Between the pandemic and the war in Ukraine, the energy industry around the world is in turmoil with soaring prices, supply chain problems, and pressure for a solution. A number of countries have turned to coal as a temporary fix for fuel shortages, U.S. LN
The Biden Administration does not bear primary responsibility for the problem, even though its cancellation of the Keystone XL pipeline and halt of drilling leases on public lands were unwise, being little more than posturing to satisfy the left wing of the Democratic Party. Oil and gas production on public lands (onshore at least) is not very significant, and without the Keystone XL pipeline, Canadian oil is still produced, but transported by rail, which is more expensive, less safe and results in slightly higher greenhouse gas emissions.
More problematic is the constant shifting between wanting more and cheaper energy and, well, not. Liberals in Congress have excoriated the oil companies for not drilling as much as before the pandemic but returning their ‘windfall’ profits to shareholders. Those same blame the oil industry for the U.S. failure to adopt economically punishing climate change policies and have urged investors to steer clear of them under the rubric of ESG investing.
At the same time, the Administration has called for higher oil production from OPEC+ countries (except Russia) and President Biden is going to Saudi Arabia—but not to talk about oil, we’re assured. This is a reversal of his earlier insistence that he considered Saudi Arabia to be a pariah state based on its human rights record and sends a clear message that oil matters. Indeed, so many American presidents have gone hat in hand to Riyadh that they must have a dedicated hatrack for such occasions. Worthy of note: one vice president who went asking for lower production to save the U.S. oil sector in 1986.
The recent turnabout regarding tariffs on imported solar panels is another example of the Administration’s inconsistency. Urging more solar investment as climate change policy ran afoul of the desire to increase solar panel production in the U.S.—and by union workers. But the use of tariffs on imported solar panels from Southeast Asia, where China’s manufacturers moved operations to avoid tariffs, has now been suspended in a sop to solar power installers. But it is a blow to solar panel manufacturers, who were repeatedly assured that the Administration wants to support them and now have no idea what tariffs and prices will be in two years, and whether or not investing in production capacity will pay off.
(Apparently the decline in photovoltaic cell prices was not only due to the learning curve, as so often claimed; Chinese subsidies and cheap labor appear to have contributed a big part of the savings.)
Comparison with the Squid Game’s Red Light Green Light episode, where losers are executed, is an exaggeration to be sure. However, politicians too often consider their shifting stances to be costless inasmuch as money is not flowing directly from the targets to government coffers. But this misrepresents basic economics, namely, the time cost of money. If a developer of a mall, nuclear power plant or oil field invests 10% of the project money, only to then see development delayed for years, they are incurring the interest expense for the money already committed. This is one of the reasons nuclear power plants built in the U.S. in the 1970s and 1980s were so expensive: numerous delays ran up the expensive of interest payments.
Similarly, when California instituted a Zero Emission Vehicle mandate in the 1990s, only to abandon it when the technology proved immature, the cost to the state was effectively zero. But the auto companies spent billions: GM said the development cost for its EV1 was $600 million (in today’s dollars). The sense that this mandate imposed no cost was fallacious: the costs were hidden but effectively passed on to consumers in higher auto prices or shareholders in lower dividends. Perhaps some job losses could be attributed to GM’s diversion of capital from other, more successful, products.
About a decade ago, when I suggested at a California conference that mandates such as this were wasteful, an environmentalist waved off my criticism by saying that they had at least advanced the technology. But drawing a straight line from the 1990s ZEV mandate to today’s lithium-ion vehicles seems fallacious. There were certainly advances in battery and fuel cell technology, but most of it occurred after the mandate was abandoned and appears to have been largely the result of ongoing basic research not the work done specifically aimed at the mandate.
So, while Republicans demand Biden give the industry the Green Light, and Democrats scream for a Red Light, the industry is left not knowing if it will be penalized for moving or freezing. This explains why so many are reluctant to commit to hiring personnel, buying drilling leases, and signing contracts to rent equipment that will last for months or years—when the end of the war in Ukraine could drop oil prices sharply or a Democratic victory in mid-term elections could see their leases and permits frozen, and the money committed piling up interest expenses.
The fight over energy policy and competition between sources and technologies will continue for many years and, as the rise of shale oil and gas and the recent embrace of cheap fossil fuels even by ‘green’ European governments show, the future of the industry is uncertain enough that even without political inconsistency, the investment challenges is daunting, not just for oil and gas companies but throughout the sector. And ExxonMobil’s