In commodity markets, the old adage is that the cure for high prices is high prices, since it will attract capital to mine, drill or sow thereby increasing supply and bringing prices down. Equally the cure for low prices is low prices, as capital will withdraw, supply weaken in time and hence prices will rise again.
Climate change, the path to NetZero and the rise of ESG (environmental, social and governance) investing has broken this flow of capital in relation to returns. Oil companies, faced with rising capital costs as swathes of investors have disinvested from the sector, have heard the message from governments, regulators and investors and acted accordingly.
Meanwhile OPEC+ has maintained supply discipline over oil production, incentivised by the West’s determination to wean themselves off their product over the next thirty years – so why not maximise prices in the meantime?
Note that hydrocarbons are still the source of around 85% of the world’s energy, and over the three decades 1990-2020 renewables went from 6% to, depending on whose numbers you believe, around 15%. At a cost of around $2trillion, apparently.
China, having embraced renewables in recent years as smog was so persistent, found their unreliability so bad they had to ration energy, with heavy industrial users powered down so that supplies to households could be maintained. Brownouts and blackouts have been recorded in numerous grids around the world. No wonder that China has renewed its enthusiasm for coal, recently calling on its mines to deliver an additional 300m tonnes this year.
Russia’s invasion of Ukraine is a wake-up call to some very muddled thinking in the West. Energy security has re-emerged as an issue alongside the source and type of energy. Initially it looked as if Germany might defer the closure of its remaining nuclear plants, but they will still happen as planned. The UK, in contrast, is backing the development of small nuclear reactors, albeit unlikely to come on stream for a decade.
Maybe we have been lulled by Moore’s law and the digital revolution into a belief that the energy transition will witness similar technological breakthroughs and productivity improvements. It cannot happen – the physics precludes tenfold increases in renewable output.
We have to learn to love gas, as less damaging than coal or oil, but reliable and plentiful when there is no wind or sun. The EU is rightly talking of building more liquid natural gas (LNG) import terminals, but even the quickest such built in the US took two years. Floating terminals might be onstream by 2024-26. High gas prices in the UK and Europe will attract LNG tankers away from Asia, but sadly Asia will switch back to coal instead.
So, we have to love the oil and gas industry too. Petroleum engineers are retiring but for the younger generation, this goes completely against their zeitgeist. Universities are suspending suitable courses as there are no applicants.
We have to be more honest about the energy transition timelines, acknowledge our continued need for gas and attract young people into the gas industry as part of the solution to climate change.
I fear, irrespective of when the situation in Ukraine is resolved, we are in for several years of high energy prices as there is no visible or immediate supply response. High energy prices mean weaker consumption and economic growth.
Or if people are really serious about tackling climate change, we need massive, legislated demand destruction. Mandatory 50mph speed limits on motorways, anyone? Does that sound like a vote-winner? Or just tax the oil and gas companies more, so disincentivising them from gas investment even more?
There are no easy ways out of this energy crisis.
The value of active minds: independent thinking
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