The oil industry is flubbing its big test

Two things to start:

Welcome back to another Energy Source.

In today’s newsletter, Derek argues the global oil industry — from Riyadh, Saudi Arabia to Midland, Texas — is failing to rise to the occasion as the world faces a potentially catastrophic energy shock.

Elsewhere, I look at how carmakers’ inability to overcome supply chain disruptions is slowing the shift to electric vehicles. Finally, despite a major push to curtail environmentally damaging gas flaring around the world, little has been accomplished over the past decade, Amanda reports.

Thanks for reading!

Justin

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The odds of a profound energy shortage are rising

In the midst of a global energy crunch, the world’s oil industry seems determined to fail its biggest test in decades. Opec’s meeting later today will be more proof.

If Europe is successful in banning Russian petroleum imports, global oil supply will fall. That is the unavoidable consequence of an embargo.

It means that, unlike in 1973 (when it was producer countries that triggered a recessionary oil crisis), it is now western nations that are flirting with inducing a damaging price increase — with consequences for everything from food to gasoline costs.

No wonder the World Bank warns of the biggest commodity shock facing the world since the 1970s.

Caveats apply. Hungary, Slovakia or another member state could hold up Brussels’s proposal. Or the embargo may be riddled with loopholes. Western officials have mooted “price caps” on Russian oil imports too, designed to let refiners keep buying the oil but at a price that covers exporters’ costs, and no more — though it’s hard to see why Moscow would not just shut off the tap.

Still, western nations’ efforts to shut down the petrodollars are escalating. So, in turn, are the chances of a profound energy crisis.

For energy producers, you would think this would be an all-hands-at-the-pump moment. As US energy secretary Jennifer Granholm told oil executives in Houston a few weeks ago — before an EU oil embargo was even up for discussion — energy suppliers should be on a “war footing . . . And that means you producing more right now, where and if you can.”

If the prospect of filling a Russia-sized oil market gap isn’t temptation enough, producers might also ponder how consumers who already want to curb consumption of fossil fuels will feel as the price of that commodity becomes more expensive.

And yet, in the face of the biggest geopolitical crisis to hit the oil market in decades, the industry’s response has been feeble.

Start with Opec, which is expected to keep its supply plans untouched when it meets today. It has been unable — or unwilling — to deal with the impending oil shortages by raising supply to tame the market. Why?

1. The producers like the extra revenue, even if the higher prices hurt their customers’ economies and demand for oil.

2. Most producers can’t increase output even if they wanted to — a deficiency that is becoming alarmingly apparent as the cartel continues to undershoot its own quotas each month.

3. The two Opec countries that most analysts believe could raise production above modest planned additions, Saudi Arabia and the UAE, are holding pat.

Saudi Arabia and its crown prince, Mohammed bin Salman, have a golden opportunity to win back US favour by ditching their Opec+ alliance with Moscow and answering the urgent pleas from western capitals to increase supply. Instead, the crown prince, who according to the WSJ, is still miffed that the US officials continue to bring up the murder of Jamal Khashoggi, appears to think now is the moment to ignore decades of US-Saudi alliance and stand with Russian president Vladimir Putin.

So much for the global swing supplier — the producer that could be relied on to ease the global economy through crises by flexing output as needed.

There’s always the US, right? Shale could play this swing producer role instead of Saudi Arabia, argued some analysts, boosting production quickly in response to surging prices.

But while Ukraine burns, crude prices inflate, and western governments plead for more energy supply, American shale producers remain fixed on winning back shareholders by resisting the urge to drill.

Their plain is working, for shareholders if not the wider world. Rystad Energy says US upstream companies will generate $834bn in free cash flow this year, up 70 per cent from last year. That’s plenty of money to pay shareholders. Wall Street will be delighted.

But not long ago, shale executives also used to tout their role in satisfying the US’s strategic ambitions, freeing the country of its dependence on Middle Eastern oil, and keeping price spikes at bay. No longer. Dividends and buybacks are a bigger priority.

From Riyadh to Midland, Texas, the world’s oil industry might have learned how to make money again. But it’s not proving very reliable in a crisis. (Derek Brower)

Electric vehicle shortages slow the shift to cleaner cars

With fuel prices across the world at or near record highs, this should be electric vehicles’ moment to shine. But many people hoping to make the switch from fossil fuels to electric power are struggling to get their hands on a new EV, blunting the shift to cleaner cars.

Volkswagen boss Herbert Diess told analysts yesterday that the company was “basically sold out on electric vehicles in Europe and in the United States”, as my colleagues Joe Miller and Alexander Vladok reported yesterday.

Buyers hoping to get into a shiny new VW ID. 3, ID. 4 or electric Audi would have to wait until 2023, Diess said.

A browse through the top carmakers’ websites shows the backlogs are widespread.

Tesla had no existing inventory within 200 miles of Houston, Texas — Elon Musk’s home state. A standard Model 3, priced at $48,490, might not arrive until November, the company says. Ford is no longer taking orders for the 2022 model of its Mustang Mach-E, its flagship electric model, because it is sold out. Rivian, the one-time EV investor darling, says any car ordered today will come in 2023, at the “earliest”.

With the auto industry hoping to lure more people into EVs in the coming years, this is not a good start. Reddit electric vehicle forums are full of epic tales of months-long searches for EVs, dealers charging way over sticker price for limited supplies, and some buyers who are ready to give up.

The supply crunch is partly because sales are booming. In the US, a record 177,561 EVs were sold in the first quarter of 2022, up 76 per cent from the same time last year, according to Kelley Blue Book. That accounted for 5.2 per cent of all cars sold in the first three months of this year — up from 2.5 per cent last year. Those figures are higher in much of western Europe, where fuel is pricier and in many cases EV incentives are more generous.

But it is also because EV makers are having trouble getting cars off the production line. VW’s Diess echoed other carmakers’ supply chain woes — triggered by the war in Ukraine, a long-running shortage of semiconductors and Covid lockdowns in China.

These may prove to be temporary kinks. But the long wait periods and increasingly frustrated buyers continue to complicate the world’s attempt to accelerate a shift off fossil fuels. (Justin Jacobs)

Data Drill

Global progress on flaring reductions has languished for the past decade, says a new report by the World Bank’s Global Gas Flaring Reduction Partnership.

Countries burnt a total of 144bn cubic metres of natural gas in 2021, roughly the same volume that was flared globally in 2012, according to the report.

Just 10 countries were responsible for three-quarters of all global flaring last year. The report found that the top seven countries have held their position for the past decade despite commitments from many countries — including Russia, Iraq and the United States — to end routine gas flaring by 2030.

Flaring is a significant contributor to greenhouse gas emissions. The report estimates 400mn tonnes of carbon dioxide equivalent was released into the atmosphere from global gas flaring in 2021. Ten per cent of these emissions were in the form of methane, a greenhouse gas 80 times more powerful than carbon dioxide. (Amanda Chu)

Power Points