When Reality Presents the Bill

Good Morning Ladies and Gentlemen

“So on some level, I think those “blockchain not Bitcoin” guys might’ve had a point, and I shouldn’t have laughed at them as readily as I did.”

Joe Weisenthal, Bloomberg

Today, I would like to do something slightly different and share a broader collection of thoughts with you. Over the past few days, I have found myself thinking about energy, oil, Europe’s diminishing refining capacity and, perhaps somewhat unexpectedly, the welfare state. These subjects may seem unrelated, but I believe they share an important underlying principle. There are limits to what politics can achieve when it disregards economic incentives, productive capacity, and physical reality. We may postpone the consequences of poor decisions, disguise them with subsidies, or finance them with additional debt, but we cannot make them disappear. Eventually, reality presents the bill. This is not an argument against political ambition or social responsibility. It is simply a reminder that sustainable prosperity requires good intentions to be matched by economic discipline. So, let me share a few thoughts.

Energy is Power

Energy is power, and few things reveal the consequences of political choices more clearly than energy policy. Modern economies may appear to be driven by technology, finance, and knowledge, but beneath this sophisticated surface lies a simple real-world condition. Prosperity requires reliable and affordable energy. Countries that secure their energy supply preserve not only economic resilience but also strategic autonomy. Those that subordinate this fundamental requirement to ideological objectives risk discovering the true costs only years later. Energy shortages, structurally higher prices, declining industrial competitiveness, underinvestment, and increasing dependence on foreign suppliers rarely emerge overnight. They accumulate gradually until they begin to constrain economic growth and, ultimately, citizens‘ welfare. Good energy policy must therefore balance environmental ambitions with technological feasibility, affordability, security of supply, and economic competitiveness. Ideology may define political aspirations, but quite frankly, I believe that physics and economics ultimately determine whether those aspirations are sustainable.

The Oil Price

The oil market currently reflects a broadly balanced interplay of supply and demand, with prices shaped primarily by evolving expectations rather than acute physical shortages. Geopolitical tensions continue to exert an influence through elevated risk premia, particularly given the strategic importance of key energy-producing regions and transportation routes. At the same time, demand fundamentals remain relatively resilient, supported by steady economic activity in the United States and parts of Asia, while weaker industrial momentum in Europe has moderated expectations for global consumption growth. On the supply side, market participants remain focused on OPEC+ production policy, the responsiveness of US shale producers, and developments in global inventory levels. Consequently, recent price movements appear to be driven less by immediate disruptions and more by adjustments to forecasts for economic growth, energy demand, and future market balances. As such, oil prices continue to serve as an important indicator of global macroeconomic conditions, inflation prospects, and geopolitical risk.

The Price for Refined Oil Products

A clear distinction must be drawn between crude oil and refined petroleum products. While global crude oil supplies remain broadly adequate, bottlenecks increasingly arise at the refining stage of the value chain. Europe, in particular, has become more dependent on imports of diesel, jet fuel and other middle distillates as domestic refining capacity has steadily declined over the past two decades. This development reflects a combination of economic, regulatory and structural factors rather than a physical shortage of crude oil itself. Many European refineries were ageing, relatively small and less competitive than newer and more efficient facilities in Asia and the Middle East. At the same time, stricter environmental regulations, rising carbon costs and expectations of a gradual decline in long-term fossil fuel demand reduced the incentive to invest in conventional refining capacity. Consequently, numerous refineries have been closed, downsized or converted into biofuel facilities. As a result, Europe is increasingly constrained not by the availability of crude oil, but by its ability to convert that crude into the refined products required by its economy.

The Welfare Sugar Rush

Now, Ladies and Gentlemen, please let me share a few thoughts in light of the riots in France and Italy. I think it is important for everyone to understand that the welfare state is one of the great achievements of modern capitalism. However, even good things can become problematic when consumed without restraint. In that sense, social benefits resemble sugar. A little sweetness can provide comfort, stability and even resilience; too much, administered too frequently, changes expectations and makes restraint increasingly difficult. Parents understand the temptation intuitively. A sweet offered today brings immediate happiness, while its potential consequences lie in an uncertain tomorrow. I think politics operates under a similar incentive structure. Across the OECD, public social expenditure amounted to around 21% of GDP in 2022, while social protection benefits in the European Union reached 27.3% of GDP in 2024. Once benefits have been granted repeatedly, however, what began as political generosity gradually comes to be perceived as an acquired right. France offers a striking illustration of the resulting fiscal tension. Social protection benefits stood at a hefty 31.9% of GDP in 2024, while public debt reached 113%. You know, if you ask me, the lesson is not that welfare is undesirable, but that every promise must ultimately rest upon the productive capacity to finance it.

Conclusion

Ultimately, energy, oil and social policy tell us the same story, that prosperity cannot be legislated into existence. Politics can shape incentives, redistribute resources and postpone difficult choices, but it cannot repeal scarcity. Physics matters, productive capacity matters, and sound finances matter. We may ignore these constraints for a while. In the end, however, reality always has the final word.

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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9494 Schaan/Liechtenstein
Mail: smk@incrementum.li