By: Chris Amstutz
We regret to inform you; the politicians are back at it again. We have commented on politics in energy numerous times in the past, and today we look to address the volley of energy headlines that have come out in recent weeks. Like every topic, there is nuance and gray area that is difficult to explain to those outside the energy industry. Today we start a new blog series to address ongoing questions from popular headlines in the industry. GETCHOICE! has decades of combined energy experience, and like a cowboy in the wild west of the energy industry, we always shoot you straight. Here are some of the recent headlines with additional nuance discussed.
Will Biden’s Strategic Petroleum Reserve (SPR) Release Lower Gasoline Prices?
This article reports that the White House predicts gasoline prices to fall 10-30 cents per gallon on the announcement that 180 million barrels of oil would be released for U.S. consumption. SPR releases have had mixed results in the past and it is difficult to say what the final outcome for this will be. The visible outcome thus far, is that the market has lowered WTI oil price futures for the next 6 months, but increased prices beyond that point (see chart below). This is due to producers adapting their production outputs lower in the long run due to lower profit margins in the short run. So all in all, the more complicated answer is that politicians can marginally adjust oil and natural gas prices in the short run but these policies have rippling, unintended consequences in the future. Upward price movements, like what we have seen in the last 6 months, ultimately are tied to long term fundamentals of supply and demand against the back drop of industry trends.
Has the U.S. given up on the Green Energy transition?
This article discusses the “reluctance of President Biden to unleash clean energy rhetoric”. Green energy topics do not typically poll well when energy prices are high (hence the President’s reluctance), but many U.S. and European politicians believe that high prices are the catalyst to increasing renewable energy sources on the grid. The reality is that the U.S. is still not close to a macro, nationwide green future due to the sheer scale in technology required to change the current system. However, micro, individual business level green-initiatives are becoming more popular due to the ability to save money on utilities. GETCHOICE!’s utility bill management platform GET: Smart Management Technology (formerly Choice! Data Connect), allows businesses to benchmark usage, track Scope 2 & 3 carbon emissions, and quantify savings from these green initiatives at the site level. This trend will grow due to high energy prices and the need for increased cost efficiencies.
Are Oil, Natural Gas, and Electricity Prices Increasing Because of Vladimir Putin?
The White House recently published this fact sheet, addressing “Putin’s price hike at the pump”. While it is easy and convenient to blame high energy prices on the Russian invasion of Ukraine, it is but a small factor in the energy market price increase, and should not be used as a meaningful procurement strategy. The truth is, oil, natural gas, and electricity prices began rising in the summer of 2021 to now (up over 100% year over year), due to chronic underinvestment in the energy industry. COVID-19 lockdowns destroyed demand for hydrocarbons, leading to some of the biggest financial losses in the history of American petroleum. The White House now claims that these same companies are gouging Americans, ignoring the need for producers to show a financial return to investors who also lost heavily in 2020-2021. This, coupled with policies that have inhibited domestic pipeline growth and drilling, has added to the global energy shortages we see today. In all reality, Vladimir Putin likely sees the global energy shortage and lack of energy security as an opportunity to advance Russia’s interests in Ukraine, knowing that Europe has no other choice than to buy their petroleum.
The path forward for energy prices is unclear. The answer to the blog question is that President Biden has only a limited capability to affect energy prices in the short run, but the effects of policies today could shape prices two years from now. In the same right, President Biden cannot be blamed fully for today’s energy prices, which were set in to motion during the height of COVID-19. Government directed policy has a tendency to cause the opposite of what is intended in an industry as complex as energy. The facts remain that the globe has felt the effects of an energy shortage since last summer and it will likely continue to be felt for another year as the market stabilizes. The current administration has vocally opposed the use of hydrocarbons, but is quickly realizing the damaging economic effects of a world without them. GETCHOICE! continues to monitor the news closely, looking out for our client’s financial well being during these times of high energy prices.