Why energy prices will remain high even as the global economy declines

And the pandemic was the mother of all shocks, causing the largest sustained shift in demand since World War II. Before COVID-19, global oil demand was around 100 million barrels per day, but lockdowns (and fear) have pushed demand down to 75 million barrels per day. Suppliers could not collectively turn off the tap fast enough (slowing down a flowing oil well is no trivial task). On April 20, 2020, the oil price briefly fell to minus $37 a barrel, as storage facilities became overloaded and suppliers tried to avoid fines for dumping.

Investment in new oil and gas production was already weak before the pandemic, in part in response to global initiatives to steer economic development away from fossil fuels. For example, the World Bank no longer finances the exploration of fossil fuels, including projects with natural gas, a relatively clean energy source.

Environmental, social and governance investments and regulations are: reducing access to finance for oil and gas projects, which is of course the point. That’s fine if policymakers have a viable transition plan to reduce fossil fuel dependency, but this has been challenging, especially in the US and Asia.

US shifts position

Oil, coal and natural gas still account for 80 percent of global energy consumption; about the same share as at the end of 2015 when the Paris climate agreement was adopted. Policymakers in Europe and now the US (under President Joe Biden) have commendable ambitions to accelerate green energy in this decade. But there really was no plan to deal with the V-shaped oil demand recovery that has accompanied the post-pandemic recovery, let alone the disruption of energy supply due to the Western-led sanctions. against Russia.

The ideal solution would be a global carbon price (or a carbon credit trading scheme if a tax proves impossible). In the US, however, the inflation-paniced Biden administration is seriously considering going the other way, and Congress has called for a three-month suspension of the federal gasoline tax — $0.18 a gallon. The G7’s recently announced plan to curb Russian oil prices makes sense as a sanctionbut Russia is already selling at a huge discount to India and China, so it is unlikely to have a major impact on the world price.

Just recently, the Biden administration used its executive powers to curb the growth of US fossil fuel production. Now it’s advocating increased production from foreign suppliers, even those — especially Saudi Arabia — it had previously shunned on human rights grounds.

Unfortunately, being virtuous by limiting U.S. oil production while sucking up other countries’ output doesn’t really do much for the environment. At least Europe had a semi-coherent plan until the war in Ukraine made clear how far the continent — especially countries like Germany, which has left out nuclear power — is from achieving a clean energy transition.

As with all types of innovation and investment, strong growth in green energy requires decades of consistent, stable policies to reduce the huge long-term capital commitments required. And until alternative energy sources can more fully replace fossil fuels, it’s unrealistic to think voters in rich countries will re-elect leaders who allow energy costs to skyrocket overnight.

The best way to encourage green investment is to have a reliably high carbon price; gimmicks like divestment are much less effective.

It’s worth noting that the protesters who have successfully pushed some universities to ditch fossil fuels don’t seem to be lobbying so hard to turn down heating and air conditioning. The energy transition must take place, but it will not be painless.

The best way to encourage long-term investments by producers and consumers in green energy is to have a reliably high carbon price; gimmicks such as divestment initiatives are both much less efficient and much less effective. †I also advocate the creation of a World Carbon Bank to provide emerging economies with financing and technical assistance to help them navigate the transition.)

For now, oil and gas prices appear likely to remain elevated, despite fears of a recession in the US and Europe. As the summer driving season kicks off in the Northern Hemisphere and the Chinese economy may recover from zero-COVID lockdowns, it’s easy to imagine energy prices continuing to climb even as Federal Reserve interest rates severely slow US growth. .

In the longer term, unless investment picks up strongly, energy prices appear likely to increase, which seems unlikely given current policy guidance. Supply and demand shocks are likely to continue to shake the energy market and the global economy. Policy makers will need strong nerves to manage them.

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