Luke Tilley is the chief economist and head of economics, asset allocation and quantitative services for Wilmington Trust Investment Advisors — the investment arm of M&T Bank.
But, if you ask him, he’ll tell you he’s just a supply-and-demand guy.
That’s how he described his role during a special presentation of the firm’s 2023 Capital Markets Forecast for M&T Bank clients last week at a closed event at the Highlawn in West Orange.
“Supply and demand,” he said. “I often joke that this is the reason I chose economics, because you only really ever need to talk about two things — supply and demand — and wherever those two things meet, you get the price.”
Supply-and-demand concerns are what make him nervous about the potential impact the push away from fossil fuels to alternative energy sources will have on inflation and the economy.
The demand for alternative energy, he said, is strong — and is here to stay.
“You don’t have to have a political view to recognize that governments around the world are pushing for these policies,” he said, noting the Paris Climate Accords, among other examples. “Even in the U.S., you recognize that it goes up and down with different administrations, but the overall push over decades is this move toward alternative energy.
“And the concern that we have is that it’s not going to be a smooth transition.”
Tilley compared the transition to that of a handoff of a baton among members of a relay team — a difficult process when both participants want the handoff to occur.
That’s not the case in energy transition.
“These two sources of energy, fossil fuel and alternative energy sources, are not working together toward a common goal,” he said.
2023 Capital Markets Forecast
The inflationary vortex has been the result of several forces — some unforeseen or unforeseeable — spiraling upward. Wilmington Trust officials said its 2023 Capital Markets Forecast focuses on three catalysts that they expect to impact tomorrow’s inflation outlook: The U.S. labor market, China’s economic and demographic evolution and the role of green energy.
Read the forecast here.
It’s understandable, Tilley said. They have duties to shareholders to make profit-maximization decisions.
But it could be leading toward a major supply issue.
In the case of fossil fuels, the demand for more alternative energy comes with a note of hostility toward the petroleum industry. It’s clear their industry is getting less support — with strong signals that there will be future challenges, Tilley said.
As a result, the petroleum industry is lowering the capital expenditures, or capex, it uses to search for oil by a significant amount — down 50% since 2013.
The impact already is being seen.
“The total amount of proven reserves — the term that is used by the industry to say this is how much oil we know that we’re sitting on top of and is feasible to be pulled out of the ground — has flatlined,” he told the crowd. “That’s not common over our 100-plus-year history in the petroleum industry.”
To be clear, the search for oil reserves is not an easy game. It’s a process that takes years — Jed Clampett’s experience notwithstanding.
And all this is happening at a time when the demand for oil is not expected to drop. That’s not coming from Tilley, but the International Energy Agency.
About Wilmington Trust
Wilmington Trust is a leading provider of wealth and institutional services for M&T Bank, one of the 15 largest U.S.-based, commercial bank holding companies. Wilmington Trust says the sound experience of its professionals and a forward-looking mindset have allowed it to help generations of families and businesses thrive for more than a century.
While the IEA’s projections for alternative energies are expected to grow significantly between 2021 and 2050 (from 12% to 29%), it will not come at a reduction of the need for oil (which will drop only from 29% to 27%) during that same time frame, he told the crowd.
“This is the IEA’s projections under current laws and subsidies across the globe,” Tilley said. “Some countries look a lot different. The U.S. is weaning itself off fossil fuels much more quickly than this. But, still, even after last year’s inflation Reduction Act, we would have a lot of cars on the road that are using petroleum (and) we would have a lot of industries that are still using that and coal.”
The supply-and-demand kicker came next.
“Simply put, if you have still a lot of your industries or a lot of the world using petroleum, and we haven’t gone out and found more of it, it’s going to get more expensive,” Tilley said.
Read more from ROI-NJ:
Tilley made it clear that he’s not offering an opinion on the transition to clean energy, just that he’s analyzing the economics behind it. They push for the transition comes with significant challenges, he said. Some that many may not have been thought of.
Tilley gave a hypothetical of the entire car industry transitioning to electric vehicles — then mentioned how EVs require approximately 100 more pounds of copper than a traditional car, due to its battery.
“You have to get that from somewhere, and our current mining operations around the world are not sufficient to supply that market as quickly as we would need it to,” he said.
Supply and demand. When it comes to economics — it’s all that really matters.