How Biden is wrong about the future of oil

Ten years. That’s how long President Biden gives the oil economy.

He’s only wrong by a few decades.

During his State of the Union speech earlier this month, Biden bashed oil companies for raking in huge profits while he also dramatically understated future demand for oil. “We’re going to need oil for at least another decade,” Biden said. “We’re going to need it. Production.”

Biden, of course, wants energy companies to produce a lot more oil and natural gas in order to keep prices low and give his sagging popularity a boost. But he undermines his own aims by hastening the demise of fossil fuels, or at least trying to. If demand for fossil fuels were really likely to dry up within a decade, we’d already see a sharp drop in oil and gas supplies, probably accompanied by soaring prices.

Luckily for Biden, that’s not happening … yet.

“By 2050, oil demand will be about where it is today,” Dave Ernsberger, head of market reporting for S&P Global Commodity Insights, tells Yahoo Finance. “But if we’re not investing in fossil fuels we will see more and more disruptions to energy security. There could be potential shortfalls in supply and we could see more inflation spikes driven by energy.”

S&P thinks global demand for oil will peak around 2031, as the chart below shows. But instead of plunging, as Biden seems to expect, demand for oil will more likely stay close to peak levels for years, maybe decades. Advanced economies are pushing hard for a transition to green energy, but it will take a long time to transform mature infrastructure not easily replaced without permitting fights and layers of opposition. Developing nations will adapt more slowly and burn more fossil fuels as they grow. Population growth, meanwhile, will mean more people driving, traveling and consuming energy.

The trick for the United States and allied democracies is making the transition to green energy without prematurely shutting off supplies of oil and natural gas that still power most of the world economy. Energy markets in 2022 gave a preview of what could go wrong. Energy prices spiked for a variety of reasons, causing political problems for Biden and several of his counterparts in Europe.

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Several factors pushed prices up. Energy producers began curtailing investment in new projects after years of over-investment and poor returns. Russia’s invasion of Ukraine and resulting sanctions threatened energy supplies just as the global economy was rebounding from the Covid pandemic. In the United States, oil and gas drillers say Biden’s condemnation of fossil fuel use has depressed investment, since lenders and shareholders don’t want to commit money to an industry on the wrong side of government policy. Huge new federal incentives for green energy development also draw capital away from traditional energy.

While not gushing the way Biden wants, US oil and gas production has been ticking upward. Domestic oil production will likely hit a new record of 12.5 million barrels per day in 2023 and 12.7 million barrels in 2024, according to the Energy Information Administration. That would eclipse the prior record from 2019. Natural gas production is already at record highs and likely to go higher.

As the world’s largest oil and gas producer, the United States enjoys cheaper energy than Europe and many other parts of the world. But that dynamic is likely to shift as more green energy comes online and the business case for further fossil-fuel investment dims. S&P forecasts that oil market share for the OPEC cartel will rise from 36% in 2020 to 42% by 2040, while the non-OPEC share, including the United States, drops from 64% to 58%. That’s largely because the nationalized oil companies of OPEC members such as Saudi Arabia and the UAE can continue investing in new facilities as long as their governments tell them to. In the United States and other free-market economies, fossil-fuel investors are likely to continue pulling back as green energy ramps up.

A few points of market share might not seem like a big shift, but with energy markets tight, small changes in supply or demand can have a large impact on prices. Saudi Arabia is already one of the most important “swing producers” of oil, able to boost supply on demand if needed to stabilize markets. That’s why Biden asked the Saudis to produce more oil last year, when US gasoline prices hit $5 per gallon. Saudi and other OPEC members seem likely to have more influence over global oil markets as investors elsewhere seek greener pastures.

As Biden learned last year, OPEC tends to prefer high prices for producers over low prices for consumers. Saudi Arabia and other Middle East oil producers are also cozying up with China, which has become their biggest and most important customer now that the United States produces much of its own oil. US influence over energy markets — and prices — seems destined to wane as the private capital driving energy development in the United States migrates away from fossil fuel.

Biden and many environmentalists hope Americans will switch to renewables before there’s a serious oil and gas crunch. Yet writing off fossil fuel too early makes such a crunch more likely. In the future, some president may have to talk about that at the State of the Union.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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