Davos Man and narcissistic eco-martyrs have booby-trapped our energy markets
The skittles are tumbling. Hedge funds that bet on growth are closing down. Central banks have gone back to the drawing board. Across Europe, factories and smelters are already being mothballed.
Markets expected to absorb the Ukrainian war without much trouble, but, like Vladimir Putin, they hadn’t banked on sanctions. The correction is proving painful. Amid it all, there is one signal coming through loud and clear: the rocketing price of oil.
There are few more powerful market signals than a price change. In normal circumstances, the response would be unambiguous. A high price means scarcity, which tells producers one thing: more, please!
But these are not normal times and the oil market is not a normal market. For one thing, it is dominated by Opec. The cartel usually tries to keep prices relatively stable and respond to price rises by raising production, but its chief member, Saudi Arabia, has been in high dudgeon with the United States ever since a row over the murder of the journalist Jamal Khashoggi in 2018.
The US wants Riyadh and its allies to ramp up production to offset price rises caused by the war. Normally, asking Opec to grab market share when prices are this high would be an easy sell. Crown Prince Mohammed bin Salman, however, is sulking. He won’t pick up the phone.
Meanwhile, European gas markets have gone haywire at the prospect that Russian gas might be cut off, one way or another, over the coming months. Qatar, the biggest alternative prospect to Russia, has sold most of its gas to Asia and was until recently being investigated by EU authorities for alleged antitrust violations, making it understandably reluctant to increase production and send more shipments north.
All of this adds up to a truly horrible prospect for Europe’s economy. An inflationary recession is on the way.
The good news is that, in the absence of another shock, like an Israel-iran war (God forbid), markets are capable of solving the problem. The bad news is that we seem to have forgotten how to let markets solve problems.
Let’s start with the US. America’s mighty shale oil and gas producers have already proved that they can turn global markets upside down. Back in 2013, oil prices were around the same level they are today ($120 per barrel) and the received wisdom was that they could only go higher. According to the experts, $200 a barrel was a realistic prospect. Instead, a year later, the price had halved.
What happened in the meantime was that the shale industry innovated. As prices fell, the US’S patchwork of new oil producers didn’t shut down, as many had expected. They worked out how to produce more cheaply. What followed was a dramatic price war waged by Saudi Arabia, as it increased production in an attempt to wipe out its upstart rivals. It was a contest that Riyadh lost.
Today, once again, that $200 number is being bandied about. All things being equal, there is no good reason to think that events won’t play out much as they did before. US oil companies will produce more in response to high prices and Opec countries will conclude that they would be fools to let US firms reap all the benefits, so they will in turn raise production.
Similarly, more and more American shale gas could be shipped to Europe to take advantage of the huge local price rises. The one major constraint on capacity comes from Europe’s gas terminals – the UK is the only country to have invested substantially in gas import capacity, one of the few successful elements of British energy policy over the last decade.
So after serving the British market, the gas will need to flow east from here along pipelines to bail Europe out of its mess.
Of course, there’s another piece to this puzzle, which bypasses the problem of import constraints: the UK’S own gas reserves. North Sea production is already on the rise, and could potentially increase further. And then there’s our own shale gas. Britain’s shale reserves haven’t been explored as extensively as America’s, so there’s still a lot of uncertainty over how much we can get out of the ground, but even a fraction of what’s there could potentially put a sizeable dent in European gas demand. According to Cuadrilla, the company trying to pull it off, the first gas could be flowing to British consumers within a year of getting equipment back on site.
But as Cuadrilla’s trials demonstrate, there is a problem with this vision: Western governments have spent the past decade building up a forest of environmental regulation and restrictions designed to make it impossible. In the US, a series of drilling moratoria, regulatory restrictions and investor anxiety over climate change and government policy have made oil companies reluctant to turn on their drills in response to demand.
In the UK, the combined forces of Nimby objectors, radical green protesters and do-good Davos men like Mark Carney have built a series of financial and political booby-traps around our last-resort, strategic resources.
With impeccable timing, Extinction Rebellion has popped up again (how we missed them) to announce a new series of protests at oil refineries. We are hobbled by good intentions – and the narcissistic martyrs who parade under their banner.
These green legions argue that we ought to focus all of our efforts on building more renewables and improving energy efficiency. Yes, fine, let’s do both – and add a fleet of new nuclear plants into the bargain. But these measures aren’t enough alone. They say they want us to turn down the heating and drive at 55 miles per hour. And this, ladies and gentlemen, is meant to be the West’s response to Russian cluster bombs and economic ruin: voluntary self-impoverishment.
It won’t wash, and the Government needs to understand that now. It is simply unacceptable, with Europe facing a war on its borders, a refugee crisis and the prospect of energy rationing or even blackouts, for our bureaucrats to tut their tongues and tap their clipboards and say: “Ooh, it’s shale gas you want? That’ll be 10 years, minister.”
The Conservatives used to understand that getting things done was the essence of competent government. But after over a decade in power spent failing to avert this catastrophe, it seems all they know how to do is pander.
The absurdity is that if only they could at least remember how to get the government out of the way, markets would fix the energy problem for us.
The market could easily solve the crisis now facing the West– if we let it