Why Joe Biden and climate hawks are not responsible for soaring fossil-fuel costs.
The true origin of today’s energy crisis isn’t the 2020 COVID crash, but rather, the 2014 oil-price collapse.
In the first years of the last decade, China’s strong growth propelled a global commodities boom, and kept the price of oil hovering around $100 a barrel. This was a boon to energy investors in the short run. But the rally sowed the seeds of its own undoing. Forms of energy extraction that had been prohibitively expensive when oil was trading at $60 a barrel suddenly became eminently profitable. Capital poured into America’s shale industry. Thus, the supply of fossil fuel on global markets rapidly increased. At the same time, slowing global growth combined with advances in energy efficiency lowered global energy demand.
Traditionally, OPEC would have responded to such conditions by trying to stabilize global prices by pumping less oil. But Saudi Arabia saw opportunity in a sustained energy glut.
As a conventional oil producer, Saudi Aramco had a much lower break-even price than America’s shale drillers. And as a sovereign government with a foreign-currency reserve worth $750 billion, the Saudis could afford to sell energy at a loss for a lot longer than private firms in the Permian basin. Thus, by keeping the taps on and allowing global energy prices to crash, the House of Saud could reclaim the global market share that frackers had so rudely wrestled from it.
As a result, the price of oil plunged by 70 percent between mid-2014 and early 2016.
All this had two lasting consequences for global energy markets that are integral to today’s crisis. First, investors’ appetite for new oil and gas production collapsed. Global capital craves steady returns, not 70 percent price swings.
Long-term shareholders in fossil-fuel firms pressured managers to cut back investment in favor of dividends. Many such shareholders had sustained heavy losses during the crash, and therefore refused to sanction risky new projects until they recouped their initial investments.
Second, the combination of advances in fracking technology and a glutted energy market made natural gas unprecedentedly abundant and cost-competitive with coal. Utilities therefore started replacing coal-fired power plants with gas-fired ones, and the global electricity system became newly reliant on natural gas.
These changes in global energy markets lay the kindling for an energy crisis. COVID lit a match, and then bad weather rained down kerosene. The COVID recession took a toll on both energy demand and supply. Thanks to unusually robust fiscal policy throughout the Global North, however, global appetite for energy rebounded much faster than supply chains did. This year has seen the highest pace of post-recession growth in eight decades. Yet 2020 also left behind a maintenance backlog in the world’s energy industry: Public-health regulations and outbreaks forced many producers to postpone upkeep operations that had been scheduled last year. This, combined with several unexpected outages and supply-chain dysfunctions, impaired the ramping up of production in 2021.
