Duel of the Fates – Chaotic Markets Re-emphasize the Need for a Balanced Energy Policy

The energy market has been in chaos for some time. Even before Russia’s horrific attack on Ukraine, the multinational push to decarbonize the global economy was slow-motion-crashing into reality. Of course, global supply shortages only got worse following the invasion and the widespread response to it. The disruptions highlight the critical need for a balanced energy policy, both in the U.S. and abroad. This became evident in Europe last year, when a heavy, early reliance on renewable energy, largely wind, left much of the continent short on fuel and scrambling for natural gas when the wind didn’t blow enough. The overall supply-demand balance caused prices to rise steadily as the global economy climbed out of its COVID-induced recession. Then the situation became more dire as embargoes on Russian crude oil and gas were planned and implemented. In the U.S., the Biden administration, eager to both “green” the economy and keep gasoline prices in check, has been giving mixed signals to E&Ps and their investors, telling them to both ramp up investments in production and expect to play a smaller and smaller role going forward. It’s a confusing world. In today’s RBN blog, we look at the current energy environment, the policy roller-coaster, challenges to the increased usage of renewables that remain unaddressed, and how the politics of decarbonization are making the ongoing energy transition a very difficult row to hoe.

The hostility toward crude oil and natural gas production and the development of supporting infrastructure seems to permeate much of our society. In popular entertainment, “He’s into fracking” is a major condemnation — more or less a punchline. Many institutional investors have invoked corporate policies against investing in oil and gas. As a candidate, President Biden said that “oil companies will be phased out.” He almost immediately backtracked to indicate that he was simply talking about tax benefits, etc. However, on his first day in office he famously put the kibosh on Keystone XL. His administration then announced a 30-year plan to electrify America and laid out plans to build out renewable energy generation resources to dominate the energy economy. The administration also suspended new drilling leases on federal lands. And government agencies, including the Federal Energy Regulatory Commission (FERC) — with assists from a few federal appellate court rulings — made it increasingly difficult to build needed energy infrastructure.

As noted, energy consumption worldwide has ramped up quickly as the world climbed out of its COVID-induced recession, but without a simultaneous acceleration in crude oil and natural gas supplies and development (see What’s Going On?) the very predictable result took place: oil, gas, NGL and gasoline prices climbed to problematic levels (before spiking higher with Russia’s invasion). This not only made it painful to fill up a car or SUV but has stimulated inflation for everything — all the stuff based on oil or natural gas feedstocks, such as asphalt, plastics and fertilizer, as well as all the things transported by ship, train and/or truck. (And yes, that includes pretty much everything.) Voters don’t like high prices, so there was an immediate political reaction — at least for now, the Biden administration has softened its view on new drilling. In an attempt to show that it was trying to ease the impact on consumers, it did several things. First, it reopened some leasing on federal land. On April 15 a new oil and gas onshore lease sale was announced (including a 50% increase in the government’s royalty rate, the first such hike since the rates were established in the 1920s). The president also called on U.S. producers to drill more while, at the same time, announcing 1 million barrels a day of crude to be released from the Strategic Petroleum Reserve (see I Want to Break Free). Third, he asked countries on which we would rather not rely to produce more oil.

This mixed messaging is by no means confined to the current administration. It is the natural result of the collision between long-term policies and short-term politics. In this case, one can dream of phasing out oil as long as one wants, but when the price of gasoline jumps seven months before midterm elections, all bets are off. Add to that what in recent years have become frequent 180-degree changes in the goals of both Congress and the White House (with each election), and we can expect to be on the policy roller-coaster for a very long time. And that makes the development of, and adherence to, a single policy path over decades virtually impossible.

U.S. oil and natural gas producers and their investors are well aware of this energy policy back-and-forth and have been evolving their business models accordingly. Thanks to pressure from their shareholders, lenders and boards of directors, many E&Ps have been reining in their spending on production and infrastructure and directing more capital toward non-carbon energy sources, as we detailed in Where Has All the Capex Gone? and I Can’t Go for That (No Can Do). They are also using more of their cash flow to pay off debt, build capital clout and return money to shareholders (through dividends and stock buybacks). The end result is that the impulse to respond to higher oil and gas prices by increasing production has not been nearly as strong as it had been over the last two decades.

Renewables Face Sourcing Challenges

It is no secret that moving to a carbon-neutral economy has assumed a massive degree of importance. But as the headlong rush toward wind and solar power, battery storage and electric vehicles (EVs) got serious traction, the many issues surrounding those technologies as they move to full scale became more and more apparent, and yet are largely still unaddressed. These issues include the sourcing of copper, nickel, lithium, cobalt and a multiplicity of other rare-earth minerals necessary for the construction of solar panels, wind turbines and batteries, as we’ve been explaining in our Tell It Like It Is series, as well as the disposal of those same materials when their useful lives expire.

Both areas present important and difficult questions around the environmental impact of mining, the social issues surrounding mining labor in other countries, and the national-security implications of being almost completely dependent on unfriendly countries for many of the materials. These issues and questions have been raised throughout energy policy discussions, but very often in the context of condemnation by political critics of the transition toward renewable energy, not in a balanced forum where the advocates of an accelerated transition might pay attention. Accordingly, many of those advocates just seem to ignore the substantial infrastructure needs and minerals sourcing for a clean energy transition. This is just one more victim of the political polarization that plagues so much of our life these days and results in the absence of a rational and balanced energy policy that recognizes the long-term need for oil and natural gas, while still moving as rapidly as possible toward a net-zero economy.

EIA Reference Case, U.S. Energy Consumption Mix Through 2050

Figure 1. EIA Reference Case, U.S. Energy Consumption Mix Through 2050. Source: EIA

The bottom line is this: Crude oil and natural gas aren’t going away anytime soon. In March, the Energy Information Administration (EIA) released its 2022 Annual Energy Outlook (AEO 2022). That comprehensive study, which is performed once a year by the EIA and relied heavily upon by U.S. policymakers, shows oil and gas still dominating the U.S. energy economy in mid-century. Figure 1, from EIA’s presentation of AEO 2022, shows the consumption mix from the agency’s base or “reference” case, under which oil/petroleum products demand (brown line) and natural gas demand (dotted blue line) continue to grow, ending at much higher levels than all of the identified renewable and zero-carbon sources combined.

Elsewhere, the study also shows that the U.S. is likely to remain a net importer of crude oil, with about half its imports from a friendly Canada and half from other countries, some of which are not so warm and cuddly. So, every success in increasing U.S. production has the effect of reducing that reliance. Meanwhile, in environmental terms, those exporting countries (besides Canada) generally lack the environmental controls that the U.S. puts on its own oil-and-gas sector.

The Cost (and Politics) of Decarbonization

For many environmentally focused non-governmental organizations (NGOs), the theory for years has been that restricting supply will push electrification and renewable generation to the fore. The challenge in that approach is that supply restrictions make oil and gas more expensive, and we have just seen what happens as soon as that price signal really shows up — politicians panic and change course. The inflationary pressure caused by very high crude oil and natural gas prices is obviously unacceptable to the general public and takes a terrible toll on lower-income families in particular.

Squeezing the supply end of the energy supply chain with no political ability to accept the economic consequences is not very effective in moving things toward low- or zero-carbon. Does that mean that there is no viable path to that goal? It does not. But it does mean we have to address the demand side of the equation along with supply. There are plenty of things that could be done, including:

(1) Enhancing the competitiveness of wind and solar (and batteries) with technological advances (and significant subsidies) would help those sectors continue to grow very quickly, but they also will need to address the challenges related to sourcing key metals and minerals.

(2) Spurring more carbon capture, use or sequestration projects to help allow for continued economic use of oil and natural gas with a lower carbon footprint. (For more on carbon capture, see our Way Down in the Hole series.)

(3) Seeking opportunities to improve the economics of “green” and “blue” hydrogen, which over time could make a major contribution as a supplement to and replacement for natural gas in some markets.

(4) Accelerating improvements in car, SUV and truck fuel economy, as well as making further gains in the efficiency of industrial processes, buildings, ships and aircraft — all of which can help reduce demand for hydrocarbons. Using less energy in the first place is the best answer.

Most importantly for GHG policy, reducing methane leaks and discharges wherever possible is absolutely critical, as we discussed in Paradise, Part 3. It is not easy, but at the end of the day containing methane in most oil and natural gas processes is mostly a matter of good plumbing — it might be expensive plumbing, but the climate benefits are enormous. However, for the widespread containment of methane to have the necessary impact, the U.S. cannot stand alone. Particularly in Russia (assuming we eventually can mend those relations), the leakage of methane from old and poorly maintained oil and natural gas wells is a massive issue that would be good for the world (and the oil and natural gas industry) to find a way to address.

With all of these moving parts, overlaid by frequent changes in U.S. policy and by geopolitics, reaching a stable, viable and balanced energy policy for the U.S. will be a tough nut to crack. It can only happen if the various energy-market players engage in a true dialogue — talking with, not at or about, each other — and work together, rather than trying to cancel those they disagree with. Whether that can happen is an open question but trying to achieve such a balance and collaboration is preferable to what’s been happening lately.

To hear RBN experts discuss these issues, along with how the ongoing energy transition and the drive toward decarbonization have run headlong into the reality of today’s natural gas markets, sign up for RBN’s School of Energy Spring 2022, to be held May 17-18 at The Houstonian in Houston.

“Duel of the Fates” was written by John Williams and appears as the 33rd track on Disc 2 of the Star Wars Episode I: The Phantom Menace — Original Motion Picture Soundtrack album. The song features the London Symphony Orchestra and London Voices Choir. It serves as a recurring musical theme in the Star Wars prequel trilogy and the Expanded Universe. Williams intended for the piece to appear at the end of the film while the credits roll (which it does) but found that it fit in other parts of the movie and makes its debut during the final lightsaber duel. The lyrics used in some parts of the piece are from the Welsh poem Cad Goddeu and are sung in Sanskrit. “Duel of the Fates” has appeared in an episode of The Simpsons and the BBC series Top Gear. A promotional single of the song was released in May 1999.

Star Wars Episode I: The Phantom Menace — Original Motion Picture Soundtrack was recorded at Abbey Road Studios in London in February 1999 with John Williams conducting and producing. Released in May 1999, it went to #3 on the Billboard 200 Albums chart and has been certified Platinum by the Recording Industry Association of America. Three different formats and versions of the album were released in 1999. Since that time a few new versions have been released, including color vinyl and 180-gram vinyl editions. One promotional single was released from the LP.

John Williams is an American composer, conductor and pianist. He has been involved in 148 studio albums, 35 compilation albums, 14 EPs and 81 singles. He has won 25 Grammy Awards, seven British Academy Awards and four Golden Globe Awards. He is a recipient of a Kennedy Center Honor, a National Medal of Arts, and has an AFI Lifetime Achievement Award. Williams has composed the score to nine of the top 25 highest-grossing films in the U.S. His career has spanned seven decades. He continues to compose, score and conduct at the age of 90.

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