Hello again from Energy Source.
It’s crunch time for Joe Biden’s energy and climate plans. Two key pieces of legislation are set to hit the floor of the US House of Representatives this week.
Democratic Speaker Nancy Pelosi has scheduled a vote on the $1.2tn bipartisan infrastructure bill for this Thursday. But progressive Democrats have vowed to block the package if it is put to a vote before an agreement has been reached on the larger $3.5tn budget bill that is also on the docket. Pelosi wants to push the spending bill forward for a vote this week as well — but details there are still being thrashed out.
Meanwhile, a new global energy crisis is brewing as European and especially British readers are already aware. In the UK, the army may be called in to help relieve an acute petrol shortage. Power and natural gas prices in Europe are still near record highs and liquefied natural gas is also selling around the world at a historic prices.
The US has been mostly insulated so far, although pump prices are vexing the Biden administration, and rising natural gas prices will feed through into the broader inflation.
But crude prices are now on a tear as well. Below, we’ll try to explain what is going on with oil prices.
One big question is what soaring fossil fuel prices and supply shortages mean for the UN climate summit in Glasgow and, more broadly, efforts to cut emissions and decarbonise economies. Does an old-fashioned energy crisis make it easier to persuade consumers (and voters) to ditch fossil fuels? After all, burning the stuff isn’t just responsible for climate change — it’s become expensive too.
Or do spiking prices make it more pressing to increase fossil fuel supply and make the hydrocarbons on which the global economy still depends much cheaper?
Our colleague Martin Sandbu argues that given Europe’s decarbonisation agenda requires making fossil energy use more expensive, the current trauma calls for politicians “to persuade voters that doubling down on decarbonisation — with its implications for gas prices — is the best way to avoid similar crises in the future”.
Merryn Somerset Webb, by contrast, argues that the crisis should inject some reality into the debate around the energy transition.
“The truth is, whether we like it or not our energy transition involves long term reliance on fossil fuels. That means that we should stop demonising them — evangelising about ESG, following the trend to divest from shares in oil companies and kiboshing new projects with regulation, high financing costs (many banks are pulling back from the sector) and the like. Instead we should focus on making their extraction cleaner and more efficient while we wait for the engineering challenges around a renewables-led future to be solved.”
I know many of you reading this have equally strong views. Please share them with me at derek.brower@ft.com. In short, my question is: Will this fossil fuel price surge make it easier or harder to pursue the urgent decarbonisation the world needs?
Elsewhere in the newsletter today, American solar developers say the threat of new import tariffs on panels is hurting their business — and the decarbonisation drive.
Finally, we detail how rising demand for electric vehicles is playing its part in the global commodity surge.
Thanks for reading!
What’s going on with oil prices?
Oil prices are following global natural gas and electricity prices higher. Brent, the international benchmark, settled at $79.53 yesterday, a three-year high. West Texas Intermediate, the US marker, is now trading for more than $75/b.
Given the Biden administration’s touchiness about gasoline prices, it seems plausible that Jake Sullivan, Biden’s national security adviser, will mention crude markets when he meets with Mohammed bin Salman, the Saudi crown prince, during a visit to the Middle East this week.
There is little consensus among analysts, traders and consultants about what is driving the rally. They say lots of things are happening at once.
For one, global stockpiles are draining fast because supply is not keeping up with soaring demand as economies reopen.
Global stocks are being depleted at a rate of about 4.5m b/d — the fastest draw on record — and inventory could fall to its lowest level since 2013 by the end of the year, according to analysts at Goldman Sachs. Goldman predicts that Brent will hit $90/b by then — $10/b higher than it previously forecast.
Opec is restoring some of the production it cut last year to prop up prices, with about 2m b/d of extra oil due to be added by the end of the year. Bulls say this is not enough to quell the market rally.
But the cartel will only raise production if it is confident that the market really needs the extra oil next year too. In fact, analysts at HSBC think Opec could pause its supply increases next year to avoid over-supplying the market. The cartel is more likely to err on the side of under-supplying the market than risking a price slide.
As for the US, shale producers will add just 250,000 barrels a day this year, according to analysts at Tudor Pickering Holt & Company — a fraction of the growth rate seen in recent years. (Growth in 2022 will be much more significant.)
Meanwhile, the damage from Hurricane Ida to US offshore production has been more severe than thought. Analysts at Energy Aspects say 29m barrels of supply has been lost so far, “which is far greater than output cuts from other storms over the past 10 years”. Production won’t be fully restored for months.
The sudden supply shortages have come just as China’s independent refineries — the so-called “teapots” — begin sucking in more crude too, according to OilX, a data firm that watches oil shipments. Florian Thaler, OilX’s chief executive, said these refiners “have put in a real and proper V-shaped recovery . . . from the lows seen in August”. It is happening despite government efforts to slow these non-state-owned refiners’ operations. Thaler says the upshot is likely to be stronger-than-expected Chinese demand for crude in the fourth quarter.
Lastly, the pandemic. Market sentiment signals that many believe the worst has passed. “Covid is over,” said one consultant.
That’s bullish. But it’s also a line that has been heard before. (Derek Brower)
Solar groups say import tariffs could derail industry
The US solar industry says hefty tariffs on imports from south-east Asia could deal a “fatal blow” to the development of American projects — and have already disrupted some shipments.
The Department of Commerce is weighing up petitions to slap duties of between 50 and 250 per cent on the bulk of imports from Malaysia, Vietnam and Thailand. Those three countries combined make up 59 per cent of US solar module supply.
“These tariffs . . . would be a serious blow — perhaps a fatal blow — to the broader US solar industry,” said Abigail Ross Hopper, president of the Solar Energy Industries Association.
The petitions, filed anonymously in August, have prompted ferocious kickback from America’s solar developers and contractors. The SEIA says the duties could add more than $3bn in costs to industry players over the next 15 years and wants Commerce to throw out the petitions. The department will decide what to do on Thursday.
As the US tries to drive a domestic green manufacturing industry, renewables developers are fretting over the imposition of protectionist policies that could increase their costs and slow rollout.
Solar developers’ concerns mirror those of their counterparts in the wind industry, which has lashed out at “Buy America” provisions being attached to tax credits. The executive leading the development of the country’s first big offshore wind project told us last month that the sector could be left “dead in the water” if authorities clamp down on the use of foreign materials.
Developers said that the threat of the tariffs alone — which could be dated back to this Thursday if they are ultimately imposed — is already causing suppliers to halt shipments.
“Just the submitting of this petition has essentially frozen the market,” said George Hershman, president of Swinerton Renewable Energy, the largest solar contractor in the US.
“We can’t get module manufacturers today to sign purchase orders that we need to deliver projects in the near term, because of the concern over whether or not there’s going to be a . . . tariff when those modules hit the port.”
By the way, if you are among the anonymous filers of the prospective tariffs, I’d love to hear from you: myles.mccormick@ft.com. (Myles McCormick)
Data Drill
With more electric vehicles hitting the road, the need for batteries has intensified demand for metals. A new analysis by S&P estimates lithium demand will double in the next four years and forecasts shortages in 2025. Currently, EVs account for more than 50 per cent of global lithium demand.
Whether a supply crunch will occur is uncertain, as metal production scales up and recycling capabilities grow. Currently, western miners are scrambling to secure new sources of metal.
Global EV sales grew over 140 per cent in the first quarter of 2021, according to the International Energy Agency. The organisation expects EV sales to reach 22m in 2030, with the number potentially higher if governments step up their climate efforts.
More than 20 countries have announced plans to phase out conventional car sales in the next few decades. If the bipartisan infrastructure bill gets the stamp of approval from the US House of Representatives this week, the package would invest $7.5bn in charging stations. (Amanda Chu)
Power Points
Europe’s energy crisis sparks hope for US LNG despite the White House’s strategy to transition away from fossil fuels.
SoCalGas said it would pay $1.1bn to settle nearly all litigation relating to the Aliso Canyon natural gas leak in 2015.
China’s power shortages are hurting its GDP.
Airbus says a hydrogen plane is possible by 2035.
Africa needs $2tn to launch low-carbon manufacturing, McKinsey says. (Bloomberg)
Inside the Pentagon’s fight over wildfire aid. (NYT)
Source: Economy - ft.com
