It can be difficult to understand what is happening with the global energy market. Since Russia’s invasion of Ukraine in March, the news has been a relentless whirlwind of confusing updates on oil prices, gas supply and a stew of acronyms (OPEC? SPR?). All of this can be intimidating, even for energy journalists and people who think about this issue professionally.
“This is one of the most confusing and difficult to analyze situations I’ve been in,” said Clark Williams-Derry, energy analyst at the Institute for Energy Economics and Financial Analysis.
As we head into winter — and America’s midterms — the rhetoric from all sides is bound to grow louder with the cold weather. Here’s what you need to know.
What’s going on with natural gas?
NOTnatural gas powers about 25% of Europe’s overall electricity needs and was the central weapon of Russia’s war on the continent. After Russia cut gas supplies in March during its first invasion of ukraineEurope struggled to find other sources of energy and to store gas before winter and the increase in electricity consumption that accompanies the cold.
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Although the summer wasn’t as bad as it could have been, thanks in part to the mainland’s renewable energy sources, there were a few stumbling blocks during the intense July heat waves. and August, when electricity consumption increased. and the lack of hydroelectricity due to drought has forced countries to go back to coal. As we head towards the cold season, experts say, Europe has stockpiled just enough natural gas to avert certain disaster.
“Europe imports LNG [liquid natural gas] like crazy in order to fill its storage with gas to get through the winter,” said Lorne Stockman, director of research at Oil Change International. “He may have enough gas to get through the winter, but it will be very precarious.”
If something happens this winter – like an extreme weather event – Europe could find itself with skyrocketing energy prices. Countries across the continent have released plans to potential short-term power outages. (UK officials have said blackouts are “extremely unlikely” and households could lose power for 3 hours in the worst-case scenario.)
“The uncontrollable factor is the weather,” Stockman said. “Europe could get through, but a prolonged cold spell could trigger a crisis again. We could see another big spike in prices and potential shortages as Asia and Europe compete to import the energy there to keep people warm. It is a precarious situation. It’s not great.
What is gcontinue with the otheysupply?
There are a slightly more complex situation with the world’s oil supply. During the past year, the oil price rebounded from its pandemic low – when oil prices briefly hit negative dollars– rising to pre-pandemic levels and soaring even higher. Earlier this year, oil briefly hit a $120 a barrel.
While this summer began with soaring oil prices and analysts predicting the worst of a busy US travel season, prices have actually remained below expectations for the past few months. A key factor here was a lack of demand for oil in China due to covid-19 imposed closures and travel bans there. “It really gave global oil markets a cushion,” Stockman said.
But another player has re-entered the mix to keep oil prices high. The Organization of the Petroleum Exporting Countries, or OPEC, is the world’s largest cartel of oil producers, representing nearly 80% global oil production capacity; the group guides the policies of its 13 member countries, including the oil giants Saudi Arabia, United Arab Emirates, Venezuela and Iran. Cartel decisions often have an outsized influence on the world price of oil.
Earlier this month, OPEC said it would cut oil production by 2 million barrels a day, sending oil prices soaring. up to $4 per barrel. Since the pandemic, OPEC has been operating in what can be seen as a scarcity mindset, like going on a diet after a long binge.
“Going into winter, there could be another covid outbreak in China or the United States that could impact demand,” Stockman said. “OPEC is very suspicious.”
The Biden administration publicly criticized the move, which sent gasoline prices soaring after a summer of work to bring them down and comes just weeks before the US midterm elections. One of the administration’s main responses is to potentially release more barrels of oil the Strategic Petroleum Reserve (SPR); this week, the administration concluded the largest-ever release of oil from the reserve, begun in May. But the SPR is a finite resource, and that’s almost impossible for a presidential administration to actually change something as global as oil prices, yet they are often a key predictor of political success.
Can’t we just produce more fossil fuels?
Since the start of the war in Ukraine and energy prices skyrocketsthe US fossil fuel industry has pushed the idea that production needs to be increased and that can only happen if the Biden administration removes onerous environmental regulations. The American Petroleum Institute, the industry’s main lobbying arm, has been busy this week claiming the Biden administration’s limits on offshore leasing are hamper the industry’s ability to meet demand and that the United States must draw even more on its fossil fuel reserves rather than tapping into the SPR.
However, there are several problems with these claims. Firstmany American fossil fuel companies are increase production, produce more fossil fuels than ever before. “When the crisis hit, many companies started producing as much as they could, not out of the goodness of heart but because the companies were making tons of money,” Williams-Derry said. “[U.S. natural gas producers] produce about as much as they’ve ever produced, maybe a little more.
It is also important to understand the financial context of how fossil fuel companies operate today. This energy crisis follows years of turmoil in the industry, fueled in large part by the hydraulic fracturing boom of the past decade in the United States. This boom flooded the market with incredibly cheap fossil fuels, but was also terrible news for investors, many of whom lost money on the glut of cheap energy; these investors are now eager to get their money back. During the pandemic, when producers were forced to tighten their belts through price floors, investors finally realized that more production doesn’t necessarily equate to more profit.
“The oil industry doesn’t want to lose money like it has for the past 15 years, and what it has finally realized is that the shale industry has started producing oil. silver in the third quarter of 2020,” Williams-Derry said. “Companies stopped drilling so much, and because they weren’t spending so much money on drilling, their operations started generating cash.”
Most of the administration’s climate policies have little to do with blocking short-term production (and some allowances for even more production). However, they are a great rhetorical scapegoat fWhere an industry worried about the long-term implications of the energy transition and wants to keep generating as much profit as possible.
“The biggest myth is that the Biden administration is somehow stuckoil production, that environmental regulations are holding us back, it’s not,” Stockman said. “What’s holding the industry back is the fact that fracking is expensive, subject to the same supply chain labor constraints as the rest of the economy, and it is not ready to increase production to the point where costs are skyrocketing.”
And the energy transition? Can’t renewable energy help?
First, some good news: They help already. The aggressive installation of renewables and solar power around the world has helped keep demand for fossil fuels lower than it usually would be during an energy crisis; the International Energy Agency found this week that renewables help keep the increase in carbon dioxide emissions much lower this year than last. And many of the initiatives passed in Biden’s Cut Inflation Act will go a long way toward making the energy transition a reality.
But the energy transition is long and complex, and we’ve wasted a lot of time supporting fossil fuels. “It will take a few years before we see the investments [in the Inflation Reduction Act] pay and get to a point where what OPEC does doesn’t have much of an impact on us consumers because we’re reducing the amount of oil and gas we use,” Stockman said. “We are at the limit of that, but it is still very difficult for the average consumer to make these choices.
And as the industry continues to push for its own self-interest, the real elephant in the room is how our overreliance on fossil fuels is what brought us to this crisis in the first place.
“We really got distracted by the allure of the fracking boom bringing in the so-called energy independence, and it didn’t work,” Stockman said. “The energy industry says we have to run amok, but thinking about the last decade, trillions of dollars have been invested in mining, infrastructure, pipelines, energy terminals, tankers. We plowed literally trillions of dollars, and a war on the other side of the world brings us back to a crisis point. It’s time to stop pretending that more investment in oil and gas will solve the problem. It couldn’t be clearer that it just doesn’t work.
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