Bank of America
For Japan, Korea and much of Europe, natural gas prices have already climbed to levels that are considerably higher than the price for crude on a per barrel equivalent basis. Further increases could support switching from gas to fuel oil in power generation, but only where such switching is still available. Many western nations have forced the elimination of that ability due to environmental considerations as governments and companies have responded to pressures from the green lobby and the ESG investor community.
That is of course just one more example of the kinds of premature and frankly irrational energy choices governments – including the U.S. – have been making in the past few years to try to hasten this “energy transition,” forcing the replacement of reliable, high-density energy sources like fossil fuels and nuclear with low-density energy sources like wind, solar and electric vehicles powered by lithium-ion batteries.
The energy crisis in Western Europe this summer has been brought on by premature retirements of hundreds of coal and natural gas power plants in favor of massive over-reliance on wind power and, to a lesser extent, solar. Ironically, this crisis is taking place just as House Speaker Nancy Pelosi and congressional Democrats attempt to ram through their massive $3.5 “budget reconciliation” bill that is in large part designed to recreate the European model in the United States.
As Allysia Finley reported in the Wall Street Journal last week, In the past decade the U.K. and Europe have shut down hundreds of coal plants, and Britain has only two remaining. Spain shut down half of its coal plants last summer. European countries have spent trillions of dollars subsidizing renewables, which last year for the first time exceeded fossil fuels as a share of electricity production. The problem with this strategy this year has been the fact that the wind has pretty much stopped blowing in Europe, causing governments that spent the last decade retiring coal and natural gas plants to scramble to re-activate them.
European officials resorted to cleaner-burning natural gas first, and the resulting added demand for natural gas has led to record U.S. exports of LNG to Europe, which in turn has caused a spike in global LNG prices. Thus we see the consequence of a mass decision by European governments to attempt to violate the laws of physics by trying to replace high-density energy sources with low-density energy sources now resulting in their colliding with the laws of supply and demand.
Making matters more precarious for the European countries, Russia has responded to their thirst for natural gas by restricting its own exports to Europe, further driving up the price. As if to illustrate the hapless situation into which those governments have placed themselves, their inability to source adequate supplies of natural gas has now left them with a choice of reactivating mothballed coal plants as well. The trouble there is that, as Natasha Tyrina, research analyst at Wood Mackenzie Ltd. told Bloomberg, Russia is also the only potential supplier that could provide the quantities of coal needed to keep Europe’s lights on and homes heated this winter.
“If all the European utilities switch to coal, it will result in a huge spike in coal demand that Russia alone cannot provide for on such a short notice,” Tyrina said. “That would need supply from other countries as well, from the U.S. for example, but the situation there is similar to everywhere else.”
Democrats Rush To Emulate Europe’s Folly
It is in the face of this looming energy crisis in Europe largely precipitated by these policy decisions that the Biden administration and congressional Democrats have spent the past week attempting to move their “budget reconciliation” bill, which is mainly a social welfare and Green New Deal funding bill. This massive piece of legislation is loaded up with hundreds of billions of dollars in new subsidies, mandates and incentives for these very same intermittent, low-density energy sources, along with new taxes and draconian regulatory actions designed to drive up the cost of fossil fuels in power generation and transportation.
It would be one thing for leaders in Washington, DC to engage in this exercise if the needed battery storage technology for those low-density energy sources existed on a wide scale. But, as I’ve documented here this year, while progress in research has been made, no such technology currently exists on a meaningful, scalable basis. Making matters even more tenuous, the producers of the array of critical minerals needed for the existing lithium-ion technology currently in limited use for power generation and essential for EVs are scrambling to figure out how they are going to meet new demand that is projected to rise by as much as 4,000 percent by 2040 for their products, according to the International Energy Agency (IEA).
Speaking of the IEA, the Chief of that international body, Fatih Birol, told the EU Parliament’s Energy and Environment Committee last week that “It is inaccurate and unfair to explain these high energy prices as a result of clean energy transition policies. This is wrong.”
What that statement is, is nonsense. Of course the “clean energy transition policies” bear some responsibility for this run-up in energy prices. Every new regulation, no matter how noble-minded, has a cost, and the “energy transition” has already demanded wave after wave of new regulation on fossil fuels. Claiming these actions bear no cost or consequence is simply absurd.
Plus, it’s not just the policies of the transition at play here. The ESG-related demands of the investor community, which have limited access to capital for fossil fuel producers and demanded that they shift big portions of their capital budgets over to “green” energy initiatives, have also played a significant role in driving up fossil fuel prices. This is not even arguable: In fact, it’s a key part of the “green” strategy to raise the cost of fossil fuels so that these other “green” energy sources become more competitive in the marketplace.
Birol’s remarks are just in keeping with the seeming vow of Omerta (code of silence) among many public leaders against ever uttering any critical remarks related to these renewable energy sources.
Disaster Also Looms In Texas
Along those same lines, last week we saw the Federal Energy Regulatory Commission (FERC) issue a report claiming that the almost complete failure of wind and solar to deliver power on the Texas electric grid managed by ERCOT had nothing at all to do with the massive blackouts during Winter Storm Uri in February.
Again, this is complete nonsense. Yes, natural gas and coal and nuclear all failed as well, but of course wind and solar’s own failures in the midst of the event played a role, and a significant one, in causing those blackouts. Here’s what the Editorial Board at the Wall Street Journal had to say about FERC’s absurd report:
According to the report, gas plants accounted for 55% of the power-plant capacity that failed during the freeze compared to 22% for wind, 18% for coal and 1% for solar. But actual power generation in Texas increased 400% for gas and 25% for coal in the week before the power outage. Solar and wind power fell 80% and 55%, respectively.
The solar industry hilariously tooted that solar “performed as expected during the February 2021 Texas blackout” and is a “predictable, reliable and affordable clean energy source.” Solar performed the worst of any source and produced less than 1% of state power during the freeze. But hey, regulators expect solar to be predictably unreliable.
FERC’s report is not only absurd, it is dangerous. After all, how can a problem be solved if public officials cannot even bring themselves to properly identify it? This insistence upon clinging to narratives that “renewables good, fossil fuels bad” is destructive to the public discourse and our energy security. These energy sources are all neither good nor bad; they all have their roles to play; we need them all. Europe is finding that out the hard way right now.
Making matters even more disconcerting for those of us in Texas, public officials here have done nothing to require any operator of any natural gas production or pipeline facility, wind farm, solar farm, coal plant or natural gas plant to winterize any of their infrastructure, or to incent the building of desperately-needed baseload power generating capacity. This inaction has taken place despite the fact that Texas Governor Greg Abbott specifically identified these as two of the main maladies on the Texas grid that led to the February event which saw more than 200 Texans die from exposure to cold due to lack of electricity.
In making that correct observation shortly after the February Big Freeze, Abbott pledged to hold the legislature’s feet to the fire, promising he would call members back into as many special sessions as needed if they failed to deal with all of the problems on the grid. It’s a promise he unfortunately failed to keep, choosing instead to cling to a narrative that the legislature had solved everything during its regular session.
God help us if we have another big winter storm next January/February. ERCOT, the manager of the Texas grid, and Gov. Abbott got lucky and avoided any blackouts over the summer thanks to unusually mild temperatures in Texas, but hoping to get lucky is not much of a strategy as prices and global demand for high-density energy sources continue to rise.
A Global Crisis Impacting Global Markets
While the news about the energy crisis focuses in on Europe right now, the truth is that this is rapidly becoming a global crisis impacting global markets. Officials like Birol and the commissioners at FERC may not want to admit it, but the truth is that just 9 months ago, crude oil was cheap, gasoline and diesel at the pump were cheap, natural gas was cheap and all were in seemingly plentiful supply. Today, just 270 days later, oil is $80 and projected to move to triple digits, gasoline at the pump costs $1 per gallon more in the U.S. than it did in January, natural gas prices have doubled in the U.S. and more than quadrupled in parts of Asia and European governments are scrambling to figure out where their supplies for the winter will be sourced.
The stark reality is that there will be no quick fixes from here, for the simple fact that none are available. The senseless policy decisions that helped create this crisis took a decade to fully implement, and will take at least that long to reverse if policymakers should decide to come to their senses. As demand for oil and natural gas rise to new global heights, both Wood MacKenzie and Rystad Energy have issued recent reports showing that the last half-decade has seen an under-investment in the finding of new reserves that runs into the hundreds of billions of dollars. That is not something that can be remedied overnight.
At the end of the day, despite all the prevailing narratives flying around, the world’s energy future will be governed as it always has: By the laws of physics, supply and demand. It is becoming fearfully evident right now that the policy decisions made by governments in Europe, the U.S. and other parts of the world during the last decade have violated all three of those immutable laws.
As a result, winter is coming, and potential energy disaster is coming with it.