By Liam Denning 

Releasing millions of barrels of reserve oil and pushing energy companies to drill are only the beginning.

With its attack on Ukraine, Russia has made enemies of more than a few states. With regard to energy, though, Russia is far from being an enemy of the state. The war has accelerated a shift in energy away from markets and toward mandates.

President Joe Biden announced Thursday not one but three federal interventions in energy markets. The headline grabber was a 180 million-barrel release from the Strategic Petroleum Reserve, the biggest ever. But he also invoked the 1950 Defense Production Act to spur domestic development of critical minerals such as lithium that go into batteries for electric vehicles and the grid. In addition, he prodded Congress to make oil and gas companies holding fallow federal acreage pay a fee for it or drill.

This is, on one level, political theater; whichever staffer came up with “Putin’s price hike” surely got the afternoon off. Gasoline averages more than $4 a gallon, and we’re eight months away from midterm elections. Biden must shift blame — in this case, to Russia and some domestic oil producers. And he must be seen to act — by multiple constituencies, from drivers to environmentalists to Senator Joe Manchin (who had called for support for domestic minerals development).

The theme of theatricality extends to the substance of Biden’s actions, too. While the SPR release is straight-up shock and awe, and will affect global oil balances, the battery-related measures look relatively limited compared with Biden’s goals for electric vehicles. As for the fallow acreage fee, calling on Congress is definitely a thing a president can do.

Nevertheless, it would be short-sighted to dismiss all this as just another day in Washington.

Two trends that will define energy markets in the coming decades are deglobalization and decarbonization. The fragmentation of supply chains doesn’t end with Russia’s isolation. There is also the mounting rivalry between the U.S. and China, which underpins the sudden focus on domestic battery minerals. Support for globalization has retreated in the U.S. and elsewhere as concerns about security, domestic resilience and job creation have been thrust forward by a series of shocks stretching from the 2008 financial crisis through the pandemic to the war in Europe (see this for a more detailed take).

The other trend is decarbonization in the face of climate change. While market mechanisms such as carbon pricing can work and are being used in places, decades of delay in addressing the issue have spurred a push for outright mandates. Moreover, here in the U.S. at least, there is an apparent preference for labyrinthine subsidies and regulations over transparent price signals.

Markets are struggling in other ways, too. In theory, American oil producers should be drilling like there’s no tomorrow. In practice, the fact that they spent much of the past decade doing exactly that means today’s investors won’t back drill-baby-drill, war or no. Consider, with oil priced above $100 a barrel, energy’s share of the S&P 500 is still below 4%, roughly where it was at the beginning of 2020, when oil was closer to $60. The two-step required to provide adequate fossil fuels today but also wind them down over time — which is how Biden structured his announcement — is also proving tricky. On the battery side, lithium production forecasts lag the expansive targets set by governments and automakers for EVs.

While the exact impact of Biden’s moves is debatable, it is striking that such steps are being taken at all — and setting precedent for further steps. The Defense Production Act, in particular, is a political Swiss army knife that, once opened, raises all sorts of possibilities. Note also that Biden is treading a familiar path. His immediate predecessor from the opposing party wasn’t shy about framing energy as a political (or geopolitical) tool or about trying to shape supply and demand by executive fiat. Such interventionist impulses can be found at state and local levels, too, particularly when it comes to a U.S. electricity grid trying to balance reliability with changing patterns of generation and consumption (and extreme weather).

Today’s concerns about national security and climate security are mutually reinforcing — and echo the situation in 2008 when, amid high oil prices, both presidential candidates’ energy platforms acknowledged the need for higher domestic output of oil and gas while also promising action on emissions. Much has changed since then. The U.S. has transformed itself from a big net importer of oil to a small net exporter. Yet energy “independence” isn’t shielding Americans from high pump prices. And while Republicans have shifted hard right on climate since 2008, they have also gained a taste for protectionism and market meddling under the influence of a certain ex-president. We tend to think of energy-market interventions only in terms of supporting cleantech from the left. But that overlooks the rash of state laws from the right blocking fossil-fuel phaseouts or punishing banks for not lending to oil producers. 

Exactly what such heavier intervention portends is hard to say, in part because it depends on who holds power. The usual messy contradictions that politics entails can be expected. The current exhibit: states cutting gasoline taxes, which encourages demand, to deal with scarcity pricing. Inflation can be expected, too, as supply chains snap and trade barriers rise — including potential emissions-linked tariffs. On the other hand, industrial policy, done right, could also foster further momentum in cleantech innovation and investment, pushing costs down. In any case, as energy markets strain to handle the exigencies of both contesting the planet and saving it, expect governments to increasingly take such matters into their own hands.

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Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker. Energiesnet.com does not necessarily share these views.

Editor’s Note: This article was originally published by Bloomberg on April 4, 2022. EnergiesNet.com reproduces this article in the interest of our readers. All comments posted and published on EnergiesNet.com, do not reflect either for or against the opinion expressed in the comment as an endorsement of EnergiesNet.com or Petroleumworld.

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EnergiesNet.com 04 05 2022