The Congress That Berated Oil Companies for Producing Oil Is Now Berating Them for Not Producing Oil

Oil production is a difficult, risky business even under favorable regulatory regimes.  For instance, here is a chart of cumulative bankruptcy filings of exploration and production (E&P) companies for 2015-2021:

A few companies go bust every year, but there are some years like 2015-2016 and 2019-2020 when a lot of companies go bust. That happens when the oil industry collectively has overproduced and driven the price of oil below the effective cost of production. Even the mighty ExxonMobil ran deep in the red in 2020, losing an eye-watering 22.4 billion dollars. With all that in mind, shareholders since 2020 have been pressuring companies to show “financial discipline”, which means “drill less”.

Beyond these basic business realities, there is a whole new set of pressures to inhibit petroleum production. Environmental activists have pushed banks to withhold funding from petroleum companies, to strangle further oil production. It was big news in 2020 when activists, alarmed by ExxonMobil’s plans to actually (gasp) increase its oil production, successfully elected several alternative members to the board of directors with the specific goal of curtailing further drilling.

There have been attacks on the oil industry on the political front, as well. Joe Biden ran on a platform of banning drilling on public lands, and one item he checked off his to-do list on his first day in office was to issue an executive order killing a pipeline that would have facilitated imports of oil from the abundant reserves in Canada. One of his nominees for a top financial regulatory post remarked regarding oil producers that “we want them to go bankrupt if we want to tackle climate change”. All these are the sorts of things that make execs less willing to commit capital for expensive drilling programs that may take years to pay back. (The counter-claim by the administration that the U.S. oil industry is just sitting on thousands of unused oil leases is a red herring).

There is only a finite amount of oil in the ground, so it makes sense to move with all deliberate speed toward renewable and nuclear energy (which emits little or no CO2). However, our European friends who have installed lots of solar panels and windmills have discovered  that the sun does not shine at night (!) and the wind does not always blow strongly (!!) , and so during their energy transition they need to maintain an adequate supply of fossil fuel power in order to keep the lights on. They elected to let their own oil and gas production dwindle, and rely instead on gas and oil purchased from Russia. We warned back in September that this European policy would give Russia leverage for harassing Ukraine, but apparently not enough EU leaders read this blog. Anyway, even back in the fall of 2021, Russia had restricted natural gas deliveries to Europe, causing sky-high prices there for gas and power.

The European experience ought to have been a cautionary tale for America, but political attacks on oil production continued in the halls of Congress itself. In an October 2021 hearing over climate change prevention, Carolyn Maloney (D-NY) and Ro Khanna (D-CA) insisted that Big Oil commit to reducing US oil and gas production by 3-4% annually (50-70% total by 2050). In a follow-up February 8, 2022 hearing,  the two legislators again demanded concrete commitments from oil companies to reduce their domestic production (although, strangely, Mr. Khanna supported President Biden’s call for other regions, such as OPEC and Russia to increase production).

With oil drilling having been curtailed for the past several years (as desired by environmentalists), the world has now flopped from an oil surplus to an oil shortage, exacerbated by Russia’s invasion of Ukraine and subsequent sanctions. And of course world oil prices (which are not under the control of U.S. companies) have gone up in response. Oil companies are actually making money again instead of going bankrupt like two years ago

In 2021 Apple had a 26% net profit margin and an effective tax rate of only 13%, while the oil industry had an average profit margin of 8.9% and an effective tax rate of 26.9%.   Yet Congress (mainly Democrats) “investigates” price gouging every time gas prices go up, without hauling in Tim Cook to grill him over the price of each new iPhone model. Repeated previous investigations have shown that domestic gasoline prices are mainly a function of world oil prices, which are not under the control of U.S. companies. Nevertheless, after berating oil execs for increasing oil production,  here come the grandstanding Congressional attack dogs, holding a hearing last week titled (wait for it…) “Gouged at the Gas Station: Big Oil and America’s Pain at the Pump”.

The oil producers patiently explained that “We do not control the price of crude oil or natural gas, nor of refined products like gasoline and diesel fuel,” and “”It [the U.S. oil industry] is experiencing severe cost inflation, a labor shortage due to three downturns in 12 years, shortages of drilling rigs, frack fleets, frack sand, steel pipe, and other equipment and materials.” But it is not clear that anyone was listening to the facts.

How Overzealous Green Policies Force Europe to Bankroll Putin’s Military

There is a difference between healthy zeal for a basically good cause like reducing CO2 emissions, and unbalanced myopia. Back in September I wrote about the European power debacle (skyrocketing gas and electricity prices):

Shut down your old reliable coal and nuclear power plants. Replace them with wind turbines. Count on natural gas fueled power plants to fill in when the breeze stops blowing. Curtail drilling for your own natural gas, and so become dependent on gas supplied by pipeline from Russia or by tankers chugging thousands of miles from the Middle East. What could possibly go wrong?

Well, now we know what can go wrong.

In January I noted more specifically, “This energy shortage also makes Europe very vulnerable to Russia, at a time when Putin is menacing Ukraine with invasion.” Now it has come to pass. All the huffing and puffing about economic sanctions on Russia is mainly just hot air. Because Europe is utterly dependent on Russian gas, massive “carve-outs” have been made in sanctions in order to continue these purchases to continue. The vaunted SWIFT restrictions on Russian banks have been carved down to practical irrelevance. While sanctions may impact the lifestyles of oligarch playboys, this flow of euros to Russia ensures that Putin will not run short of money for his war.

Ecomodernist Michael Shellenberger writes that behind the Ukraine military drama “is a story about material reality and basic economics—two things that Putin seems to understand far better than his counterparts in the free world and especially in Europe.” Shellenberger asks, “How is it possible that European countries, Germany especially, allowed themselves to become so dependent on an authoritarian country over the 30 years since the end of the Cold War?” and then answers this question in his trademark style:

Here’s how: These countries are in the grips of a delusional ideology that makes them incapable of understanding the hard realities of energy production. Green ideology insists we don’t need nuclear and that we don’t need fracking. It insists that it’s just a matter of will and money to switch to all-renewables—and fast. It insists that we need “degrowth” of the economy, and that we face looming human “extinction.” (I would know. I myself was once a true believer.)

… While Putin expanded Russia’s oil production, expanded natural gas production, and then doubled nuclear energy production to allow more exports of its precious gas, Europe, led by Germany, shut down its nuclear power plants, closed gas fields, and refused to develop more through advanced methods like fracking.

The numbers tell the story best. In 2016, 30 percent of the natural gas consumed by the European Union came from Russia. In 2018, that figure jumped to 40 percent. By 2020, it was nearly 44 percent, and by early 2021, it was nearly 47 percent.

…The result has been the worst global energy crisis since 1973, driving prices for electricity and gasoline higher around the world. It is a crisis, fundamentally, of inadequate supply. But the scarcity is entirely manufactured.

Europeans—led by figures like Greta Thunberg and European Green Party leaders, and supported by Americans like John Kerry—believed that a healthy relationship with the Earth requires making energy scarce. By turning to renewables, they would show the world how to live without harming the planet. But this was a pipe dream. You can’t power a whole grid with solar and wind, because the sun and the wind are inconstant, and currently existing batteries aren’t even cheap enough to store large quantities of electricity overnight, much less across whole seasons.

In service to green ideology, they made the perfect the enemy of the good—and of Ukraine.

There we have it.  It’s not just the Europeans. As I write this, shells are raining down on Ukrainian cities but the U.S. is not restricting its imports of Russian oil, lest our price of oil go even higher. The present oil shortage (even before the Ukraine invasion) is what happens when a president on his first day in office signs an executive order to cancel a pipeline expansion which would have enabled increased oil production from Canada’s massive oil sands, and the whole ESG movement hates on investing in projects for producing oil or gas.

All that said, what the West gives with one hand it may take back with the other. Although energy exports from Russia are theoretically permitted, Western private enterprises, including finance arms, are pulling back from any dealings with Russia. This means in practice, lots of wrenches are being thrown into the machinery of international finance, such that energy exports from Russia are being slowed, though not stopped. But in turn, the Russians are getting higher prices per barrel for the oil that does get exported. There are many moving parts to all this, so we will see how it all shakes out.

Europe Natural Gas Shortage: Factories Shut, Maybe Worse to Come

Shut down your old reliable coal and nuclear power plants. Replace them with wind turbines. Count on natural gas fueled power plants to fill in when the breeze stops blowing. Curtail drilling for your own natural gas, and so become dependent on gas supplied by pipeline from Russia or by tankers chugging thousands of miles from the Middle East. What could possibly go wrong?

That is what Europe is discovering now as natural gas prices have quintupled, taking electricity prices up with them. Europe is having a hard time finding enough gas supply to fill up storage facilities to get them through the winter. If consumers are prioritized, widespread industry shutdowns are possible if there is a cold winter. Prices for many things will rachet up, with implications for inflations and in turn for central banks’ response to inflation. (The Fed’s Powell has been talking down the current inflation as merely transitory).

 In the UK, energy companies are going bankrupt because the wholesale price that at which they purchase gas is higher than the government-mandated cap on gas price they can charge consumers. Plants which use natural gas as a feedstock like fertilizer plants are shutting down, which impacts farmers. Carbon dioxide is a byproduct of some of these operations, and the resulting shortage of CO2 is affecting meat-packers who use it in their operations. Indeed, a food producer has warned that the Christmas dinner could be “cancelled.” That’s just how bad it is. The Brits are even delaying the shutdown of the country’s largest remaining coal-burning power plant.

Jason Bordoff of the Columbia Climate School and the Center on Global Energy Policy just published a long article giving his perspective on all this. He identifies several contributing factors:

( 1 ) Cold and hot weather affected gas consumption this year. Winter in much of the Northern Hemisphere was unusually cold earlier this year, which boosted gas demand for heating. And then a hot summer consumed more gas to make electricity for air conditioning. 

( 2 ) Other sources of electricity have been hampered. “Wind generation in Europe has been far below average this year due to long periods of less windy weather. …Demand for fossil fuels is set to spike further as Germany takes another three nuclear reactors off the grid this year as part of its nuclear shutdown. Meanwhile, drought conditions in China and South America have led to reduced hydropower output, drawing supplies of globally traded gas into those markets instead.”

( 3 ) The post-COVID economic recovery has boosted industrial demand.

( 4 ) Russia has restricted gas deliveries to Europe though the existing pipeline that runs through Ukraine. (Many observers see this as a pressure tactic to get Europe to switch over to a northern pipeline route, which would then remove the importance of Ukraine for Russian gas marketing, which would then give Russia a freer hand to resume military harassment of that country.) Also, European countries have restricted their own gas production. The Dutch are curtailing the production rate at their big Groningen gas field because local residents fear earthquakes from ground subsidence, and the Brits have restricted fracking of promising gas fields due to public protests.

As might be expected in our interconnected world, the European supply crunch has affected U.S. prices, which are at their highest level in five years. America exports gas via liquified natural gas (LNG) tankers, but U.S. gas supplies so far have not responded much to the price increase. The hostility of the Biden administration and pressure from green-leaning investors has discouraged petroleum companies from expanding drilling.

Meanwhile, California is running its own experiment in green energy  adoption:             

California, for example, is having trouble keeping the lights on as it rapidly scales the use of intermittent solar and wind power. It recently requested an emergency order from the U.S. federal government to maintain system reliability by, among other actions, allowing the state to require certain fossil fuel plants scheduled to retire to stay online and by loosening pollution restrictions. California is also proposing to build several temporary natural gas plants to avoid blackouts, even as the state shuts down the Diablo Canyon nuclear power plant, which produces more zero-carbon electricity than all the state’s wind turbines combined.

Professor Bordoff notes that “Many projections for how quickly and how much clean energy can be scaled are based on stylized models of what is technically and economically possible”, and unsurprisingly calls for policies which mitigate volatility, e.g., “…regulatory and infrastructure policies can facilitate more integration, flexibility, and interconnectedness in the energy system—from power grids to pipelines—so there are more options to pull energy supplies into a market when needed.”

Oh, and this restatement of the obvious:  

Uncertainty about the pace of transition may lead to periodic shortfalls in supply if climate action shutters traditional fossil fuel infrastructure before alternatives can pick up the slack—as may be starting to happen in some places now. And if fossil fuel supply is curbed faster than the pace at which fossil fuel demand falls, shortfalls can result in market crunches that cause prices to spike and exacerbate existing geopolitical risks. In fact, this is what the International Energy Agency just warned is happening in oil markets—a striking contrast to what it said only a few months ago, when it warned that new fossil fuel supplies would not be needed if nations were on track to achieve net-zero emissions by 2050.

Me? After working through  all this material, I’m going to go buy me some shares of ExxonMobil, the largest natural gas producer in the U.S.