Almost one year on from Joe Biden's US election victory, his mandated moves to begin the "transition" (as he put it) from oil have taken a knock.
Well, several, to be more precise. During campaigning, Biden expressed the view that the US could shake off its reliance on oil and gas by the year 2050, and pledged to limit the spread of fracking (hydraulic fracturing), for example, by withdrawing leases on federal land. New oil and gas exploration approvals were also expected to be cut in the coming years, to reduce future oil and gas production activity. But, the first eleven months of the Biden Presidency have been dogged by an acute energy crisis, which has reinforced the importance of the United States in global oil and gas supply and thrown transition plans into confusion. We already know that several banks and pension funds have pledged not to fund new oil and gas projects, citing environmental concerns. And these moves, now accompanied by government pledges along the same lines, appear to be creating the impression of an impending future shortage of oil and gas. Hence, prices have escalated as a natural response to this fear.
Based on this, are we looking at postponement or dilution of transition measures in the US oil and gas market?
The likelihood is that we are, and we are already seeing the signs. Among the market variables routinely scrutinised by US oil and gas traders, alongside inventory stock levels and refinery runs, is the “rig count”. Published by US oilfield engineering services group, Baker Hughes, the count tells us how many active rigs are in place across the US, and provides an overview of the health of the industry itself, as a high rig count suggests confidence in future demand for oil and gas. So, what is happening to the US rig count? Over the last year, the rig count has risen sharply. In October 2021, the count was reported at 543, up from 282 in October 2020, and the highest since April 2020. Not much sign of transition there, and this trend is likely to continue, as long as oil and gas prices remain upbeat. The rig count also suggests a rising need for associated gas, often a by-product of oil production. In bygone years, associated gas was very often flared, but with high prices and demand from the domestic and LNG export sectors holding up, associated gas has become sought after.
High global gas and LNG prices are also certain to raise the case for new US LNG export proposals, once again suggesting growth in the US gas market, and probably funded by hedge funds, if not by banks. LNG is an essential element of any global transition phase, since it is cleaner than oil and coal, and it is abundant. New US LNG projects will have a key role to play in meeting rising demand in Asia and Europe, supporting conventional backups to unreliable and intermittent renewable energy sources. US LNG and oil have also become crucial in providing political balance. If US production were to be halted, and in other areas such as the UK North Sea, for example, such steps would effectively hand control of the global oil, gas and LNG markets to Saudi Arabia, Iran and Russia - a worrying prospect for many in terms of risks of security of supply.
The US may seek to lead by example in climate policy and in reforming its oil and gas industry, but the strategy here, and the example it sets must be appropriately balanced, otherwise it has potential to create too many risks. Transition cannot be achieved overnight, in the US or in any other major economy, and the reality is that transition will take much longer in certain markets than in others. And, while affluent countries may appear, in principle, able to move quickly, within their boundaries there is great diversification in terms of wealth, which, in practice, will certainly inhibit progress. Ownership of an electric vehicle is still well out of the reach of many Americans and Europeans, never mind those inhabitants of less affluent economies. Indeed, maybe we should start to talk less about “transition” (which might imply a clear, readily achievable and uniform process), and more about “adaptation”, which leaves scope for pragmatism, margins of error, and varying speeds of climate and energy policy implementation by different regimes at different times.
The next steps taken by the US / Biden Administration should also recognise that exploitation of gas and LNG need not be contrary to climate policy objectives, if it is accompanied by equivalent efforts to cancel, mitigate or lessen emissions through carbon capture programmes, flue gas emission capture, carbon allowance trading systems and other technologies and market mechanisms. Such an example would serve as a solution to the upcoming desires of such states as Mozambique to exploit their gas reserves as a means of raising future income levels and improving standards of living, while complying with global low-carbon standards in LNG production put in place by the US. US oil and gas are here to stay for the time being. Indeed, the start of the US transition is still a long way off, and the latest market shocks and developments suggest that the US should continue to make its vital contribution to global oil and LNG security, until such time as an orderly method of market reform can be developed.
