In film and television, the “boxed crook” trope is where a condemned person is sought as a last-ditch effort to pull off some impossible mission or overcome a formidable opponent. In return, the convict is typically offered amnesty or other consideration by the operatives in charge. Millennials will probably think of the recent Suicide Squad movies. For Generation X, The Rock starring Sean Connery was a great example. And for the boomers, it was The Dirty Dozen. Our current situation in the U.S. energy sector may not be quite as thrilling as those movies but the same plot elements exist. In today’s RBN blog, we discuss the predicament faced by industry and political leaders and begin to sort out the various proposals to put a lid on prices and restore energy security.
Then-presidential candidate Joe Biden pronounced judgement on the oil and gas industry on September 6, 2019, when he said, “I guarantee you, we’re going to end fossil fuel.” After Inauguration Day in January 2021, the Biden administration, in the name of decarbonization, continued to press its advantage against an industry that, with COVID and its resulting demand destruction and low commodity prices, was on the ropes. Policies that would limit supplies were implemented, thereby propelling a transition to alternative forms of energy. And by focusing on supply, rather than demand, a basic understanding of economics told us what was going to eventually happen to prices. Capital fled the sector with big-picture analysts calling the oil patch “un-investable.” The U.S. wasn’t alone in this effort, of course. Around the world, and particularly in Europe, governments enacted plans to reduce fossil fuel development and invest heavily in renewable energy. Major capital funds and investment firms followed suit.
The plan to divert capital away from fossil fuel development worked. Long-term growth plans along the hydrocarbon value chain were scrapped but, despite increased investment, renewables haven’t been able to satiate increased demand. By late summer last year, cracks in the plan had already begun to emerge as Europe faced increasing uncertainty about its ability to meet winter gas demand and gas prices there spiked (To the Moon and Back) — the higher prices might be chalked up to an emerging energy transition premium. Russia’s war against Ukraine and the additive war premium was then the catalyst that sent prices spiraling out of control. Vladimir Putin is using energy as a weapon — cutting supplies, forcing commercial terms (e.g., pay in rubles), and otherwise weakening the European Union’s response to Russia’s attack. It is bad enough now, but it will get a lot worse when winter comes around and Europeans are freezing, and their industries are shutting down. Both factors — the energy transition premium as well as the war premium — have had a profound cumulative effect on prices and any response needs to take both forces into account.
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