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Economic Pain Forces The Energy Transition Narrative To Shift

The past two weeks saw a significant shift in the overarching narrative surrounding the energy transition, as the previous narrative of a rapid shift away from fossil fuels and the need to stop all new investments in them gave way to the realities in the world as it is today and as it will likely remain in 2050. As the prices for oil, natural gas and coal spiked due mainly to artificially-created supply crunches, a new narrative demanding massive new investments, calls for increased production and recognizing the need for ongoing abundance for decades to come has emerged.

Here are some of the key events of the week that together form the outline of this emerging new narrative:

  • The U.S. Energy Information Administration (EIA), in its annual International Energy Outlook for 2021, while recognizing that demand for renewable energy will rise rapidly through 2050, recognizes the reality that demand for both oil and natural gas will also continue to rise over that same period of time in a near-straight-line progression. “Driven by increasing populations and fast-growing economies, consumption of liquid fuels will grow the most in non-OECD Asia, where total consumption nearly doubles by 2050 from 2020 levels in the Reference case,” EIA says. “Because these countries will consume more liquid fuels than they produce in the Reference case, we project that non-OECD Asia will supplement local production with increased imports of crude oil and finished petroleum products.”
  • Moody’s released new research Thursday in which it finds the oil industry will need to increase its capital investments by as much as 54% to avoid an even more major, non-artificial supply crunch in the coming years. The firm estimates that the $352 billion of industry capital investment during 2021 would need to rise to $542 billion in order to keep pace with new demand. Moody’s report is consistent with earlier reports by Rystad Energy and Wood MacKenzie estimating the industry under-investment since 2015 in the finding and development of new reserves that will be needed to meet rising demand.
  • The trouble with Moody’s finding in the U.S. though, was illustrated in a statement made by Scott Sheffield, the CEO of big Permian Basin producer Pioneer Natural Resources PXD this week. Sheffield was quoted by the Financial Times as saying that the upstream sector of the oil and gas industry has become too intimidated by ESG-focused investors to create a supply response to any price signal, regardless of how high it goes. “Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent,” Sheffield said. “All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.”

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  • Sheffield’s comments have led some to speculate that privately-held firms are immune to such investor pressures, and would create a supply response of their own. But as I’ve detailed in earlier stories this year, the ESG pressures aren’t coming just from investors: They’re also coming increasingly from contractors and customers. Privately-held upstream firms may be less influenced by investor pressures, but they will be influenced by similar pressures coming from banks that hold their debt, corporate midstream companies and corporate refiners and LNG export companies that ultimately sell their production abroad.
  • Thus, it seems illogical to expect to see any truly significant supply response from the U.S. or corporate international majors like Shell, BP or Total. Strategically, this will inevitably provide OPEC and the OPEC+ alliance increasing influence over global supply and, as a result, global crude prices.
  • It’s key to note that all three reports by Moody’s, Rystad and Wood Mac have come in the wake of the May, 2021 hyper-alarmist report by the International Energy Agency (IEA) in which that global body called for the cessation of all new capital investment in the finding of new oil and gas reserves. That report was of course designed to support the old narrative, involving the notion that the world could just quickly and easily transition from a fossil fuel-based energy mix to one based on renewables without pain or displacement or other negative consequence.

Capping this week of data points off, the World Energy Council issued its’ 11th annual World Energy Trilemma Index this week. The WEC designs this report to serve as a tool for governments to use to “track national policy performance over time and cross reference performance and progress with other nations.”

Among the report’s top-line findings, these two seem especially compelling in the context of current events:

  • Worldwide renewable capacity has grown with renewables now accounting for over 80% of new capacity additions. However, global carbon dioxide emissions have continued to rise.
  • More than 700 million people on the planet still lacking basic access to any electricity or clean fuels.

In issuing this year’s report, WEC Secretary General Dr. Angela Wilkinson notes that “Energy literacy remains poor across many stakeholder groups. There is a general lack of appreciation and understanding of the connections – between climate neutrality, affordability and social justice and in relating matters of price, cost and value.”

This is a very astute observation, and it helps to explain the ongoing disconnect between the fluffy, pain-free “energy transition” narrative that has been pushed so forcefully since Election Day 2020 and the painful, volatile and disruptive realities that are taking place in real time as policymakers attempt to force this transition on reluctant economies and societies. As Dr. Wilkinson notes, these connections between noble goals and the economic and societal impacts created by pursuit of them are very real and very important.

What the world has seen this this year is that, if those connections are not properly understood and considered when policymakers attempt to force changes that markets aren’t ready accept or facilitate, the societal consequences become severe, and prevailing narratives can be suddenly forced to shift.

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