Prioritizing climate change and green energy means that Democrats actually like high gas and fossil fuels prices. ~ American Enterprise Institute
The United States is sitting on 264 billion barrels of untapped oil — more than any other country on the planet, according to a new report from Rystad Energy. The vast quantity includes oil in existing fields, new projects, recent discoveries as well as projections in undiscovered fields.
More than half of America’s untapped oil is unconventional shale oil, according to Rystad. Thanks to fracking and the shale oil boom, the U.S. is sitting on more oil reserves than Russia.
Yet, the Biden Administration’s vow to make Saudi Arabia a pariah nation, to reduce the world’s dependence, and to curtail domestic fossil fuels production has made the United States more dependent on energy from foreign sources, writes Marc A. Thiessen, Senior Fellow, American Enterprise Institute. The hostility towards domestic hydrocarbons has also resulted in higher gasoline prices at the pump and in higher prices to generate electricity with natural gas.
Since taking office, the Biden Administration has leased fewer acres of federal land for oil and gas drilling, suspended all oil and gas leases in Alaska’s Arctic National Wildlife Refuge, and announced plans to block new offshore oil drilling in the Atlantic and Pacific oceans.
And the Biden Administration might be preparing to implement a ban on exports of gasoline, diesel and other refined petroleum products — a move that energy groups warn would backfire by reducing domestic refining capacity and further raising prices for U.S. consumers, explains Thiessen.
Prioritizing climate change and green energy means that Democrats may actually prefer high gas and fossil fuels prices. Higher gas and fossil fuels prices would encourage Americans to abandon fossil fuels. Rising gas and hydrocarbon prices would theoretically curb and ultimately end Americans use of fossil fuels.
Inflation, which is a loss of purchasing power, is likely to stay elevated thanks to a variety of structural forces.
The Labor Department reported an 8.3% year-over-year increase in the total Consumer Price Index (CPI) for August. It was a bigger gain in inflation, which is a loss of purchasing power, than expected. Economists and financial strategists agreed that the latest data show inflation is sticky.
Sticky inflation is underlying inflation, or inflation in areas where prices tend to change relatively slowly. Additionally, inflation is structural, meaning the floor is higher than many might assume, and the potential implications go beyond recession.
Vincent Deluard, director of global macro strategy at StoneX Financial, says the current period of inflation is the result of three shortages: labor, energy, and trust.
Labor. The U.S. labor market is still about seven million workers short of pre-pandemic levels.
Energy. The transition to green energy requires moving down the energy-density ladder for the first time in history, meaning the green transition will consume more resources for similar output. And, when withdraws from the strategic petroleum reserve (SPR) stops, it will remove a downward force on oil prices.
Trust. Inflation is inversely proportional to the level of trust between a country’s citizens. “Inflation is a fever that tells you an economy has an underlying ailment of weakening trust, then the fever weakens the body, and it all worsens,” opined Deluard. Inflation is “always and everywhere a psychological phenomenon,” where the problem worsens the longer it persists, Deluard states, as he modifies Milton Friedman’s take on inflation.
Additionally, the August’s CPI report puts the “peak inflation” assumption into question and shows that the labor market and demand -– not supply — problems are driving price increases.
More volatile inflation in categories such as food and energy, which economists and policy makers back out of inflation readings to get to what they call core inflation.
The Fed’s attempt to front-load interest-rate increases is one attempt to regain public trust and restore price stability. The “transitory” inflation argument that has been retired in speeches but not in spirit.
Investors, and central bankers themselves, may therefore be underestimating what the Fed must do to curb inflation, while simultaneously underestimating the odds that inflation remains well above 2% for longer.
The Environmental, Social, and Governance (ESG) movement has shaken up the oil and gas industry over the past 10 to 15 years.
Rising energy prices points ti the reality that the global demand for oil and natural gas exceeds its current supply.
Investments in oil and gas companies and the development of new projects are increasingly under scrutiny due to ESG, which, according to analysts at Deutsche Bank, could increase inflation in the long run. And higher inflation is already one of the biggest worries people have.
ESG stands for environment, social and governance. It is characterized as a responsible or sustainable investment.
According to ESG philosophy, a portfolio manager may not invest in a company if, for example, he or she considers the risk due to climate change to be too severe. Another scenario is that investors may only invest provided the company works to reduce the environmental risks such as climate change.
“If you systematically underinvest in oil and gas production for years, then that necessarily increases your reliance on foreign dictatorships abroad that don’t care about the green energy transition,” says Vivek Ramaswamy. “This is not by accident, this is by design.”
“Solar and wind power aren’t reliable sources of energy, simply because there are nights, clouds and windless days.” Bjorn Lomborg
“The developed world’s response to the global energy crisis has put its hypocritical attitude toward fossil fuels on display,” writes Bjorn Lomborg. Wealthy countries continue to admonish developing ones to cut their fossil fuels consumption and increase their use renewable energy, he states.
Last month the Group of Seven went so far as to announce they would no longer fund fossil-fuel development abroad.
Meanwhile, in response to the current energy supply constraints, Europe and the U.S. are begging Arab nations, specifically Saudi Arabia, to expand crude oil production. Germany is reopening coal power plants, and Spain and Italy are spending big on African gas production.
Over the past century, the developed world became economically wealthy through the pervasive use fossil fuels, which still overwhelmingly powers most of their economies. Fossil fuels still provide three fourths of wealthy countries’ energy consumption, while solar and wind provide less than 3% combined.
The reality is that solar and wind power aren’t reliable sources of energy, simply because there are nights, clouds and windless days. And, improving battery storage won’t help much: There are currently enough battery storage in the world today only to power global average electricity consumption for 75 seconds. By 2040, the battery storage capacity would cover less than 11 minutes of average global consumption.
The assault on fossil fuels has shrunk U.S. refining capacity and the refinery shortage is driving up fuel prices. Basic economics should inform politicians that “prices rise when supply doesn’t meet demand”.
With oil and gas prices on the New York Mercantile Exchange are at five-year highs, you would expect that it would be in oil and natural-gas companies interest to ramp up production, given the current high prices,.
But, oil and gas companies expect that as soon as the current energy turmoil subsides, the Biden administration will shift back to hostile rhetoric, anti-energy legislative proposals, and oppositional regulatory policies.
By forcing up the price of fossil fuels, policymakers have put the proverbial cart in front of the horse. Instead of driving up fossil fuel prices higher, policymakers need to make green energy much cheaper and more effective.
Humanity has relied on innovation and technological breakthroughs to solve other big challenges. We didn’t solve air pollution by forcing everyone to stop driving but by inventing the catalytic converter that drastically lowers pollution.
Politicians rarely let facts get in the way of a good sound bite and political theater.
Experience, economics and simple logic tell you that anything Congress does to “fix” a situation, like high consumer energy prices, will probably do more harm than good, writes Fisher Investment’s manager Elisabeth Dellinger, Senior Editor of MarketMinder. So it is a blessing for equity stocks and financial markets that gridlock on Capitol Hill will likely block any energy related legislation coming out of Washington.
Recently, Congress indulged in one of its favorite pastimes: a public flogging of large company chief executives…on this occasion the targets were major energy company chief executive officers. Politicians have accused the industry of price gouging, and a couple of Senators have proposed windfall profits taxes for energy companies.
The allegations at the Congressional hearings appear ‘more politics than substance’. For one, gas prices have ticked down slightly for three straight weeks. In reality, gas prices tend to follow oil at a lag, so gas’s failure to match oil’s rate of decline over the past four weeks isn’t a shock.
Moreover, the oil executives offered some simple, logical answers why gasoline prices haven’t matched the magnitude of oil’s retreat. Some cited rising costs and shortages of drilling equipment as well as transportation bottlenecks. Others pointed out that the industry is still dealing with the wild swings induced by lockdowns, which brought swift production cuts—and then a need for fast restarts when the companies didn’t have the labor or equipment to oblige.
And, there is a third reason, writes Dellinger: Oil isn’t the only major ingredient in gasoline. The ethanol mandate is still the law of the land. Gasoline sold in the US is required to have a certain amount of ethanol blended with refined petroleum—typically around 10% of every gallon. Ethanol is a “renewable” fuel derived from corn, which has jumped in price since Vladimir Putin invaded Ukraine. Corn is now up 42.2% over the past six months, and unlike crude oil, it hasn’t backed down from the post-invasion spike.[iii] Demand from all corners is keeping the price high, and that is feeding into prices at the pump.
But Congressional hearings are rarely about the truth and facts, especially when the facts put Congress’s past deeds in a bad light. True to form, politicians highlight a hot-button issue, press the blame button and advance a politically motivated policy solution, even though it isn’t likely to pass.
Senators’ have offered windfall tax proposals which are in response to claims that these taxes are necessary because energy firms are restraining supplies and production to keep prices up, tied to “financial discipline” demanded of oil firms by investors. Although these are strong emotional appeals intended for their loyal constituents, but the facts demonstrate that there isn’t much evidence of actual excessive windfall profits.
“Energy is a cyclical business, and companies won’t survive if they can’t bank on having good times to counterbalance the bad”, writes Dellinger. “If eventual profits can’t offset losses, there is no math there for shareholders or creditors. Essentially, a windfall tax implemented now would punish companies for surviving. Moreover, it would destroy the incentive to invest. What is the point in stomaching the high upfront costs it takes to drill and pump new wells if there is a risk the government will confiscate your profits retroactively? How can you plan? Retroactive taxes kill investment, and doing this in the oil and gas industry would probably whack US oil production, making prices even higher over time.”
On the bright side, the likelihood this windfall tax legislation goes anywhere stands about zero. The 50/50 Senate hasn’t managed to pass anything contentious and probably won’t start now—not with Democratic Senator Joe Manchin, who has effective veto power, representing a state with a big natural gas and coal industry.
Midterms currently look poised to deepen gridlock next year. Angry Congressional political tweets and sound bites might stoke fear and hit constituents’ sentiment during midterm campaigns, but financial markets should quickly view that these bills are likely to be ‘dead on arrival’.
Conversely, NYT foreign affairs columnist Thomas Friedman suggests that the U.S. needs to implement an ‘oil import tax’ that sets the price of oil in America at around $50 to $60 per barrel. This tax, he opines, would provide a stable, predictable price for oil companies, and eliminate the wild price swings and volatility in oil prices American have experienced over the past two decades.
“One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis.” Bill Ackman, Pershing Square
Benchmark crude oil prices have surged to $115 per barrel.
The ‘pre-Russian invasion of Ukraine’ rise in gas prices has been the tax Americans pay at the pump for Biden’s administration pro-climate and anti-fossil fuel policies.
Upon taking office in January 2021, the Biden administration implemented policies and regulations that have been extremely detrimental to the exploration, production and investment in domestic fossil fuel energy:
They rejoined the Paris climate agreement,
They terminated the Keystone XL pipeline,
They suspended all oil and gas leases in Alaska’s Arctic National Wildlife Refuge
They began working on his pledge to ban all “new oil and gas permitting on public lands and waters.”
The Biden administration entered office promising to “end fossil fuel” and signaled a hostility to the fossil fuel industry with a major push for clean energy, including a pledge to cut U.S. greenhouse gas emissions by at least 50 percent of 2005 levels by 2030. The result has been that investment, exploration and production has fallen across the oil and gas industry within the U.S.
When you announce your intention to tax and regulate the fossil fuel industry out of existence, investors, along with fossil fuel executives and corporate boards listened, writes Marc A. Thiessen, in a Washington Post opinion piece. The results are less production and capital investment — and higher prices.
Considering that the price of gasoline never rose above $3.04 in the year prior to Biden taking office. Once Biden entered office, gasoline prices broke that threshold in four months — long before Putin invaded Ukraine and economic sanctions were imposed on Russian energy.
Entrepreneur Elon Musk — the founder of the electric car company Tesla — says we need to drill for more oil and gas at in the United States to alleviate world wide pressure on crude oil supplies brought on by the ban of Russian oil exports.
Many billionaire investors, such as Berkshire Hathaway’s Warren Buffett, believe that oil prices will continue to remain elevated in the coming quarters and are putting their reserves of capital were their long term investment beliefs are.
Last month the Group of Seven went so far as to announce they would no longer fund fossil-fuel development abroad.
Recently, Congress indulged in one of its favorite pastimes: a public flogging of large company chief executives…on this occasion the targets were major energy company chief executive officers. Politicians have accused the industry of price gouging, and a couple of Senators have proposed windfall profits taxes for energy companies.