Higher prices can solve energy crisis
Reports of a global energy crisis are greatly exaggerated.
The world has plenty of oil, natural gas and coal. The sun and the wind can generate all the electricity we need. We have battery technologies capable of providing backup power.
The only question is whether consumers are willing to pay full price.
Recent Headlines have heralded West Texas Intermediate Crude topping
$80 a barrel for the first time in seven years. Good news for Texans, but bad news for the rest of the country as average gasoline prices hit $3.18 a gallon, a dollar more than last year.
Analysts pointed to shrinking crude oil inventory, particularly at Cushing, Okla. Politicians have called for American companies to drill, baby, drill. Roustabouts have switched their phones off vibrate, waiting for rig operators to call.
But flashback to 2014, the end of the last boom. Drillers were running
1,200 rigs and fracking hundreds of miles of Texas shale. They added millions of barrels to the global market, cutting into Middle Eastern market share and angering petro-dictators worldwide.
OPEC showed the Americans what a free market really looks like. They allowed the oil glut to drive prices down to $26 a
barrel. Then, after hundreds of U.S. companies entered bankruptcy, OPEC cut a deal with Russia and its allies to limit production at a price that works for them.
Then the COVID-19 pandemic squelched demand. OPEC+ cut production further, and the surviving American companies used their cash flow to pay off debt and reward investors. The rig count dropped to under 300.
As the economy restarts, demand is growing. If it chooses, OPEC+ has enough spare capacity to flood the market in a few weeks. U.S. companies have identified billions of barrels of proven reserves, and they can complete a shale well inside of three weeks.
Oil executives, though, are more interested in keeping prices high after years of subpar profits. Only the smallest and scrappiest companies are adding rigs. There is no oil shortage, just a shortage of companies willing to sell at an economic loss.
Natural gas stocks are also low. Two years ago, producers felt lucky to get $2 for a million British thermal units. These days they get more than $5. Europeans are worried about having enough for the winter.
U.S. natural gas is typically produced alongside oil. Usually, that keeps prices low because the gas is a byproduct. But if companies are not producing oil, gas prices rise. U.S. companies are also exporting more liquefied gas than ever to overseas buyers.
Luckily, natural gas producers have an incentive to drill. When prices get this high, electricity generators shut down gas-fueled plants and switch to cheaper coal or fuel oil. The U.S. Energy Information Administration predicts gas demand will drop in 2022 if prices remain high.
With more export facilities coming online, gas drillers can also serve a hungry overseas market. Europe is incredibly lucrative now, but its gas shortage is more about politics than markets.
European Union nations, particularly Germany, are relying more on Russian natural gas as they shutter nuclear and coalfired generators. Russian President Vladimir Putin wants to guarantee long-term dependence
by completing a new pipeline called Nord Stream 2.
The U.S. is pushing the EU to cancel the pipeline and buy U.S. gas instead. Critics accuse Putin of raising gas prices 250 percent and withholding extra gas the EU needs to bully them into connecting to Nord Stream.
Politics are also behind the
brownouts in China this summer. The global price of coal and natural gas has more than doubled, but the Communist Party will not allow electric companies to raise retail prices. So, the utilities shut down and triggered brownouts instead of losing money.
Chinese officials are allowing utilities to slowly raise prices, which is also the solution for global oil and natural gas markets. The federal Energy Information Administration’s Short-term Energy Outlook predicts higher fossil fuel prices now that historic surpluses give way to a more balanced market.
The ultimate solution, of course, is to transition away from fossil fuels to cleaner sources. Ironically, higher fossil fuel prices will speed things up. Inexpensive wind turbines, more efficient solar panels and new battery technologies are all cheaper than new fossil fuel projects.
Energy investors recognize the inevitable transition, which is why many refuse to finance new long-lived fossil fuel projects.
For years, consumers have enjoyed cheap energy thanks to an oversupply and the prices not capturing the damage to the planet. Those days are over, and costs will be higher. But we’ll have a healthier world as a result.