Elon Musk IDs The Global Energy Problem, But Who Has The Solution?

In an extraordinary pair of tweets Friday evening, Tesla founder and CEO Elon Musk suddenly sounded like a spokesman for America’s oil and gas industry:

And there you have it: The visionary of the electric vehicle (EV) industry appearing to admit that “sustainable”, i.e., renewable energy sources are useless in this emergency. Just as they’ve been essentially useless to Germany and much of the rest of Europe during their energy emergency since last summer. It almost seems as if living in Texas for the last year is starting to rub off on Mr. Musk’s energy outlook.

But here’s the thing: The U.S. oil and gas industry can’t respond to this crisis immediately, either, though it can respond more quickly than wind and solar could. After all, this is an industry that increased U.S. oil production by 2 million barrels per day in just a 12 month period a few years ago: With the resource available in the U.S., the domestic industry could add a million barrels per day in a few months.

Contrary to a recent statement by Energy Secretary Jennifer Granholm, the U.S. industry can’t just “flip the switch” to turn on more production. It’s a capital-intensive industry whose big projects involve obtaining permits, building roads, leveling drilling pads and installing major infrastructure before production can take place. That takes time, and it takes money. Real money.

There is no doubt the world needs to produce more oil, and fast. But where would it come from? Russian oil is steadily disappearing from the market as refiners and traders increasingly view it as toxic and overly risky due to rising sanctions. Millions of barrels of Russian oil per day are currently going unsold as a result, putting more stress on an already under-supplied market.

It has become increasingly evident in recent months that most of the OPEC+ countries lack significant spare capacity to increase production. Only Saudi Arabia and the United Arab Emirates appear to possess significant excess capacity now. News reports circulated in recent days that negotiators are close to striking a nuclear deal with Iran, which could add half a million to a million barrels per day back onto the markets in fairly short order. Markets responded to that news on Wednesday, as the price fell by 5% or so, but seemed to forget all about it Thursday and Friday, raising the Brent price to $118.10 and West Texas Intermediate to $115.70 at the close.

I’ve previously discussed the fact that the global industry in recent years has failed to invest enough in the finding of new reserves needed to replace the oil we’ve been consuming since 2015. Big analytics firms Rystad Energy and Wood Mackenzie estimated last year that the cumulative investment deficit has been somewhere between $400 billion to $500 billion in that time. Those are big numbers even for this big industry, and it would take years to work that deficit down even in calmer times. Whether this has been a result of pressure from the ESG investor community or due to other factors no longer matters: It’s a fact, and it’s a problem.

Given this lack of needed investment in new resources, it was inevitable that the world would eventually experience a supply/demand train wreck where oil is concerned. Many had thought it would come about in a year or two, but the growing war in Europe has interceded and accelerated the time line; thus, the train wreck has arrived, and Western governments have been caught with their energy pants down.

While there has been some pickup in industry investment levels since those reports were issued last summer, it has been marginal at best. The U.S. rig active count has risen since then, but last week the Baker Hughes count actually fell, and this week’s count from Enverus saw a net increase of just 1 rig over the previous week. This is not exactly the supply response some were anticipating from the domestic industry, and it is certainly not of a magnitude that would be required to even begin to correct 7 years of massive under-investment in new resources.

It is important to remember that Europe’s current energy crisis came to fruition long before Vladimir Putin made the decision to invade Ukraine. It has been ongoing since last summer, a product of more than a decade of irrational energy policy decision-making by the governments of Germany, the UK, France and other European nations. In the U.S., the situation has been exacerbated by the same kind of irrational decision making by the Biden administration, which was still clinging to its “Green New Deal” messaging this week in spite of the energy emergency swirling around it.

As Mr. Musk said in his tweet, “extraordinary times demand extraordinary measures.” But they also require extraordinary decision-makers to make extraordinary choices. In this continuing crisis, it is painfully difficult to identify any such extraordinary individuals among the leaders of the free world. Thus, it seems inevitable that this crisis in energy will continue, and grow far worse before circumstances force the extraordinary choices to be made.