Environmentalists are perplexed. They shouldn’t be.
President Biden’s decision to approve a massive oil-drilling project in Alaska feels like a betrayal to climate warriors, with Biden’s campaign promising to “end fossil fuels” and pivot to a green-energy economy. But that campaign promise was never realistic. Biden is now learning the lessons of the 2022 energy crisis and acknowledging that the green energy transition is going to take a long time.
The Biden administration on March 13 approved ConocoPhillips’ Willow Drilling project, which could eventually produce 180,000 barrels of oil per day over the course of 30 years of operation. To appease his climate critics, Biden is limiting the amount of drilling at the site to the lowest amount economically viable, while also imposing new limits on drilling in other areas of Alaska.
That doesn’t seem like a deal to climate activists, who call the Willow project a “carbon bomb.” But Biden’s soft approach to fossil-fuel production is practical and necessary. As some environmentalists insist, the green-energy transition is not an either/or proposition. It is a both/and situation in which the United States needs assured access to the hydrocarbons we depend on today, while also aggressively developing renewable sources of energy that will gradually replace them.
Developments in 2022 made it abundantly clear the importance of oil and natural gas for the foreseeable future. Prior to Russia’s invasion of Ukraine in February 2022, fossil-fuel supplies were tight, resulting in rising prices for gasoline and other types of fuel. The Russian invasion created a real energy crisis. Russia’s hydrocarbon supplies came into question as Ukraine’s allies imposed punitive sanctions on Russia, threatening economies everywhere, given that Russia was and still is a top exporter of oil and natural gas. .
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Those sanctions were supposed to avoid an energy war with Russia, but an energy war happened anyway, because Russian President Vladimir Putin wanted one. Putin cut off most natural gas supplies to Europe, which used to get 40% of its gas from Russia. Natural gas prices soared worldwide as Europe struggled to find other sources of heating fuel for the winter. As the war progressed and Russia continued to earn the hard currency needed to finance the war through the sale of oil, the advanced nations placed price caps on Russian oil, risking further supply disruptions and rising prices. Was. All this is still going on and could once again lead to energy shortages and rising prices.
As energy prices rise in 2022, Biden finds himself in the awkward position of drilling more than American drillers, Saudi Arabia and other petro-states. No one rushed to the rescue, with drillers and their investors signaling their preference for handsome profits over risky new investments that boost supply. It must have been a sobering moment for Biden and his economic advisers, who until then mercilessly bashed oil and gas as a dinosaur industry we could easily do without.
What 2022 taught us is that it will take decades for us to live without oil and gas. The likely consequences of miscalculations are shortages and painfully high prices – no matter how fast we adopt renewable forms of energy. S&P Global Commodity Insights expects worldwide oil demand to continue rising through 2031. Then it would flatline, roughly so for years. By 2050, S&P expects oil demand to be at today’s levels. Natural gas demand may remain strong for now.
As environmentalists point out, interruptions in the supply of fossil fuels create an incentive for rapid deployment of renewable energy. And renewable energy is rapidly coming online. The US Energy Information Administration expects the share of US electricity generated from renewable energy to increase from 22% to 26% by 2024. The big green-energy bill Biden signed last year would pump unprecedented amounts of government money into renewables and speed technology breakthroughs.
But abandoning fossil fuels too soon could make the economic hardship worse. Natural gas shortages in Europe, and rising prices everywhere, have prompted some utilities to switch back to burning coal, the dirtiest fossil fuel. Utilities could switch to sun or wind power if it isn’t available. Here in the United States, many homes in the Northeast still rely on heating oil because pipelines carrying clean natural gas cannot be approved in the region. Heating oil is similar to diesel fuel, which is scarce and expensive due to limited refining capacity and the loss of Russian supplies. As a result, households in New England are bearing the highest winter heating costs in years.
It would be miraculous if some magical incantation converted America’s fossil-fuel infrastructure to renewable energy. But some clean-energy advocates greatly underestimate the complexity of the job. Building new infrastructure to get renewable energy where it’s needed will be just as difficult as getting new oil pipelines approved through residential communities. Everyone wants infrastructure, as long as it’s somewhere. Allowing battles and other approvals will take years to build the high-voltage transmission lines and other equipment needed to generate and move the renewable energy. Meanwhile, fossil fuels already exist.
Someday, renewable energy will displace the geopolitical power petro-states such as Saudi Arabia, Russia and today’s other large oil producers. While renewable energy may not take over until fossil-fuel production ceases in the United States and other democracies, petro-states may have more power. This is because most petro-state governments control fossil-fuel production through nationalized energy companies that the government calls. In the United States, energy companies are private sector businesses governed by shareholder and investor interests, not government diktat. If drilling isn’t profitable enough, they won’t do it. As long as the world economy needs oil, whoever has oil has power.
Biden can now recognize this. He has been engaging with oil and gas officials over the same issues for a year, begging for more production in return for the government’s hostile policy. He is now trying to make the government’s policy a little more favorable towards oil and gas producers, even if it brings fire from the left. But the Left can’t lower anyone’s utility bills, while more energy can. This is powerful, because navigating the present is just as important as planning for the future.
Rick Newman is a senior columnist yahoo finance, follow him on twitter @rickjnewman
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