Sleepwalking into an energy crisis

Richard Buxton argues that energy security means more natural gas, being honest about the clean energy transition and preparing for years of high energy prices.

Whilst it might be convenient to blame Russia’s invasion of Ukraine for the recent surge in oil prices, the harsher reality is that we have been sleepwalking into an energy crisis for some time, with gas prices rising significantly well in advance of February’s invasion.

In commodity markets, the old adage is that the cure for high prices is high prices, since it will attract capital to mine, drill or sow thereby increasing supply and bringing prices down. Equally the cure for low prices is low prices, as capital will withdraw, supply weaken in time and hence prices will rise again.

Climate change, the path to NetZero and the rise of ESG[1] (environmental, social and governance) investing has broken this flow of capital in relation to returns. Oil companies, faced with rising capital costs as swathes of investors have disinvested from the sector, have heard the message from governments, regulators and investors and acted accordingly.

Maximising prices

Oil and mining companies have sold oil, gas and coal assets, reduced exploration, and development expenditure, invested in wind and solar energy or the commodities needed for the energy transition. Even US shale oil companies, chastised by investors for expensive over-development, are not responding to higher prices with more drilling but returning capital to shareholders instead. The rig count has hardly risen in response to recent price surges.

Meanwhile OPEC+ has maintained supply discipline over oil production, incentivised by the West’s determination to wean themselves off their product over the next thirty years – so why not maximise prices in the meantime?

Note that hydrocarbons are still the source of around 85% of the world’s energy, and over the three decades 1990-2020 renewables went from 6% to, depending on whose numbers you believe, around 15%. At a cost of around $2trillion, apparently.

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Termes et définitions
1. ESG ( ESG ) L’ESG (Environnement, Social et Gouvernance) est un terme générique qui désigne les critères de responsabilité sociale et environnementale…
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