Will High Oil Prices Boost Renewables, Drilling, or Both?

March 23, 2022

Above, Andrés Gluski, president and CEO of global energy company AES, makes some fair points, is generally bullish on renewables and storage in both Europe and the US.
While oil and gas importers moving away from Russia, AES is moving solar and polycrystalline silicone sourcing out of China. Many moving parts, but market pressures generally in direction of clean energy.

Houston Chronicle:

There are two schools of thought on the curious spot at which the energy industry now sits.

One is that high crude oil prices will spur a new era of oil and gas exploration, especially as Russian oil and natural gas look like they’ll remain a taboo commodity for some time to come. U.S. Secretary of Energy Jennifer Granholm, who has championed pivoting away from fossil fuels since she took office last year, recently called on energy executives to boost production to help ease prices as the United States imposes a import ban on Russian oil and its European allies seek to end their reliance on Russian energy.

European countries will be clamoring to buy U.S.-produced natural gas as the intensifying war in Ukraine puts Russian supplies in peril and leads them to rethink their sources of energy over the long-term. Germany, for example, has blocked the Nord Stream 2 pipeline that was built to transport Russian gas to Western Europe, and plans to build two liquefied natural gas import terminals.

The shift is helping to spur the expansion of the U.S. LNG industry, concentrated along the Gulf Coast. The Energy Department forecasts the United States this year will surpass Qatar and Australia to the become the largest exporter of natural gas this year.

But on the other hand, the current energy crisis could be a watershed moment for clean sources of energy.

As the Houston Chronicle’s James Osborne reported recently, governments and companies often seek out alternative forms of energy when fossil fuel prices spike. During the energy crisis of the 1970’s, power plants turned to nuclear and began to invest in developing solar and wind energy. Those renewable technologies have moved into the mainstream, generating cheaper electricity than traditional power plants and becoming the fastest growing segment of the power industry.

Electric vehicle technology has also reached the point where it is competitive with internal combustion engines, with the recent surge in gasoline prices leading to a jump in EV sales.

“Think about the learning curves seen in wind and solar,” said Steve Pattyn, founder and chief investment officer of Yaupon Capital Management at CERAWeek. “People 10 years ago were asking ‘wind and solar — do they even work? They’re so expensive.’ Now, the cheapest electricity in the world comes from West Texas wind farms.”

There was a third position championed by some at CERAWeek — an “all of the above” strategy that invests in getting energy wherever its available, whether it be from fossil fuels or sunlight. Speakers talked about continuing to pull oil and gas from the earth, and capturing methane and carbon dioxide, while continuing to invest in renewables. Senators Joe Manchin, D-West Virginia, and Lisa Murkowski, R-Alaska, spoke about the need for a holistic approach to energy in their appearances at the conference.

“We can get to a place and recognize that climate is still a very serious issue,” Murkowski said, “but we don’t have to ignore what we can do to contribute to the safety and security and resiliency of people we care about, who are fighting for their own freedom and democracy.”

Bloomberg:

One argument is that high fossil fuel prices are a good thing — consumers might be incentivized to switch to more fuel-efficient or electric cars, take fewer flights and consider replacing oil-fired boilers.

The same applies to policy makers. “When the oil price gets very high, governments put in policies to move away from oil,” said Amy Myers Jaffe, head of the Climate Policy Lab at Tufts University. And that’s easier today than during previous price spikes. The last time oil stood at more than $100 a barrel was a decade ago, when clean energy was still quite expensive, affordable electric cars weren’t in sight and the Paris Agreement hadn’t been signed.

Yet clean energy has merely slowed down the growth of fossil fuel demand, and hasn’t yet led to substantial decrease in oil consumption in most countries. That’s because replacing fossil fuel-consuming infrastructure takes time. Consider what’s happening in Norway, where 65% of all vehicles sold in 2021 were electric and yet oil demand has fallen less than 10% since 2013. Plus, there’s rising demand from developing countries that need more energy to fuel growing economies.

Consider what happened in 2021. As the price of natural gas hit record highs in Europe, governments spent billions of dollars in subsidies to ensure that energy remained affordable. Much of that money ended up in the pockets of fossil-fuel companies, which reported bumper earnings. Green power generators, who are typically locked into long-term price contracts, didn’t gain as much from sky-high electricity prices. Now that the war in Ukraine has prices soaring again, the biggest European importers of Russian gas, Germany and Italy, are considering ramping up coal plants even as they build more renewables for the long term.

Expensive oil also drives up inflation, potentially prompting central banks to raise interest rates. That raises the cost of capital for everyone —including renewable companies, which have to pay more to borrow to cover the high upfront costs of building wind and solar plants. It should hurt oil companies too, but high returns mean they have less need to raise money through debt markets.

One Response to “Will High Oil Prices Boost Renewables, Drilling, or Both?”

  1. rhymeswithgoalie Says:

    “More than half of all cars sold in Norway were electric in 2020, but that hasn’t yet led to a drastic reduction in oil demand.”

    I recall from the mid-20th century the Big Three automakers built cars with “planned obsolescence” such that people would want to replace them in three to five years (yes, really). Now it is paradoxically unfortunate (shakes fist at Japan’s quality revolution) that today’s ICE vehicles have been built so well that they can last decades in good shape. The purchase of a new EV very likely involves pushing the old ICE vehicles into a thriving used-car market.

    (1) Nobody expects an immediate “drastic” reduction in the total demand for petrol.

    (2) Even a modest decrease in demand would have a nonlinear pressure on petrol prices.

    (3) The people who often drive long distances will be among the last to convert to EV.

    The metric to watch is EVs as percentage of total distance driven.


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