Ignoring the laws of economics comes with a substantial price tag. Tariffs are ultimately paid by the consumer as so neatly illustrated by the latest stock market slump. So, now that the next clockwork-like policy reversal arrived, this time in the form of a ‘targeted approach’ when applying reciprocal tariffs from April 2, of course, equities rallied. The brighter investor’s mood was also aided by the rise of composite PMIs on both sides of the Atlantic. The suffering of the US manufacturing sector was more than compensated by the expansion in the service industry (albeit business confidence took a hit) whilst Europe experienced the opposite trend.

A big sigh of relief was clearly audible in New York, London, and Frankfurt but it would be dangerously irresponsible and premature to become complacent. The sabre-rattling from the White House continues as President Trump pledged to announce punitive measures on automobiles, aluminium, and pharmaceuticals. It’s a fair bet that under this scenario the current correction will prove brief and financial diarrhoea will return, the major symptom of which is the perceptible loss of risk appetite.

Last week’s Iran-related sanctions are being applied to Venezuela as the US administration now gave Chevron until May 27 to cease operation in the Latin American country and promised additional tariffs on Venezuela’s trading partners (meaning China and India) that buy its oil. No wonder Brent finished the day nearly $1/bbl higher also supported by the lack of tangible progress in the US-Russian peace talks whilst completely ignoring the OPEC+ pledge to go ahead with unwinding cuts starting May. The seemingly spontaneous and often chaotic announcements and policymaking continue further muddy the water in which investors are forced to fish. The bottom line is that markets have not and will not appreciate the introduction of excise duties in any shape or form, something that is dawning on US economic acolytes as demonstrated in the announced tweaking of tariffs, but it is by no means a guarantee that they would not go ahead with it. Seat belts must remain fastened, the rollercoaster ride is far from over.

In the Meantime, in the Transition…

The ferocity of the US Administration’s policy implementation has understandably been the focus of investors in the last two months. The potential impacts on geopolitics and geoeconomics will plausibly occupy traders’ minds in the foreseeable future. Issues and developments of the utmost significance before January are now being dwarfed by the prospects of trade wars, tax cuts, deregulations, and immigration. This shift in attention, however, does not mean that pre-Trump affairs are entirely forgotten. One of these topics, a rather salient one, is climate change and the transition from fossil fuel to renewable energy. An annual paper by the Asset & Wealth Management arm of investment bank, J.P. Morgan, titled Heliocentrism released for the 15th time at the beginning of the month makes an intriguing read on how the transition progresses in the light of latest developments. Below we attempt to sum up the most interesting findings, arbitrarily picking the topics of global solar capacity and the renewable energy policies of Trump 2.0.

Global solar capacity more than doubled in the past 3 years and the trend will continue for the next 3 years, using estimates from BNEF. It is the most dominant form of global capacity addition and was responsible for 60% of new capacity additions last year, which will grow to circa 75% by 2027, the author projects. Although these growth rates might seem impressive, solar power is still responsible for a mere 7% of electricity generation, a figure that should double by 2027. Solar’s share is 2% of the final energy consumption and is forecast to reach 4.5% in 3 years. The seemingly slow increase in the share of solar in the energy mix is down to the fact that economic prosperity will rely on energy-intensive products, such as steel, cement, plastics and chemicals, and as such demand for natural gas and other fossil fuels will remain healthy for years to come. A bright spot is electric vehicles (EVs). EV share of new passenger vehicle sales has risen from 1% in 2015 to 20% last year with China leading the way whilst EV share of passenger vehicles on the road has increased from close to 0% 10 years ago to over 4% last year. Looking at the broader picture and confirming the view that fossil fuel is here to stay, Europe grows its share of renewable energy at the fastest pace, which has been around 0.6% per year since 2010 followed by China at 0.4% and the US at 0.3%. At this rate, the Old Continent will rely on 30% of renewable energy in about 20 years.

As it has been becoming abundantly clear, the priorities of the second Trump administration lie with fossil fuel and not with renewable energy. As part of the energy policies of the US government energy subsidies will decline considerably, by around $650 billion, the paper reckons, roughly a two-thirds cut from the original energy bill. These reductions will chiefly impact EV credits, wind and solar investment tax credits, manufacturing tax credits, mainly EV battery projects, and specific renewable spending categories. New energy policies could adversely impact offshore wind should the DoE decide not to approve new leases and permits in the Atlantic seaboard and on federal lands. The relaxation of greenhouse gas targets and fuel economy standards would also be viewed as a setback for the prevalent use of renewable energy and so would be the withdrawal of ‘endangerment finding’, a determination by the Environmental Protection Agency (EPA) that a specific air pollutant, like greenhouse gases, poses a threat to public health or welfare, serving as the basis for regulating those pollutants under the Clean Air Act. As for fossil fuels, significantly increasing US crude oil production and mitigating energy price inflation will be an uphill battle.

The paper confirms the increasingly ubiquitous view that whilst the transition from fossil fuels to renewable energy is irrevocably underway, its speed is much slower than anticipated a few years ago and fossil fuels, including oil and natural gas, will remain an integral and consequential part of the energy mix in the short to medium-term.
 

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