The ‘sustainable’ investing fad is based on a Wall Street-created myth

Businesses handling climate change and rising waters representing ESG investing and sustainability
There is no empirical evidence that investing in ESG funds helps mitigate climate change.

  • The latest investing fad is environmental, social, and governance funds that invest in “responsible” companies.
  • But there is no evidence that ESG funds help mitigate climate change.
  • Investors and the SEC should be wary of thinking these funds help the environment.
  • Bernard S. Sharfman is a research fellow with the Law & Economics Center at George Mason University’s Antonin Scalia Law School.
  • This is an opinion column. The thoughts expressed are those of the author.

Investing fads are nothing new. For example, in the 1990s the stock market was caught up in the dot-com bubble – a massive speculation spree where investors flocked to any and all stocks related to the internet. Eventually the fad faded, the bubble burst, and investors lost approximately $5 trillion.

The latest fad in investing is environmental, social, and governance (ESG) funds. The purpose of these funds is to invest in “responsible” companies as a way to push for social change – particularly for the purpose of mitigating climate change – while at the same time earning market returns. But the problem with this fad when it comes to climate change is that there is no empirical evidence backing up the idea at their core. In fact it seems fairly clear that an investment strategy of overweighting portfolios with securities of companies that produce a relatively low level of carbon emissions has no impact on mitigating climate change. The world just keeps spewing out emissions in spite of the rapid growth and level of investment in ESG funds.

ESG investing doesn’t mitigate climate change

People that understand the data on ESG acknowledge the lack of a connection between the popularity of the products and attaining their supposed goals when it comes to climate change. In a recent LinkedIn post by noted finance professor Alex Edmans of the London Business School, he agreed with my comment “that ESG investing doesn’t mitigate climate change.”

In another comment, Ashley Hamilton Claxton, the head of Responsible Investment at Royal London Asset Management, wrote, “ESG data is not data, it’s opinion. We can’t and shouldn’t claim direct impact in secondary markets. Investors are one cog in the wheel that turns the global economy. You can’t change the world or fix climate change by buying and selling shares and bonds.”

This understanding is also shared by Bill Gates, Boston College professor Alicia Munnell, and former BlackRock chief investment officer for sustainability Tariq Fancy, among others.

The idea behind ESG’s impact on climate change is that by moving money away from companies that spew fossil fuels, the funds can effectively make it cheaper for “clean” companies to raise money either through debt or equity offerings and more expensive for “dirty” companies. This sounds good in theory, but does not hold up in reality because the major effects of ESG funds are on the secondary market, where securities are traded but no new money is being raised. As explained by Fancy, investing in ESG funds does not provide new funding for those companies that would help mitigate climate change. “Instead, the money goes to the seller of the shares in the public market.” Basically, ESG products are buying stock in companies from other asset managers, not the underlying businesses, so they aren’t directly funding these firms at all.

Moreover, there are still plenty of investors out there who are willing to invest in the securities of high carbon emissions companies, allowing those companies to raise new funds at less-than-onerous rates. For example, if ExxonMobil, a company under attack for its policy of refusing to move into low carbon energy production and lobbying against legislation to mitigate climate change, were to make a $2 billion debt offering with a maturity of 30 years, it would probably only have to pay an interest rate of around 3% per year.

So, what’s with the ESG fad?

If ESG funds do not mitigate climate change, what is the motivation for marketing these funds to investors? The simple answer is that the investment industry, which includes large investment advisers, rating agencies, index providers, and consultants, makes a lot more money when investors purchase shares in ESG funds versus plain vanilla index funds where the management fees sometimes approach zero.

Of course, investors have a right to invest in anything they want, including the latest investment fad. However, in doing so, it is important for them to understand that investing in ESG funds will not result in the mitigation of climate change. What they are getting for their money are investment funds with higher management fees and potentially higher levels of unsystematic risk – due to a lack of diversification – relative to comparable non-ESG funds.

Finally, the SEC is moving forward on a proposed rule that will require a broad range of mandatory climate change disclosures, facilitating the providing of ESG ratings and the creation of ESG funds. For this to take place, the SEC must not only determine that it has legal authority to do so under the applicable legal statutes, which I discuss in my recent comment letter to the SEC, but also whether it wants to use its discretionary rule-making power in this regard.

In coming to a decision on the use of its discretion, I suspect that at least some of the SEC commissioners will be influenced by the presumption that by requiring mandatory climate change disclosures they are going to somehow help mitigate climate change. The incorporation of this presumption may encourage those commissioners to test the limits of their legal authority.

However, before doing so, I urge each commissioner to take a critical look at the empirical evidence – not just the marketing hype that is coming out of the investment industry. If they can find good empirical evidence demonstrating that investment in ESG funds provides a significant benefit in mitigating climate change, then it may be appropriate, depending on what the law allows, for the SEC to take a broad based approach to its new disclosure rules.

However, I doubt such empirical evidence actually exists, requiring the SEC to take a more restrictive approach in promulgating a new rule on climate change disclosures. In sum, before investors dive into ESG investing and regulators approve new rules that support such investing, I hope all parties take into consideration that such investing will not mitigate climate change.

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What it’s like to be a wind-turbine technician, where workers start for the good wages and stay for the adrenaline and panoramic views

A rope access technicians stands on top of a wind turbine
  • Energy companies like GE and Vestas rely on legions of technicians to keep wind turbines working.
  • An outage of just one tower can jeopardize a company’s service contract at a 54-tower field.
  • Andrew Slate, who has worked in the industry for five years, described a typical day on the job.

There are more than 65,000 land-based wind turbines in the US. To keep all of those pieces of equipment in service, large firms like GE and Vestas – and a host of smaller ones – employ legions of wind-turbine technicians, or wind techs.

There were nearly 7,000 wind techs in the US in 2020, and the occupation is one of the fastest-growing jobs tracked by the US Bureau of Labor Statistics, with an expected 68% increase in new jobs by 2030. The base median wage is $27 per hour, or $54,000 per year, but overtime hours and other payments can significantly increase those earnings.

Andrew Slate is a newly hired wind tech for Vestas who has worked in the wind industry in various other roles for the past five years. He’s now part of a team that services wind fields in Texas, New Mexico, and Oklahoma, with some sites having upwards of 200 to 400 towers.

In an interview with Insider, Slate described the typical day in the life of a wind tech, based on his own experience. The following questions and answers have been edited for clarity.

Insider: What is your role now?

Slate: I report to the regional manager, and me and my cousin are on a crew together. We just jump from site to site in our region and help, whether they need us a week here in Texas or two days in Oklahoma.

Sometimes a tower takes 20 to 30 minutes, but it depends on the nature of the repair. If we do a gear-box swap up-tower, it could take us three days to a week depending on the crane company, the wind, and the weather. There’s so many factors that factor into completion of work.

What does an average day look like?

I wake up at 5:00 am to be at the site by 7:00 am.

You have your safety meeting first thing every morning to be aware of any new or potential threats coming such as dangerous weather, lightning, hornets in a tower.

After you find out what jobs you’re going to be doing for the day, you go out to the shop, load up your truck and hit the road. We always have two people at a tower no matter what, just in case somebody needs a rescue.

On a great day you usually get done about 3 or 4 pm. On a really bad day you may be there ’till 11 o’clock at night – you may have to work 18 hours straight.

Why would you need to work so late?

The customers sometimes want a base efficiency rate for what the towers are producing. If a site has 54 towers, and they’re rated at two megawatts a piece, you typically want 95% to 97% of those 54 towers at peak two megawatt production.

If the company doesn’t meet its goals, it can lose the contract for that site and another another large company will take over maintenance for the field.

A rope access technician carries out maintenance service on a wind turbine blade

What are the physical challenges?

Before you can work they have you free climb with about 40 to 50 pounds of gear, including the harness, the fall protection system, and some other things you may have to carry up with you.

Free climbing can take anywhere from 20 minutes to an hour, but with a climb-assist system it takes me on average six minutes.

The towers are usually around 300 feet tall, and in the summer it can be pretty hot -upwards of about 120 to 130 degrees inside.

Can you see yourself doing a different job?

I know guys that started 15 years ago and would never ever dream of quitting until they retire. You build that awesome rapport with everyone around you and in essence it’s all about being your brother’s keeper and providing for your family.

Being on the road for so long does take a toll on your mental health, but you get addicted and crave the views and the adrenaline whenever you get up-tower. And the pay is great.

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Vladimir Putin sees value in cryptocurrencies – but says it’s too early to tell if they can settle oil trades

Russian President Vladimir Putin holds his earpiece while listening to a translation of a question from an American reporter at a news conference.
“We have no other choice but to move to transactions in other currencies,” Putin said.

Russian President Vladimir Putin said cryptocurrencies may hold some value, but it’s too early to tell if they can be used in the oil trade.

“I believe that it has value,” he told CNBC at the Russian Energy Week event in Moscow on Wednesday, when asked whether bitcoin or cryptocurrencies can be used in place of the US dollar. “But I don’t believe it can be used in the oil trade.”

Russia has been considering replacing the dollar in crude-oil payments in response to challenges from Joe Biden’s administration and economic sanctions imposed by the US. But it may be premature to consider cryptocurrencies as a replacement, according to Putin.

“Cryptocurrency is not supported by anything as of yet,” he said. “It may exist as a means of payment, but I think it’s too early to say about the oil trade in cryptocurrency.”

Putin separately predicted Wednesday that oil could hit $100 a barrel, from the current range of around $80, as global demand skyrockets in a tightening market.

He also indicated that the negative environmental impact from bitcoin mining, which is said to take up roughly 0.5% of energy consumption worldwide, is another obstacle the digital asset faces for widespread use.

But he maintained that Russia is still keen to ditch dollar-denominated payments.

“I believe the US makes a huge mistake in using the dollar as a sanction instrument,” he said. “We are forced. We have no other choice but to move to transactions in other currencies.”

“In this regard, we can say the United States bites the hand that feeds it,” the world leader added. “This dollar is a competitive advantage. It is a universal reserve currency, and the United States today uses it to pursue political goals, and they harm their strategic and economic interests as a result.”

Russia said in June that it would abandon US dollar assets from its $186 billion sovereign wealth fund as it was at risk of more sanctions.

Read More: The chief operating officer of Helium told us the 3 key factors that affect how much the crypto’s miners can earn – and how the network has grown to include over 230,000 hotspots, with another 1,000 hotspots joining every day

Read the original article on Business Insider

Volatile energy markets are here to stay if investment in sustainable power fails to keep up with energy demand, IEA warns

Solar installer working
Solar panels.

  • Recent volatility in energy prices could become the norm if investments in renewable sources aren’t enough to meet demand, the IEA warned.
  • “We are not investing enough to meet future energy needs, and the uncertainties are setting the stage for a volatile period ahead,” the agency said.
  • More investments in renewable energy are necessary to reduce carbon emissions and to prevent an economic shock from a surge in oil prices, the IEA said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

A surge in energy prices in Europe and Asia due to an ongoing supply crunch could become the norm if investments in renewable sources aren’t accelerated, the International Energy Agency warned in its annual outlook report.

The watchdog group said that while demand for energy continues to surge as global population growth continues and millions of people are lifted out of poverty every year, it will be essential for supply to play catch-up to avoid an ongoing surge in oil, coal, and natural gas prices.

“We are not investing enough to meet future energy needs, and the uncertainties are setting the stage for a volatile period ahead,” the IEA said.

A lack of investment in renewable energy sources like solar and wind could be a lose-lose situation for the global population, as it would lead to a continued rise in carbon emissions and could also contribute to an economic shock if energy prices stay elevated.

To achieve the goal of transitioning to net-zero emissions by 2050, the energy grid needs to play a delicate balancing act in matching supply with demand when transitioning away from fossil fuels and toward less carbon-heavy alternatives.

“If the supply side moves away from oil or gas before the world’s consumers do, then the world could face periods of market tightness and volatility. Alternatively, if companies misread the speed of change and over-invest, then these assets risk under-performing or becoming stranded,” the IEA report said.

The world is grappling with that imbalance after coming out of the pandemic, as demand was underestimated and energy suppliers are struggling to catch up. Oil prices are up 60% year-to-date, and US natural gas prices have more than doubled.

To meet the expected surge in energy demand and at the same time reach a net-zero emission goal by 2050, the IEA forecasts that $4 trillion in annual spending on renewable energy will be needed by 2030. Much of that funding must come from the private sector, but leadership is required.

“Clear signals and direction from policy makers are essential. If the road ahead is paved only with good intentions, then it will be a bumpy ride indeed,” the IEA report said.

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China’s biggest coal-producing region was hit by floods at the worst possible time, as the country’s energy supplies are already strained

China Shanxi province floods
Villagers clear floodwaters near residential houses following heavy rainfall in the Shanxi province of China.

  • Massive floods have hit Shanxi, China’s major coal-producing province, forcing some mines to shut.
  • The closures come amid an energy crisis in China that could add further strain to the global supply chain.
  • China coal futures have hit a record high on the supply crunch.

Massive floods have hit China’s Shanxi province in the last week, forcing coal mines in the major production hub to temporarily shut down.

The floods in Shanxi, a province in northern China that’s home to around 35 million people, are due to unusually heavy rainfall this year. Some 17,000 homes have been destroyed and 120,000 thousand people have been resettled in the latest flood, according to state media outlet Xinhua News Agency. At least 15 people have died.

In addition to the human toll, the floods have also shuttered 60 coal mines – about 9% of the province’s total, although some are gradually coming back online, according to local media.

The closures could add further stress to the global supply chain just ahead of Christmas. As it stands, China is already in an energy crisis that has forced key suppliers for major companies like Apple and Tesla to suspend production.

Rescue workers working at a flood in China, Shanxi province.
Rescue workers drain off flood waters after heavy rainfall at a flooded area in in China’s northern Shanxi province.

The floods couldn’t come at a worse time for China, as the country is already facing a power crunch.

The electricity shortage the country has been facing since the middle of the year has been causing factory shutdowns and residential blackouts since late September – and authorities were banking on Shanxi to raise coal output this year, according to Reuters.

The province accounts for more than a quarter of China’s coal production.

The supply crunch could also impact China’s growth, with research house Fitch Solutions saying in an end-September report that it will likely revise the country’s GDP growth forecast this year to account for the power shortage. Its current forecast for China’s GDP growth this year is 8.3%.

Meanwhile, coal prices are surging in China.

China’s thermal coal futures on the Zhengzhou Commodity Exchange have extended gains to a fresh record high on Tuesday after closing 12% higher on Monday.

Read the original article on Business Insider

This could be the most expensive winter yet for homeowners

Snow on a roof with a chimney.
  • The price of natural gas has surged more than 180% over the past 12 months.
  • Homeowners can expect a 30% increase in the cost of natural gas this winter, experts say.
  • Harsh winter weather also increases demand that suppliers may not be able to keep up with.

Home heating prices are expected to rise this year as parts of the world face an increasing energy crisis.

Americans have been paying more to fill their cars with gas since 2014, and the same problem is expected to hit homeowners this winter as the cost of natural gas continues to increase.

Homeowners can expect a 30% increase in the cost of their natural gas bill this winter, the National Energy Assistance Directors Association told Insider. The average residential gas bill is expected to increase from $572 to $859, while heating oil could climb from $1,272 to $1,900. About 61 million households use natural gas to heat their homes, according to a recent report from the US Energy Information Administration.

“If we have a colder winter, prices could go much higher because of increased demand,” Mark Wolfe, NEADA’s executive director, told Insider. “The impact on low-income households will be significant.”

The price of natural gas, which heats about 48% of American homes, has surged more than 180% over the past 12 months, CNN reported. Wolfe says any increase in the cost of natural oil prices will have a “significant impact” on a ​​struggling household’s ability to pay their energy bills.

Last year, 29% of families surveyed by the US Census Bureau said they had to reduce spending on other essential items like groceries, medication, and other utilities.

Weather can also have a large impact on the cost of oil. Winter storms can increase home heating oil prices, as people typically use more at the same time that winter storms interrupt delivery systems, according to the EIA. Harsh winter weather also increases demand that suppliers may not be able to keep up with, ultimately causing the price of home heating oil to rise.

In February, Texas was hit with a devastating winter storm that left millions without power, water, and heat. Some Texas residents were hit with bills up to $5,000 after the mass outage because their bill was tied to the wholesale market. The price increase came as natural-gas plants, Texas’ main sources of electricity, went offline in the freezing temperatures. At the same time, the cold weather also meant that overall energy consumption in the state went up as residents of the state turned up their heaters to stay warm.

This winter, the Natural Gas Supply Association expects prices of home heating to increase citing a multitude of factors like demand, production, and storage in the oil and gas industry’s supply chain, according to a recent press release.

The US Department of Energy recommends setting the thermostat for the lowest temperature that still allows you to remain comfortable, this is typically around 68 degrees during the day and 58 degrees at night to save about 10-15% off of your bill.

Cleaning and replacing your furnace’s filters will also help lower the cost of your monthly bill because it helps it run more efficiently, the Department of Energy says. During winter, keeping the shades open on south-facing windows during the day to allow the sunlight in and closed at night to keep in the heat. Blocking any potential drafts from doors and windows will also help keep costs down by reducing the strain on your furnace.

Read the original article on Business Insider

Biden’s proposed tax credits for solar power may only benefit high-income households in practice – here’s why

Solar installer working
President Biden’s proposal aims to have almost half of the nation’s electricity derived from solar energy by 2050.

  • President Biden’s plan increase to solar power usage in the US includes $350 billion in tax incentives.
  • Law professor Feliz Mormann says only people with high tax bills will really benefit from the breaks.
  • Higher income households will also contribute more for the solar push through federal income taxes.
  • See more stories on Insider’s business page.

Electricity generation produces a quarter of US greenhouse gas emissions that drive climate change. The electric grid also is highly vulnerable to climate change effects, such as more frequent and severe droughts, hurricanes. and other extreme weather events.

For both of these reasons, the power sector is central to the Biden administration’s climate policy.

President Joe Biden’s proposal to produce 45% of the nation’s electricity from solar energy by 2050 seeks to transform the power sector from problem child into child prodigy. As the details evolve, two cornerstones have emerged.

First, Biden has repeatedly called for extending tax credits for solar power and other renewables, at a projected cost of $200 billion over the next decade. Second, his administration has proposed a Clean Electricity Performance Program to subsidize electric utilities that increase the share of solar in their sales. This initiative is budgeted at $150 billion.

Reduced emissions and cleaner air help everyone, but who ultimately pays for public spending on this scale, and who will reap the economic benefits?

I have studied renewable energy for years, including the allocation of clean energy policies’ costs and benefits. My research focuses on direct economic benefits, such as government subsidies and tax breaks.

By proposing $350 billion in policy incentives, Biden is pushing solar further into the mainstream than ever before. Most of the costs and benefits of this massive solar play are distributed fairly, but I see room for improvement.

A break for lower-income households

Many clean energy policies, including renewable portfolio standards and net metering programs – strategies that dozens of states have adopted – pass their costs onto electricity customers. Renewable portfolio standards require utilities to source a certain share of their power sales from renewable sources. Net metering requires them to credit customers for generating electricity at home, typically from solar power, and feeding it back into the grid. In both cases, power companies bill their customers for associated costs.

It may seem sensible to ask electricity customers to pay for new resources, but rising electricity rates impose heavier burdens on lower-income households. Already, one-third of US households struggle with energy poverty, spending disproportionately large shares of their income on basic energy needs. The Biden administration avoids such inequities by using tax dollars to fund its solar push.

Many low-income households contribute to federal tax revenue via payroll taxes, but most do not pay federal income tax. This largely leaves higher-income households to fill the federal tax coffers that finance solar incentives, which reduces the risk of widening the income and wealth gap.

A tenfold increase in solar power’s contribution to the US electricity supply would require significant upgrades to the grid. But not all of these upgrades would be covered by incentives funded with tax dollars, so some would fall to ratepayers. To minimize burdens on lower-income households, the Clean Electricity Performance Program earmarks some of its incentives for electric utilities to help struggling electricity customers pay their power bills.

Direct economic benefits are less widely shared

While Biden’s proposed solar policies spread costs broadly across US taxpayers, they allocate direct economic benefits more narrowly. The Clean Electricity Performance Program specifically targets electric utilities that sell power to homes, businesses, and other end users.

Under the economic plan that Congress is now considering, utilities that grow the share of clean energy in their retail sales by a specified amount compared to the previous year would receive payments based on the amount of clean electricity they add. Utilities that fail to meet the growth target would pay penalties based on how far they fall short.

Electric utilities own many of the country’s existing, mostly fossil-fueled power plants. Most have been reluctant to promote solar, which would reduce demand for electricity from their own power plants.

But the Clean Electricity Performance Program does not cover another category of power company, called non-utility generators. Instead of selling power to end-use customers, these companies sell electricity to utilities, marketers, or brokers. Non-utility generators provide over 40% of US power and have driven much of the recent deployment in solar and other renewables.

Non-utility generators may benefit indirectly if utilities buy solar power from them to comply with the Clean Electricity Performance Program. But by focusing on utilities, the program threatens to alienate non-utility generators and stifle competition.

In contrast, tax credits for solar appear to offer economic benefits for a wide swath of taxpayers. In theory, anyone installing a new solar array on their rooftop or elsewhere earns tax credits for a portion of their investment. But I have found that, in practice, only those with higher tax bills can readily profit from these tax breaks.

Tax credits don’t normally have cash value – they merely reduce the amount you owe to Uncle Sam on April 15. A typical homeowner’s tax bill in the hundreds to low thousands of dollars is easily reduced to zero using part of the solar tax credit. But the remaining credit value will go unused, at least until subsequent tax years.

Since the tax code prohibits “selling” one’s tax credits, third-party financiers offer ways to structure solar projects so that the financier’s higher tax bill is used to monetize tax credits, passing part of the value onto homeowners. But such help comes at a price, diverting a significant portion of these tax incentives away from their intended use and beneficiaries.

How to retarget solar policies

A large-scale expansion of solar power would be an important step toward a low-carbon economy, with huge environmental benefits. A few tweaks could help make the Biden administration’s proposal more efficient and spread its benefits more widely.

As former President Barack Obama suggested in his 2016 budget proposal, solar tax credits should have a refundable cash value, like the child tax credit, that converts to cash if the recipients don’t owe enough taxes to use the credit. Lower-income households who install solar or buy into community solar projects could use this cash value to take immediate advantage of the credits, regardless of their tax bills.

Expanding the Clean Electricity Performance Program to bring non-utility generators into the fold would foster competition among power producers to help further reduce the cost of solar. Finally, since environmental justice is a central theme of Biden’s climate policy, it would make sense to add place-based incentives to the solar tax credit provisions that direct clean energy investment toward historically disadvantaged communities to make up for previous environmental injustices.

Felix Mormann, professor of law, Texas A&M University

The Conversation
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3 reasons why gas prices are so high right now

A man pumps gas at a gas station and is wearing a protective face mask
Drivers are feeling the pain at the pump.

  • Gas prices in the US have hit a seven-year high.
  • Demand has increased as the economy reopened and Americans have begun driving more.
  • Meanwhile, supply has been constrained because of hurricanes and OPEC decisions.
  • See more stories on Insider’s business page.

Americans are once again feeling pain at the gas pump, and it’s because of a classic clash between rising demand and constrained supply.

A report from AAA found that gas prices across the US hit an average of $3.22 on Wednesday, higher than they’ve been at any point since 2014. That’s consistent with data from the US Energy Information Administration, which found gas prices rising throughout 2021, hitting levels not seen since the middle of the last decade:

The reasons for the price spike are textbook supply and demand from an economics textbook: Americans have gotten back to driving more this summer as the pandemic has moderated, and a combination of domestic supply interruptions and trouble in energy markets overseas have made crude oil more expensive.

Demand is up as Americans take to the road again

As with so many other aspects of everyday life, the COVID-19 pandemic radically changed how Americans travel. Lockdowns and the uncontrolled early spread of the virus led to canceled travel and a sharp reduction in commutes.

By summer 2021, however, Americans were back on the road. The number of vehicle miles traveled measured by the Federal Highway Administration plummeted in spring 2020, but in July 2021, the most recent month for which data is available, highway traffic was back up to what would normally be seen in midsummer:

That increase in the amount of driving Americans are doing also means an increase in demand for fuel for cars.

Hurricane Ida slowed down US oil production and refining

In addition to that ramp-up in demand, there have been some big supply constraints as well.

The Energy Information Administration noted in mid-September that Hurricane Ida shut down a large swath of the US’s oil drilling and refining capacity in the Gulf of Mexico in late August.

While rigs and refineries have quickly come back online since, crude oil inventories remain low, suggesting an ongoing lack of supply. EIA wrote that as of late September, oil stored at Cushing, Oklahoma, one of the main crude depots in the US, was down 40% from the start of the year.

Other EIA data shows that crude oil inventories across the country remain subdued:

A crunch in domestic oil supply and stockpiles coupled with a rise in demand leads to higher gas prices.

Energy markets around the world are in a crunch

In addition to domestic oil supply slowing down, oil and energy markets overseas also aren’t helping matters on the supply front.

On Monday, OPEC and other major oil-exporting countries agreed to only a modest increase in production, despite oil consumers like the US and India pushing for higher exports, according to CNBC. That lack of relief on oil supply sent crude prices higher.

It also shows how the cartel of oil exporters still holds a huge amount of power in global oil markets, even as the US has vastly increased production over the last decade and countries around the world begin the process of moving toward greener energy sources.

Broader energy markets have been facing supply shortages as well. European natural gas and electricity prices have skyrocketed in recent weeks, and traders expect higher oil and other energy prices for months to come.

Put together surging demand from the US reopening with supply crunches both domestic and global, and it should be no surprise that gas prices are spiking.

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3 reasons why energy is the best sector of the stock market to invest in right now, according to JPMorgan

Oil rig sunset background
Oil rigs.

  • The sharp outperformance in energy stocks this year is likely to continue, JPMorgan said in a note on Thursday.
  • The bank named the energy sector as one of its favorites and said it offers an attractive risk vs. reward profile.
  • These are the 3 reasons why JPMorgan is advising its clients to invest in energy stocks.
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It’s not too late for investors that missed out on this year’s best-performing sector to gain some exposure, JPMorgan said of energy stocks in a note on Thursday.

The energy sector is up about 50% year-to-date, nearly triple the S&P 500’s 17% gain over the same time period. But there’s still room for energy stocks to play catch-up to the broader market when looking at a longer time horizon, the bank noted. Since 2014, the energy sector is lagging the broader market by a whopping 183%.

JPMorgan sees gains continuing for energy stocks as a supply crunch pushes oil, natural gas, and even coal prices through the roof. Those prices could continue to creep even higher, as JPMorgan sees oil potentially surging to $130 per barrel.

The energy sector offers an attractive risk vs. reward profile to investors thanks to three key reasons: low valuations, improving fundamentals, and increasing capital returns, JPMorgan said.

In fact, valuations of energy stocks are so low that the sector represents only about 3% of the S&P 500 today, down from about 20% at one point, the analysts noted. That leaves significant runway for the sector to increase its value as favorable economics wash over energy companies amid a surge in oil prices.

“As is usually the case with commodities, we expect the energy recovery to be swift and more extreme than post-bust rebounds seen in other asset classes such as commercial real estate during the 1990s, dot.com during the 2000s, and financials/housing during the 2010s,” JPMorgan said.

The bank said investors looking for the most upside potential in the sector should buy small-cap energy stocks. That’s because they have higher sensitivity to rising oil prices, are undergoing a balance sheet recovery, and are potential merger targets as larger peers look to build up their reserves.

And many of the risks that have scared investors out of energy stocks over the past few years, like regulations, the rise of ESG investing, and a surge in electric vehicles, are actually catalysts for buybacks and dividends.

Those factors are “helping bring much needed discipline to the sector with a focus on reducing debt and returning excess shareholder capital rather than higher market-share and production,” JPMorgan said.

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Americans are paying more for gas than they have in 7 years, with some Californians paying more than $5 a gallon

A sign advertising gas prices approaching $5.
Gas prices approaching $5 a gallon are displayed in front of a Shell gas station on October 05, 2021 in San Rafael, California.

  • Consumers are paying more for gas in the US than they have since 2014, according to AAA.
  • The national average for a gallon of regular gas stood at $3.22 on Wednesday.
  • Gas prices have been rising in recent months amid an oil supply shortage.
  • See more stories on Insider’s business page.

In the face of an ongoing oil rebound, American consumers are spending more on a gallon of gas today than they have in seven years, according to the American Automobile Association.

On Wednesday, the national average for a gallon of regular gas stood at $3.22 – the most expensive it has been since October 2014, CNBC first reported. And in many places across the country, motorists are paying even more to fill up.

In California, the average price of a gallon sits more than one dollar higher than the national average at $4.42. And in certain parts of the state, prices have reached $5.

Meanwhile, Mississippi boasts the lowest price per gallon at $2.85.

Prices in recent months have been steadily rising amid increasing demand for petroleum products following the steep fall in 2020 spurred by the coronavirus pandemic. As people have returned to the roads, demand has soared while supply has remained low.

Hurricane Ida, which struck the Gulf Coast in late August, worsened the supply problem by knocking production offline.

Then, last week, despite pressure from massive consumers like the US and India to increase crude supplies amid the shortage, OPEC+ instead chose to keep output at 400,000 barrels per day based upon an existing agreement.

Oil prices have climbed more than 50% this year alone, CNBC reported.

Last year at this time, the national average cost for a gallon of gas was $2.18, more than one dollar less than today’s average price, according to AAA.

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