Government Responses to Oil Subsidies: You Cannot Subsidize Away the Pain of a Physical Shortage – Renewable, Batteries and EVs for the Win?

The Russian invasion of Ukraine in 2022 and the potential closing of the Strait of Hormuz have triggered significant responses from governments worldwide, especially in the realm of oil subsidies and energy policy. When the conflict in Ukraine erupted, many Western governments responded by imposing sanctions on Russian oil exports, causing disruptions in global energy markets. To address the surge in fuel prices and shield their economies, several countries increased oil and gas subsidies, provided tax relief for consumers, and released strategic oil reserves. These actions primarily aimed to stabilize domestic energy prices and maintain access to fuel, while simultaneously seeking to reduce dependence on Russian energy sources.

However, during crisis surrounding the Strait of Hormuz (a vital passage for global oil shipments) governments have placed greater emphasis on incentivizing domestic energy production than during the Ukraine conflict. When faced with the possibility of the Strait's closure, some nations introduced measures such as tax credits and fuel subsidies specifically targeted at shielding consumers from the price shock. In addition, some nations cut regulatory barriers to encourage private investment in new exploration and production projects. However, most governments have increased support for the development of alternative domestic energy sources, such as renewables and biofuels, to mitigate vulnerabilities from disrupted imports.

This focus on strengthening domestic energy infrastructure is contrasted with the Ukraine response, where the immediate measures centered more on consumer relief and strategic reserves. The Hormuz crisis highlights a strategic shift: governments prioritizing energy self-sufficiency and seeking to minimize exposure to foreign supply shocks by expanding local production capabilities. In both cases, while subsidies and incentives provide short-term relief, the clear winner in the short, medium and long-term is renewable energy, batteries and EV since the best energy is domestic.

A major reason for this shift in policy is that options that could limit oil consumption are substantially improved compared with five years ago. One example is EV; EVs have gone from around 8% of global new vehicle sales in 2021 (the year before the Russian invasion of Ukraine) to around 25% last year. The world, in theory, has the capacity to produce enough EVs to cover around 1/3 of the world’s car and light truck demand. That capacity has increased by 300% compared to 2021. That also does not include the ability to repower internal combustion engine cars to electric vehicles. While certainly not a panacea, it does give countries options that could substantially cut oil imports in many countries.

Another source of pain is natural gas for energy generation. While the US is insulated by our large domestic energy production and Europe has cut back demand substantially, the rest of the world now knows how Europe felt five years ago. Europe was very reliant on imported natural gas from Russia which, when cut off, created huge economic and social pain throughout Europe.

The big difference today is that technology (such as solar panels) is globally plentiful, and battery costs have dropped so much that grid battery energy storage is now becoming a major grid solution around the world. The major change in the power grid is a game changer.  Below are charts showing how grid solar energy production has tripled in five years and annual battery installations have increased by a factor of 10x. Again, while not a panacea, the technology is at a scale to have a major impact on demand for natural gas for energy generation in a relatively short time frame.

This shift and the fact that we are nearing a physical shortage tipping point in which price cannot solve the oil and gas supply problem for countries (especially in developing countries) has led many countries and, more importantly businesses and individuals, to quickly look at cheap, cost effective and timely solutions such as EVs, solar panels and batteries. This has nothing to do with saving the planet but with finding solutions to control your own destiny with the economic security of domestically produced energy that can be built out quickly. It is worth noting that a barrel of imported oil provides energy for a few days while an imported solar panel can provide energy measured in decades. A solar panel provides a lot more energy security than even a few weeks stockpile of oil. A paradigm shift is developing in which renewables and batteries provide much more energy security than energy import diversification. The only secure energy is domestic energy and for most countries that solution involves cutting back oil and gas consumption from imported fuel and replacing them with domestically produced electrons from renewables with battery storage.

One way to invest in the decarbonization and electrification megatrend is with the Ridge Creek Global Energy Transition Strategy.  Despite this volatility, the strategy delivered strong performance. During the quarter, it returned 6.9%, substantially outperforming the Russell 2000, which gained 0.9%, and nearly matching the MSCI Global Alternative Energy Index, which rose 7.5%. Over the past year, the strategy returned 72.5%, compared with 25.7% for the Russell 2000 and 64.2% for the MSCI Global Alternative Energy Index. Over the past three years, the strategy returned 17.2%, compared with 13.0% for the Russell 2000 and -6.5% for the MSCI Global Alternative Energy Index.  Over the past five years, the strategy returned 8.9%, compared with 3.8% for the Russell 2000 and -7.7% for the MSCI Global Alternative Energy Index.    Since inception on January 1, 2020, the strategy has generated an annualized return of 21.8%, significantly ahead of the Russell 2000 (8.1%) and the MSCI Global Alternative Energy Index (3.7%).*

*Performance data shown represents past performance and is not a guarantee of future results. Investments involve risk, including loss of principal. Investment returns and principal value will fluctuate with changing market conditions. Investors should carefully consider the investment objective, risk, charges and other expenses.