Analysis | Russia’s war lures governments into energy markets

Take control of the energy system. (Photographer: Al Drago / Bloomberg)

Russia has antagonized many states by attacking Ukraine. However, in terms of energy, Russia is far from being an enemy of the state. The war accelerated the transfer of energy from markets and powers.

President Joe Biden announced on Thursday not one but three federal energy market interventions. The title was the release of 180 million barrels of strategic oil reserves, the largest ever. But he also used the Defense Production Act of 1950 to facilitate the internal development of critical minerals such as lithium, which is included in electric cars and main batteries. In addition, he forced Congress to pay a tax from oil and gas companies that own federal land for this or the drilling.

On the one hand it is a political theater; Which employee thought of “raising Putin’s price” certainly emerged in the afternoon. Gasoline cost more than $ 4 per gallon on average, and midterm elections were eight months away. Biden must shift the blame, in this case, to Russia and some national oil producers. He needs to see the action of such diverse voters as chauffeurs and environmentalists right up to Senator Joe Mancin (who has asked for support for the development of home mines).

The theme of theatricality also extends to the presence of Biden’s shares. Although the launch of the SPR is a direct shock and awe and will impact the global oil balance, the battery size is relatively small compared to Biden’s ambitions for electric vehicles. As for land taxes, an invitation to Congress is definitely what the president can do.

However, the prediction would be to dismiss this as another day in Washington.

Two trends that will define energy markets in the coming decades are globalization and decarbonization. The fragmentation of supply chains does not end with the isolation of Russia. There is also growing competition between the US and China, which is leading to a shift in focus on domestic battery minerals. Support for globalization declined in the United States and elsewhere as concerns about security, internal resilience and job creation were fueled by a series of shocks ranging from the 2008 financial crisis to the war pandemic in Europe ( see for more details).

Another trend is decarbonisation in the face of climate change. While market mechanisms such as carbon pricing can work and be used on the ground, decades of delays in addressing the issue have led directly to applications for permits. Plus, here, at least in the US, there’s a clear advantage over transparent price signals over subsidies and maze regulations.

Markets are struggling in other ways as well. In theory, American oil producers should drill like there’s no tomorrow. In practice, the fact that they have spent most of the last decade doing just that means that today’s investors will not support drilling – child drilling, war or not. Imagine that if oil prices were above $ 100 a barrel, the energy share of the S&P 500 is still below 4%, as it was in early 2020 when oil was approaching $ 60. Also the two steps required today to provide sufficient fossil fuels are difficult to reduce over time, as Biden noted in his statement. As for the battery, lithium production estimates are lagging behind the targets set by governments and carmakers for electric vehicles.

While the precise impact of Biden’s steps is questionable, it is surprising that such steps can be taken and sets a precedent for further action. The Defense Manufacturing Act, in particular, is the blade of the Swiss political army that raises all possibilities once open. He also remembers that Biden is on a familiar path. His predecessor did not hesitate to establish energy as a political (or geopolitical) tool or to attempt to create supply and demand on the part of the Fiat executive. These impulses for intervention are found both at the state and at the local level, in particular in the case of the US network, whose reliability struggles to balance with the evolution of production and consumption models (and extreme weather conditions).

Today’s concerns about national security and climate security reinforce each other and reflect the situation in 2008, when, amid high oil prices, both presidential candidates accepted the energy platform’s need for greater national oil production and gas and have pledged to act on emissions. A lot has changed since then. The United States has gone from a major net oil importer to a small net exporter. However, energy “independence” does not protect Americans from high prices at the pump. While Republicans have advanced in terms of climate since 2008, they have also acquired a taste for protectionism and market intervention under the influence of a certain former president. We tend to think of energy market interventions only in terms of promoting clean technologies from the left. But that does not take into account the breaking in of state laws on the right that thwart the fossil fuel phase or penalize banks for not lending to oil producers.

It is difficult to say exactly what such violent intervention would entail, because it partly depends on who has the power. The usual dirty contradictions that follow politics are expected. Ongoing Exhibition: Governments are cutting taxes on gasoline, which helps demand cope with opening prices. Inflation can also be predicted as supply chains collapse and trade barriers increase, including tariffs on potential emissions. On the other hand, properly implemented industrial policies can encourage clean technological innovations and investments for further momentum, thus reducing costs. In any case, as energy markets struggle to cope with the planet’s conflict and the need to save it, we expect governments to take these issues more into their hands.

Source: Washington Post