War, Covid Recovery Creating Energy Gridlock

May 5, 2022


Let’s see if I can describe this.
Production of coal, oil and natural gas were down sharply in the wake of the Global Covid shutdown.

Covid recovery spiked global energy demand.
Prices went up sharply, particularly in Europe and Asia.

Russia threw a spanner into the works with a war of choice.
That war clarified as never before the West’s security exposure to a (now obviously) hostile and uncooperative trading partner. Prices spiked even more in Europe.
Oil majors have been unwilling to boost production rapidly, fearing another crash, and feeling overwhelming demand from their shareholders to make good on a decade of unfulfilled promises of profit, so invested in stock buybacks instead of production.

The situation has made the need for an energy transition painfully apparent, at the same time it has heightened the short term need for natural gas. That would require investment in very expensive Liquified Natural gas infrastructure, but at the same time recognizing that those structures have a short useful life cycle, if we’re going to move quickly to renewable, non-fossil fuels.

We’re asking for major fossil companies to commit resources that may never be fully paid back, simply to save humanity, the life support system of the planet, and a livable society for their children.

I’m traveling at the moment. I’ll fill in the blanks on this later today, the elements of the story has been well reported in major media, but not well put together for a wider public.

Houston Chronicle:

The world’s largest oil companies are churning out massive profits in the first few months of the year even as they face uncertainties created by Russia’s war with Ukraine, a pandemic that continues to slow parts of the world, and calls to simultaneously increase production and focus on climate change efforts.

Together these issues signal how globally interconnected the energy industry has become, especially as a war half a world away affects boardroom discussions here in Houston. At the heart of those discussions is whether to boost production while oil is at $100 a barrel, which could reduce the price of gasoline and other fuels — and help ease inflation.

The oil companies, however, remain keenly focused on keeping investors happy with higher dividends and stock buybacks. On Friday, Exxon said it would triple its buyback plan to $30 billion while Chevron vowed to repurchase $10 billion worth of shares this year.

New York Times:

 Oil and gasoline prices are climbing. Energy company profits are surging. President Biden, who came into office promising to reduce the use of fossil fuels, has effectively joined the “drill, baby, drill” chorus. Europe would love to end its dependence on Russia.

Yet most U.S. oil businesses are not eager to capitalize on this moment by pumping more oil.

Production of oil by U.S. energy companies is essentially flat and unlikely to increase substantially for at least another year or two. If Europe stops buying Russian oil and natural gas as some of its leaders have promised, they won’t be able to replace that energy with fuels from the United States anytime soon.

U.S. oil production is up less than 2 percent, to 11.8 million barrels a day, since December and remains well below the record 13.1 million barrels a day set in March 2020 just before the pandemic paralyzed the global economy. Government forecasters predict that American oil production will average just 12 million barrels a day in 2022, and increase by roughly another million in 2023. That increase would be well short of the nearly four million barrels of oil that Europe imports from Russia every day.

“You had this bombastic, chest-pounding industry touting itself as the reincarnation of the American innovative spirit,” said Jim Krane, an energy expert at Rice University. “And now that they could be leaping into action to pitch in to bring much-needed oil to the world, they are being uncharacteristically cautious.”

The biggest reason oil production isn’t increasing is that U.S. energy companies and Wall Street investors are not sure that prices will stay high long enough for them to make a profit from drilling lots of new wells. Many remember how abruptly and sharply oil prices crashed two years ago, forcing companies to lay off thousands of employees, shut down wells and even seek bankruptcy protection.

Executives at 141 oil companies surveyed by the Federal Reserve Bank of Dallas in mid-March offered several reasons that they weren’t pumping more oil. They said they were short of workers and sand, which is used to fracture shale fields to coax oil out of rock. But the most salient reason — the one offered by 60 percent of respondents — was that investors don’t want companies to produce a lot more oil, fearing that it will hasten the end of high oil prices.

The Dallas Fed survey found that U.S. companies need oil prices to average just $56 a barrel to break even, a little more than half the current price. But some are worried that the price could fall to as little as $50 by the end of the year.

Larger oil companies complain that even if they wanted to invest more, it would be hard because Wall Street isn’t keen on financing new fossil fuel projects. Some investors who are concerned about climate change are instead putting their money into renewable energy, electric cars and other businesses.

It is not that investors have become environmentalists. Many have run the numbers and concluded that the recent jump in fossil fuel prices will be short-lived and that they are better off investing in companies and industries that they believe have a brighter future.

“If you are an investor, has your view of the next five to 10 years actually changed? I think the answer is no,” said Amy Myers Jaffe, managing director at the Climate Policy Lab at Tufts University’s Fletcher School. “History tells us that oil shocks accelerate a shift to alternative energy, not the opposite.”

Many oil executives also complain that the future of their industry is clouded by political and regulatory uncertainty. They acknowledge that Mr. Biden has been calling on them to produce more, but they fear that his administration will go back to emphasizing the need for less oil and gas when prices fall.

Meanwhile, political developments threaten to ramp up the pressure.

Associated Press:

The European Union’s top official on Wednesday called on the 27-nation bloc to ban oil imports from Russia and target the country’s biggest bank and major broadcasters in a sixth package of sanctions over the war in Ukraine.

European Commission President Ursula von der Leyen, addressing the European Parliament in Strasbourg, France, proposed having EU member nations phase out imports of crude oil within six months and refined products by the end of the year.

“We will make sure that we phase out Russian oil in an orderly fashion, in a way that allows us and our partners to secure alternative supply routes and minimizes the impact on global markets,” von der Leyen said.

The proposals must be unanimously approved to take effect and are likely to be the subject of fierce debate. Von der Leyen conceded that getting all 27 member countries — some of them landlocked and highly dependent on Russia for energy supplies — to agree on oil sanctions “will not be easy.”

One Response to “War, Covid Recovery Creating Energy Gridlock”

  1. J4Zonian Says:

    “We’re asking for major fossil companies to commit resources that may never be fully paid back, simply to save humanity, the life support system of the planet, and a livable society for their children.”

    Ah ha ha ha ha ha ha ha ha hee hee! For a second I thought you were serious.

    The only rational solution to this short term crisis is

    1. To not build infrastructure that might come on line 3-5 years after the crisis is over & will never be used;

    2. To declare a national & global emergency;

    3. Implement a Green New Deal dwarfing the US’s WWII mobilization;

    Nationalize the oil & gas industry at least, probably coal (hard to separate them), ICEV, agro-chemical, & others so they actually transition to sustainability rather than manipulate & delay forever;

    Institute mandatory conservation measures;

    Order the immediate building of gigawatts of 4-coast offshore wind, massive solar & grid storage installations (numerous widely-distributed 4-hour batteries, pumped hydro storage reservoirs with floating solar…);

    Ramp up production of heat pumps, induction cookers, & other electrical & muscle-operated devices to replace fossil-fueled ones immediately;

    Build a state of the art meta-national high speed rail network anchored in public local & regional transit systems, each using a variety of modes;

    Replace all government, university, commercial & other car, truck, & bus fleets with EVs; build a national network of standardized, universal EV charging stations powered by solar roofs in workplace, commercial, public parking lot & other locations

    Ration private EVs so those who have to drive get them;

    And a bunch of other stuff.

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