The energy problem

 Mark P. Mills:

If we needed just one example of the labyrinthine nature of global oil markets, it would be the fact that even as President Biden was visiting Saudi Arabia to cajole the kingdom to increase oil production, the Saudis were buying oil from Russia. Those purchases, at the embargo discount, allow the Saudis to export their embargo-free oil at the current high price. Despite headlines and hype about an imminent end to the oil age, oil and its price still matter. The way to tamp down prices, and to contain the risks—and the price consequence—of a loss of supply from Russia is to produce more oil elsewhere. While the U.S. remains the world’s biggest producer, it’s only third in terms of exports (Russia places second). Hence the energy realpolitik of meeting with the Saudis, the world’s biggest petroleum exporter.

In the modern era of oil geopolitics, every president has visited Saudi Arabia since Richard Nixon in 1974. The reasons have always been the same. Energy security is closely tied to stability in the Middle East. But while oil currently trades above $100 a barrel, and gasoline goes for about $4.50 a gallon, we have not yet experienced anything close to the two true energy shocks of modern times. Policymakers fear another loss of supply similar to what happened during the 1979 Iranian revolution and the 1973 Arab oil embargo, which triggered oil prices to jump 200 percent and 400 percent, respectively, and sparked global recessions. A loss of a major share of Russia’s supply to the world, whether from an accident or deliberate retaliation, would trigger a third energy shock. Under a worst-case scenario, J. P. Morgan analysts recently noted, oil would hit $380 a barrel.

Two things are different today. First, a shock this time could be more severe because comparable scales of both petroleum and natural gas supplies are at risk. While oil keeps everything moving, natural gas keeps the lights on and is a critical chemical feedstock in both manufacturing and agriculture. The potential price spike for natural gas is far greater than it is for oil. That’s what’s motivating the political scrambling, both public and behind the scenes. European leaders are canvassing the world’s producers of both fuels, from Algeria to Venezuela, and are busy planning for or implementing draconian energy-rationing measures.

The other new factor is the U.S. shale revolution, the fastest and greatest addition to world energy supply in modern times. The only comparable expansion started in about 1965, with the opening of Saudi Arabia’s giant Ghawar oil field. But the shale boom, 60 years later, added twice as much energy to world supplies over the same length of time. In more politically salient terms, the shale expansion added 800 percent more energy to the U.S. than did the subsidized expansion of solar and wind combined. In fact, the growth in U.S. shale energy production was nearly double that of the entire world’s expansion of solar and wind combined.

America’s energy transformation has had far-reaching implications, not least that the U.S. began exporting crude oil again for the first time in four decades, and at a volume double the last peak seen circa 1960. The U.S. now exports more crude than five of OPEC’s members. Policymakers spent a half-century handwringing about U.S. import dependencies and implementing programs that had little effect on overall energy realities. Instead, the technologies and techniques of the shale revolution, developed and financed almost entirely by private concerns, upended the status quo.

All of which raises a critical geopolitical question: Is it possible to ignite a repeat of the shale boom?

The long-promised “energy transition” that would putatively eliminate society’s dependence on hydrocarbons has not happened. So it would be dangerous to base policies on the assumption that such a transition is in the offing and could delink from Russian oil and gas or reduce the economic havoc from high prices. Those goals require both increasing supply from elsewhere while also reducing demand, whether from rationing or expanding alternative energy sources. With their newfound energy realpolitik, most European nations are now pursuing that “all of the above” strategy. The U.S. has not joined that club.
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Still, unleashing the potential for an American shale resurgence remains significantly in the hands of policymakers. Government leaders ignore at their political peril the importance of energy costs. Gallup’s long-running tracking poll about what people volunteer as the “most important problem” finds that the economy and inflation top the list by huge margins. The second-ranked issue was “government/poor leadership.” The Russia situation was halfway down the top ten, and climate change didn’t even make the top ten.

Given the importance of low-cost energy and the brutal lessons now visible in the geopolitical dependencies in Europe, it is past time for an energy realpolitik. That would mean a policy that embraces an “all of the above” energy strategy by unleashing competition among energy forms—rather than opposing, or favoring, one or the other. The competition we should want distills to that between America’s technology-centric possibilities and Saudi Arabia’s geopolitical calculations. Think of it as our silicon versus their sand.

I suspect that much of the US production going to Europe is a beleated attempt to deal with the cut-off of Russian energy that Trump warned about.  If Europe had heeded Trump's warning rather than laughing at it they could have developed other resources and import more US LNG. What we do know is that Green energy is incapable of making up the difference.