Biden finally glimpses the importance of oil

Environmentalists are aghast. They shouldn’t be.

President Biden’s decision to approve a big oil-drilling project in Alaska feels like betrayal to climate warriors, given Biden’s campaign promise to “end fossil fuel” and pivot to a green-energy economy. But that campaign promise was never realistic. Biden is now learning the lessons of the 2022 energy crisis and acknowledging that the green energy transition is simply going to take a long time.

The Biden administration on March 13 approved ConocoPhillips’s Willow drilling project, which could eventually produce 180,000 barrels of oil per day during 30 years of operation. To appease his climate critics, Biden is limiting the amount of drilling on the site to the minimum amount that is economically viable, while also imposing new limits on drilling in other areas of Alaska.

It doesn’t seem like a compromise to climate activists, who call the Willow project a “carbon bomb.” But Biden’s softening stance toward fossil-fuel production is pragmatic and necessary. The green-energy transition is not an either/or proposition, as some environmentalists insist. It’s a both/and situation in which the United States needs assured access to the hydrocarbons we rely on today while also aggressively developing renewable sources of energy that will gradually replace them.

Developments in 2022 made crystal clear the importance of oil and natural gas for the foreseeable future. Fossil-fuel supplies were tight before Russia’s invasion of Ukraine in February 2022, with prices for gasoline and other types of fuel rising as a result. Russia’s invasion created a genuine energy crisis. Russia’s hydrocarbon supplies came into question as Ukraine’s allies imposed punishing sanctions on Russia, and that threatened economies everywhere, given that Russia was and still is a top exporter of oil and natural gas.

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Those sanctions were supposed to avoid an energy war with Russia, but an energy war happened anyway, in part because Russian President Vladimir Putin wanted one. Putin shut off most natural gas supplies to Europe, which got 40% of its gas from Russia. Natural gas prices spiked worldwide as Europe scrambled to find other sources of heating fuel for the winter. As the war dragged on and Russia continued earning hard currency needed to finance the war through oil sales, advanced nations imposed a price cap on Russian oil, which risks further supply disruptions and rising prices. All of this is still going on and could once again cause energy shortages and spiking prices.

As energy prices soared in 2022, Biden found himself in the awkward position of beseeching American drillers, Saudi Arabia and other petro-states to drill more. Nobody ran to the rescue, with drillers and their investors indicating their preference for handsome profits over risky new investments that would boost supply. That must have been a sobering moment for Biden and his economic advisers, who up till then had blithely bashed oil and gas as a dinosaur industry we could easily do without.

What 2022 taught us is it will be decades before we can live without oil and gas. The possible consequences of misunderstanding that are shortages and painfully high prices—no matter how fast we adopt renewable forms of energy. S&P Global Commodity Insights expects worldwide oil demand to keep growing until 2031. Then it will flatline, staying roughly level for years. By 2050, S&P expects oil demand to be about where it is today. Demand for natural gas may remain strong even longer.

Disruptions to fossil fuel supplies do create an incentive for faster deployment of renewables, as environmentalists point out. And renewables are coming online quickly. The U.S. Energy Information Administration expects the share of American electricity generated from renewables to rise from 22% now to 26% by 2024. The big green-energy bill Biden signed last year will pump unprecedented amounts of government funding into renewables and speed technology breakthroughs.

But abandoning fossil fuels too quickly can cause economic hardship and worse. The shortage of natural gas in Europe, and rising prices everywhere, led some utilities to switch back to burning coal, which is the dirtiest fossil fuel. If utilities could switch to sun or wind power they would, but it’s simply not available. Here in the United States, many homes in the northeast still rely on heating oil, because pipelines carrying cleaner natural gas to the region can’t get approved. Heating oil is similar to diesel fuel, which is scarce and expensive because of limited refining capacity and the loss of Russian supply. As a result, families in New England are bearing the highest winter heating costs in years.

It would be wondrous if some magic incantation switched America’s fossil-fuel infrastructure to renewables. But some clean-energy advocates vastly underestimate the complexity of the job. Building new infrastructure to get renewable energy where it’s needed is going to be just as fraught as getting new oil pipelines approved through residential communities. Everybody wants the infrastructure, as long as it’s somewhere else. Permitting battles and other approvals will add years to the construction of high-voltage transmission lines and other equipment needed to generate renewable energy and move it around. In the meanwhile, fossil fuels are already there.

Someday, renewable energy will displace the geopolitical power petro-states such as Saudi Arabia, Russia and other large oil producers wield today. Until renewables take over, however, petro-states could have more power, if fossil-fuel production drops off in the United States and other democracies. That’s because most petro-state governments control fossil-fuel production through nationalized energy companies that do what the government says. In the United States, energy companies are private-sector businesses driven by shareholder and investor interests, not by government diktat. If drilling isn’t profitable enough, they won’t do it. As long as the world economy needs oil, whoever has the oil will have the power.

Biden may now recognize this. He’s been tussling with oil and gas executives over these very issues for a year, begging for more production while getting an earful in return about hostile government policy. He’s now trying to make government policy toward oil and gas producers a little more friendly, even as it brings incoming fire from the left. But the left can’t lower anybody’s utility bill, while more energy can. That’s powerful, because navigating the present is just as important as planning for the future.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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