Cheer up. The energy crisis is person-made. It can be undone by correcting policy errors. A quick review of the policy blunders.
Start with natural gas, the transition fuel from oil and coal to a less globe-heating energy economy. Prices have shot up to almost double last winter’s in America, and are four times higher in Europe and Britain than they are here. In the United States, Biden-administration regulations make it difficult to maintain fracking operations, and in Europe politicians have banned fracking. Policy error surely.
The adminstration’s decision to withdraw objections to Nordstream 2, and Germany’s insistence on making Europe dependent on Russia, handed power over natural gas supplies and prices to Vladimir Putin, who is asking what Europe might give in return for his decision to dampen price increases by stepping up supplies. Russia is meeting its contractual obligations, but has about 15 per cent more capacity that could profitably be used to transport spot purchases. It is now being left unused, despite Secretary of State Anthony Blinken’s warning not to use energy as a weapon, or else — Blinken will warn him again. Any list of policy errors surely must include Western support of Nordstream 2.
Turn to oil. Crude prices have doubled. On the famous Day One, President Biden cancelled the Keystone XL pipeline that would have brought crude down from Canada. He then imposed a moratorium on new oil and gas leases on federal lands and waters. Approval of drilling permits on federal lands was down 75 per cent this past summer.
Leaving no government policy error uncompounded, the private sector rushed to display its ESG (Environmental, Social and Corporate Governance) virtues. Banks and other institutions are denying drillers access to capital needed to build oil infrastructure, and urging them to withdraw capital from the industry by paying down debt and returning cash to shareholders. Capital investment in oil drilling in the US is scheduled to end the year at the lowest level since 2004, below pre-pandemic levels, and below years in which crude prices reached the lofty $80 at which they now sit. It will fall further if activist members of Exxon’s board succeed in forcing the company to cut back on several billion-dollar oil and natural gas development projects now planned.
Biden is asking the OPEC cartel to step up production to protect him from voters’ wrath at the 55 per cent, $1 per gallon rise in gasoline prices since he was sworn in. The cartel will dribble out a bit more crude, but not enough to reverse price hikes since Biden’s Day One, or to conflict with its dream of $100 per barrel crude in the near future. The most widely held option by traders is one that pays out if oil reaches the OPEC-dream price of $100 by the end of December reports the NYT’s Stephen Gandel.
“Of course we are trying to benefit from the lack of investments by major players in the market,” Aramco CEO Amin H. Nasser told reporters. These state companies “don’t care about the political pressure to reduce emissions” adds René Ortiz, former OPEC secretary general. A government policy that prevents American drillers from maintaining the country’s relative energy independence, produces higher prices for oil and gasoline, as well as natural gas, while failing to reduce global emissions significantly must be listed among policy missteps.
Then there is coal, which produces more of the CO2 emissions deemed responsible for the overheating of the globe than any other fuel. Kathryn Porter, founder of consultancy Watt-Logic, put it best, “When governments are faced with the choice of not supplying electricity, or using coal, they will use coal.”
- Europe is burning more coal than at this time last year, with Germany “set for the biggest jump in greenhouse emissions in thirty years…” writes Ted Nordhaus, founder of The Breakthrough Institute. Complicit policy errors: Angela Merkel’s decisions to shut down her country’s nuclear plants and to endorse Nordstream 2, and to ignore the fact that there are times when the wind don’t blow and the sun don’t shine.
- China relies on coal for 60 per cent of the electricity needed to produce its “dirty” mix of exports that keep its factories humming, its masses in work, its homes warm and streets lit. In the face of a power shortage, the government has ordered all coal mines to operate at full capacity, including during holidays, and approved new mines. The complicit policy error by countries lapping up China’s exports: failure to tax the carbon content of those exports to give China a strong incentive to clean up its act.
- In the US, economic recovery combined with rising prices of natural gas drove the portion of electricity generated by coal from 17 per cent in the first half of last year to 23 per cent this year. Complicit policy errors: reducing availability of natural gas by limiting fracking, and refusing to tax greenhouse gas emissions.
None of this is intended to minimize the effect of the demand spurt engendered by the reopening of the economy as Covid-19 is brought under control, a speedy recovery from the depths of a slowdown produced by still another policy error: shutting down the economy.
The Good News
Here’s the good news. Even politicians who specialize in ignoring reality have learned some lessons. One is to rely more on getting energy prices to reflect true costs. The EU is proposing border adjustment taxes that would raise the price and thereby reduce demand for “dirty” imports, most especially from China and Russia. Politicians in America have come around to considering carbon taxes. Even Xi Jinping is trying to use higher prices for coal to restrain its use.
The second lesson is that Bismarck was on to something when he said, “Politics is the art of the possible.” Trying to do too much too soon can result in too little too late, at least in democratic societies. Voters do not abruptly surrender their lifestyles to plans by politicians whose motives might well be political power rather than green power. They are unwilling to shoulder an enormous tax burden in the here-and-now to fund plans that allegedly will make life better for generations as yet unborn. Which is why President Biden has dropped his costly, government-directed plan to recreate an electricity grid, and is trying to develop a regulatory and tax package that would accomplish the same objective but conceal the cost to the economy.
Most important, major producers of fossil fuels have plans to produce 240 per cent more coal, 57 per cent more oil, and 71 per cent more natural gas than would be needed to limit warming to the green target of 1.5 degrees Celsius according to a new UN report. Altering those programs to fit into the 1.5°C ceiling will stretch the art of the possible to its absolute limits.
The Despots Stay Home
Xi and Putin have decided not to attend the Glasgow confab. The Chinese President has not left China since January of 2021, choosing not to follow the Wuhan virus as it travelled around the world, or to face questions about his regime’s stepped-up use of coal, and its repressive measures and military provocations. His Russian counterpart has already spent one period in isolation, and told audiences he would not take the risk of contracting the virus. His large delegation, after weighing risks and rewards, independently decided to attend.
Place Your Bets
Still, there is much to play for in Glasgow. The race is between reality and rhetoric, environmentalists’ dreams and taxpayer/consumer nightmares. Odds have not been posted.