“The Growing Leverage of Autocratic Energy Producers” 

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Today’s Key Takeaways:  Unwanted consequences of the attempts to prematurely retire fossil fuels include a US energy shortage, giving “autocratic fossil fuel providers more leverage” and an energy advantage for China.

Why the war on fossil fuels is causing chaos
Rick Newman, Yahoo! Finance, December 6, 2022

Climate change is a real and urgent problem. More than a century of carbon emissions is warming the planet and causing floods, droughts, fires, and other cataclysmic events that are killing people, threatening livelihoods, and upending economies.

But the war on fossil fuels that are the source of those carbon emissions is causing its own forms of chaos.

Oil, natural gas, and other types of carbon-based fuel will be essential for decades, yet the pace of investment in future capacity is declining in the United States and other western nations, and chronic shortages are becoming likely. There’s plenty of carbon in the ground, but energy firms no longer want to risk the long-term investments required to get it out.

“The world is experiencing the worst energy crisis since World War II,” Brenda Shaffer, a professor at the Naval Postgraduate School, said at a recent conference sponsored by the Dallas Federal Reserve Bank. “The factors contributing to this are long-term underinvestment in oil and gas, public finance denial of investment in fossil fuels, market design and energy policies around the world.”

The transition to renewables and low carbon energy that U.S. and European policymakers are pushing is necessary. But the bridge from fossil fuels to renewables is missing a few spans, which could mean energy shortages and skyrocketing prices until green energy is widespread.

While many governments are creating strong incentives to adopt renewables, they’re not safeguarding supplies of the fossil fuels that meet 80% of the world’s energy needs today. And renewables aren’t coming online fast enough to offset the shortfall of oil and natural gas. That’s why energy markets were getting tight even before Russia’s Feb. 24 invasion of Ukraine sent prices spiking. Many analysts now think energy markets will remain tight — and prices high — for the next several years.

In advanced economies, costly energy will likely slow growth and perhaps contribute to recessions. In the developing world, energy shortages may worsen famines and trigger catastrophe.

The problem may not be obvious.Oil and gasoline prices have moderated recently, and new supplies from producers such as Venezuela could bring further relief. But this is a false sense of normalcy. Once China recovers from ongoing COVID shutdowns, demand for oil will strengthen and prices will go back up, maybe by a lot. The energy war between Russia and the west continues, as well, and a drop in Russian oil exports could also push prices up. American releases of oil from the US national reserve are due to end soon, further tightening supply. Self-imposed limits on western production will make the United States and Europe more dependent on other nations that prefer high prices over ample supplies.

The 2022 energy crisis persists in other parts of the energy sector. There’s a shortage of diesel, which is pushing the price of the fuel that powers long-haul trucks and farm machinery close to record highs. US natural gas prices this year have hit the highest levels since 2009, which was before the fracking boom that brought vast new supplies online. That means expensive heat and electricity this winter. In Europe, nations including the U.K., Italy, Spain, German, and France are spending more money to mitigate the energy crisis and subsidize consumer energy bills than they devote to their military budgets, according to research firm Tellurian.

Here are some of other unwanted and unforeseen consequences of the premature retirement of fossil fuels:

The resurgence of coal. A shortfall of natural gas for electricity generation in the United States, Europe and other parts of the world is forcing utilities to burn more coal—the dirtiest of all fossil fuels—and to a lesser extent, oil. Natural gas is the cleanest-burning fossil fuel, with fewer emissions than coal or oil. But the blockage of new pipelines and drilling in some areas is keeping supplies tight, pushing prices up and forcing utilities to find cheaper alternatives.

“During the past decade, the anti-natural-gas campaigns have put gas into the basket with oil and coal,” Shaffer said at the Dallas conference. “Extreme policy against natural gas doesn’t lead to more consumption of renewables, but to higher consumption of oil and coal.” She points out that many existing utilities can easily switch their feedstocks from gas to coal or oil without any public notice, especially in Europe.

The International Energy Agency (IEA) expects the global demand for coal to reach an all-time high in 2022, largely because of the rising cost and scarcity of natural gas. Coal prices have doubled from pre-COVID levels, reviving an industry many thought was headed for extinction. “We’re seeing coal come back on the market,” Paul Dabbar of Columbia University said at an October energy conference sponsored by the university. “The odds are emissions are probably going to head in the wrong direction this year as a result of energy security going backwards.”

Natural gas production in the United States—now the world’s largest provider—has also flatlined since 2019, following a decade-long production surge triggered by new fracking technology. The Appalachian Basin stretching from New York to Alabama is one of the largest natural gas reservoirs in the world, but at least five pipelines that could transport that gas to American consumers and to U.S. export terminals have been blocked.

Nobody protests the building of a natural gas pipeline because they want utilities to burn more coal, yet that’s what is happening.

An American energy shortage. The United States is the world’s largest oil and natural gas producer, yet some parts of the country are likely to endure soaring prices and even rationing of the energy required to stay warm this winter. Residents of the Northeast are most vulnerable because there aren’t enough pipelines bringing gas there from other parts of the country. The Northeast can import gas by ship, but seaborne gas prices have soared as Russia shut off gas pipelines to Europe and those nations looked for new sources. The ancient 102-year-ld Jones Act essentially prevents cheaper seaborne shipments of American gas from Gulf Coast ports. Some Northeast consumers use heating oil as an alternative to gas, but those prices have skyrocketed because heating oil is similar to diesel, which is scarce because of tight refining capacity, a ban on Russian diesel imports, and a variety of other factors.

Some Americans enjoy abundant energy and cheap prices, but Northeasterners may as well live in a different country.

The growing leverage of autocratic energy producers. It’s in Europe’s and America’s interest to become less dependent on oil and gas from undemocratic suppliers such as Saudi Arabia and Russia. Yet government and market pressure to curtail drilling in democratic nations gives autocratic fossil-fuel providers more leverage, not less. Unlike the Biden administration, Saudi Arabia and other Persian Gulf petro-states control domestic energy production and can direct investments required to secure future output. In the United States, by contrast, drillers are reluctant to produce more because they fear a future profitability crunch once renewables take over. The president can ask them to drill more, but he doesn’t control the private sector the way OPEC autocrats rule their nationalized oil industries.

“Who’s going to be the last man standing in terms of who invests in fossil fuels?” Helima Croft of RBC Capital Markets said at the Columbia energy conference. “It’s going to be a small number of Gulf producers. We are still going to have to make asks of these countries when we need more oil.”

An energy advantage for China. American and European consumers pay the global price for oil. China pays less. That’s because China doesn’t participate in sanctions against Russia and Iran and is therefore able to buy their energy products at a discount to global prices. “China has access to cheaper oil than any competing economy,” Shaffer said at the Dallas Fed conference. If that persists, it will give China—America’s top economic rival—an important cost advantage in key global industries just as the Biden administration is ratcheting up guardrails against China’s future domination. China could also become an oil and gas refining powerhouse if western economies continue to discourage oil and gas investment.

What’s Next?

President Biden and other green-energy advocates argue that the widespread adoption of renewable energy will solve these sorts of problems. Sun and wind captured on US territory will reduce the need for foreign energy. The plunging cost of renewable technology can make some forms of green energy cheaper than fossil fuels. Cornering the market for the next generation of energy technology will boost the US economy for decades.

That’s may all be true—in the future.