Nation's Need for Secure, Accessible Energy at Stake in Policy Debate
Posted June 10, 2021
Throughout the 2021 economic recovery, API’s data have demonstrated the intertwined relationship between the nation’s recovering economy and affordable, reliable energy. Leading economic indicators have continued to rise, and along with them so has oil demand – even as domestic oil drilling and supply have fallen.
According to the current Bloomberg consensus of economic forecasters, U.S. real GDP growth could average 6.6% in 2021 compared with 2020 -- its strongest expansion since 1984, when the real price of West Texas Intermediate crude oil was just over $70 per barrel. Coincidentally, recent oil prices have been at similar levels, and the key question now is whether we have the energy supply to support such a torrid pace of growth.
In that context, actions by the Biden administration that negatively impact or could impact domestic oil and natural gas production appear detached from the nation’s critical need for secure, accessible energy:
- Suspension of oil drilling leases in the Arctic National Wildlife Refuge (ANWR)
- Paused new oil and natural gas leases on U.S. federal lands
- Canceled the Keystone XL pipeline
- Red line discriminatory proposed tax hikes on energy companies, singling them out from every other sector of the economy for higher taxes
Limiting access to oil and natural gas reserves, canceling pipelines and neglecting energy infrastructure, and targeting America’s energy industry for higher taxes – hampering investment and reinvestment – are all moves that should make Americans question where the energy they rely on every day is going to come from under this administration. If it’s not going to be American-made natural gas and oil, supplying nearly 70% of the energy we use, then where will we get the affordable energy needed to keep the lights on and vehicles running?
Energy makes economies – ours and the world’s – go. This linkage manifested as a massive energy surplus during the depths of the 2020 COVID-19 recession, and we’ve recently seen buoyancy in a positive direction as oil demand rebounded along with the economy, as we discussed here.
Among wealthy economies like the U.S., restricting oil and natural gas production could dramatically impact consumers in the form of increased costs, a dubious course in the name of environmentalism, especially in the midst of an economic recovery that’s only just begun.
Globally, energy policies averse to fossil fuels are a direct assault on emerging economies and potentially negatively impact the lives of billions of people in the process.
Under the Paris climate agreement, many emerging economies signed on due to promises of financial assistance, technology transfers and capacity building. Now the International Energy Agency (IEA) has laid out a Net Zero by 2050 scenario calling for no – that is, zero – investment in fossil fuel supply projects starting today. Under this scenario, there would not even be natural gas-related investments, which have been the driving force for lowering power sector emissions over the past decade.
Yet, at the same time, IEA’s Oil Market Report (OMR) for May 2021 candidly noted that “under the current OPEC+ production scenario, supplies won’t rise fast enough to keep pace with the expected demand recovery.”
For the past two quarters, we’ve continually said that oil demand was recovering in tandem with the economy; that U.S. and global oil demand earlier this year had already neared its pre-COVID levels; and, without more drilling and investment, expected economic growth and recovery could be a recipe for an oil shortage, as we detailed here.
If we weren’t emphatic before now, let’s be amply clear that the world needs energy, and our collective prosperity depends on it. Among affluent nations, the restrictions on oil and natural gas could spur upward pressure on prices and, consequently, headwinds to economic growth and prosperity that could disproportionately affect various households and their ability to make ends meet.
Energy requires investment, but recent investment levels raise alarms. In the first quarter of 2021, publicly listed natural gas and oil companies across the industry value chain collectively invested $38 billion, which was the lowest on record for any quarter since 2008 including the Great Financial Crisis.
Meanwhile, the U.S. queue of energy infrastructure projects under construction basically fell by half over the past year – to $174 billion currently from $344 billion one year ago, per API estimates. This says that, as some projects have been completed and others delayed or canceled, the flow of new multi-billion-dollar energy projects has frozen, which in turn means that many oil and natural gas projects that take years to build might not be there when we need them.
It’s actually a global problem as worldwide energy investment and oil drilling has fallen to historic lows. Even in the Middle East and North Africa (MENA) region, where oil can be developed relatively rapidly and economically, energy investments committed between now and 2025 have fallen and lost share in relation to investments in other forms of energy, per APICORP.
We already see indications of an energy shortfall as the U.S. and world economies recover – and the administration’s policies could exacerbate the situation and put U.S. energy security at risk. The moral of the story is to be careful what one asks for as the U.S. and global economies – all the way down to individual household budgets – continue to require continued investments in new oil and natural gas developments.
About The Author
Dr. R. Dean Foreman is API’s chief economist and an expert in the economics and markets for oil, natural gas and power with more than two decades of industry experience including ExxonMobil, Talisman Energy, Sasol, and Saudi Aramco in forecasting & market analysis, corporate strategic planning, and finance/risk management. He is known for knowledge of energy markets, applying advanced analytics to assess risk in these markets, and clearly and effectively communicating with management, policy makers and the media.
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