High prices, winter shortages delay arrival of post-fossil-fuel world

The question “Do you think it is going to be a cold winter?” has a double-edged meaning this year. Whether the temperature is above or below freezing, it looks increasingly likely that our ability to keep our homes and workplaces warm will be more limited. Adjusting the thermostat may not be enough. There could be actual shortages of fuel, as well as high prices.

We are talking “likely,” rather than “certainly.” But with crude oil ending higher in price on Tuesday than it has since November 2014 — just short of $80 per barrel — everyone is on edge. 

We are intently watching what the Saudis and the Russians do. Together they lead OPEC+, the cartel combining the old OPEC and the big non-OPEC producers. Their economic motivation is simple but has an inner tension. The Saudis want higher prices to balance their budget, which is out of line with their ambitions for economic transformation. The Russians also want high prices for oil but, in a dilemma that we can savor, they don’t want to impact their market dominance in natural gas. Such gas, for which there are actual shortages, often can be substituted with oil.

“Yes” is the answer to those who should be asking whether we are putting our faith in President Vladimir Putin in Moscow and Crown Prince Mohammed bin Salman in Riyadh. A distasteful thought for many of us, but a reason why we may be praying that, despite the dire predictions, things might not turn out as we fear. As a writer in the Heard on the Street column in Tuesday’s Wall Street Journal noted: “… [T]he industrialized world need not panic.” 

For the Biden White House, this is a potential crisis they could well do without. Already criticized in recent weeks for publicly asking OPEC to increase production, a gesture at odds with what is judged right for all those who can remember the 1973 oil price increases and lines at the pumps, it would only compound the sense of political chaos of the Afghanistan withdrawal, congressional obstructionism and falling opinion polls.

Whatever happened to shale oil, shale gas and American self-sufficiency in energy? Ah, so yesterday. And such a misunderstood concept. The United States’s status as a net exporter did not equate with energy independence, and the gloss has been taken off shale oil and gas because many efforts made losses that investors want to recoup rather than allow to grow. And, despite possible natural gas shortages at home this winter, tankers filled with American liquefied natural gas (LNG) will be steaming across the ocean to fulfil contracts for supplies to customers in Europe and elsewhere. 

It’s perhaps a little premature to start playing the blame-game but the parameters likely would be as follows: the transition to a post-fossil-fuel world carries its own challenges, and new fuels are still more dreams than realities. The very fact that oil and gas, not to mention coal, are going out of fashion has reduced investments in these areas even though we still need them. In layperson’s terms, why put money in a project that needs 20 years to show a profit when the need for the fuel may be substantially reduced in 10 or 12 years? And, will efforts to transform hydrogen into a usable (and green) fuel come to fruition in 15 or 20 years — or, perhaps never? 

In the short term, of course, we are being constantly wrong-footed by COVID-19. Have we, the industrialized world, come to terms with it? Is the economy about to take off again, or not? The implications for energy demand are potentially substantial, up or down.

In the meantime, whatever happens, we are back to relying on that often contentious word: the “market.” It will distribute goods and services to where demand is, at a price. Whether people like that price is another question. Here’s hoping, personally, for a mild winter (though ski resorts no doubt will disagree).

Simon Henderson is the Baker Fellow and director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy. Follow him on Twitter @shendersongulf.