Column: Electric dreams turn into a nightmare for battery metals
A sector that was once racing to build new supply has been closing mines and deferring projects as low prices bite into the cost curve.
Trump is back, and the threat of tariffs looms large over China’s economy.
On Wednesday, base and precious metal prices took a dive.
Resource markets are deeply concerned about Trump’s proposed tariffs and how they will impact China’s manufacturing-led economy.
But there is a dichotomy to all of this; Trump has also promised to keep inflation low.
Tariffs will increase the cost of imports for the American consumer, which is inflationary.
So, which direction will Trump move? Continue accepting cheap goods from China or implement stiff tariffs, driving up the cost of imported goods?
And ultimately, risking the re-emergence of inflation in the US economy?
Some might suggest that Trump will lean toward whichever policy juices markets the most.
Chest-beating on China certainly grabs voters’ attention, but I doubt this real estate tycoon wants to see a return of high inflation in the US economy.
Yet, there is one avenue available to Trump… Where he can have his cake and eat it too: Lowering the cost of energy.
This could offset inflationary pressures born from tariffs.
So, how can Trump achieve that? Well, the US holds major reserves of oil and gas. Flooding the global economy with cheap energy offers an inflation-busting strategy.
In fact, this has been another one of Trump’s primary election promises, where his campaign borrowed the line from former Alaskan governor Sarah Palin… Drill, Baby Drill!”
The slogan that promises a push for new oil and gas development across the US. But there’s a problem with that strategy, too…
Whether it’s a new mine or an O&G field, finding, developing, and activating a new operation takes years. Often more than a decade.
Whether it’s a mineral deposit or an oil and gas field, new sources are becoming harder to find. They’re also getting deeper, more difficult, and more expensive to develop!
And pushing these timelines back further is the dilemma of years of underinvestment in exploration.
Over the last eight years, average cumulative spending on oil and gas exploration has fallen from $10 billion to $7 billion:
Despite some attempts to increase supply over the last few years, discovery rates continue to decline in the O&G sector.
According to Rystad’s latest report, discovery volumes fell to their lowest level in 2023. That was according to Aatisha Mahajan, vice president at Rystad:
‘Upstream companies [oil producers] are facing a period of uncertainty.
They are eager to capitalize on the increased demand for fossil fuels and find additional resources, but recent results have been lacklustre.
If exploration efforts continue to yield unimpressive results for the remainder of the year, 2023 could be a record-breaker for the wrong reasons.’
But suppose technology and artificial intelligence rapidly uncover new oil fields over the next few years and deliver Trump’s promise of cheap energy.
Well, even in that unlikely scenario, supply shortages loom.
According to Western Australia’s Department of Energy and Mines, developing new oil fields typically takes at least ten years.
That includes factoring in permitting, applying for a production license, negotiating with native title parties, negotiating compensation agreements with landholders, feasibility, and financing.
Given the regulatory hurdles against new oil and gas developments, a ten-year development horizon is likely the best-case scenario.
But only once that new deposit has been found!
In short, new supply won’t come cheaply or quickly and is unlikely to arrive during Trump’s time in office.
To make matters worse, Goldman Sachs believes oil demand will rise considerably over the next ten years, placing further pressure on established oil fields.
According to the investment bank, emerging growth in Asia will increase global oil demand by around 110 million barrels per day by 2034.
In the meantime, capex spending by the world’s six major oil producers, including ExxonMobil and Chevron, has fallen by around $3.8 billion this year alone.
No doubt, poor appetite toward new developments is being driven by a push to go green. This global mandate has seen capital flood out of O&G exploration and development.
A Trump re-election will certainly make it easier for new developers to access the necessary approvals.
But really, that’s all Trump can do. And that alone won’t drive more supply into the global market.
The promise of cheap energy could come eventually (think a decade or more), but as I said, new supply can’t be turned on like a switch!
Oil stocks may seem like an unlikely bet, especially given Trump’s promise to deliver cheap energy to the American people by flooding the market with new supply.
But as I detailed above, this won’t come easily or quickly, meaning prices could move higher in the years ahead, not lower.
James Cooper is a geologist based in Australia who runs the commodities investment service Diggers and Drillers. You can also follow him on X @JCooperGeo.
