignment between the companies and the regulators.
THOMAS: Great. Well, uh, obviously there’s a lot of disruption ahead, a lot of opportunities ahead, a lot of risks ahead. We’ll be looking to you guys all along the way as we get through this crisis and move more into the, the green energy transition. So thank you so much, both of you for your time, your expertise, your thoughts today. David Chang, Tim Casaletto, take care.
DAVID: Thanks, Thomas.
TIM:It’s been fun, thank you, Thomas.
Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk. Podcast produced April 2022.
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