U.S. President Joe Biden would do better to spend time and political capital on renewable energy development rather than jousting with OPEC to manage short-term oil prices.
A U.S.-led coordinated release of strategic oil reserves by major countries in an attempt to dampen global oil prices seems to have backfired, as prices rose more than 3% after the announcement. Other participants in the effort include China, India, South Korea, Japan and Great Britain. Brent crude prices, which spent some time under $80 a barrel this month, are back up and over that mark.
The U.S. leader could likely hit oil prices just as hard – which is not at all, so the bar is low – by concentrating on the long-term solution and doubling down on support for renewable energy investment. His focus on oil is all the more galling because Biden actually does support renewables. So why stray?
Instead, the reserve release basically became “an expensive PR stunt for oil import economies,” Chris Weafer, Chief Executive Officer at Macro Advisory, said in a LinkedIn post. “The problem is that governments may only release a limited amount (today’s release is just a half day’s global consumption) and it simply proves how tight the market is.”
The U.S. government does not need to play games trying to manage oil markets with the Organization of Petroleum Exporting Countries (OPEC). Likewise, Biden did not need to take a time out from COP26 climate talks earlier this month to ask OPEC to pump more oil. It sent a mixed message, to say the least, considering the context. And OPEC completely ignored him.
That said, the petroleum era is passing and current price pressures won’t last, according to a statement from Carbon Tracker. The choice between oil or renewables-backed electrification is quickly becoming more and more of a zero-sum game.
“Cyclical highs can quickly reverse,” according to a statement from the consultancy. “The energy transition shall begin to drive annual demand reductions and fewer projects within the oil sector once again. Investors must ensure that they are not left heavily exposed to potential value destruction when this comes.”
Why not stick to that message? Why does Biden instead engage in petro-politics? The U.S. energy industry does not run on government orders, so pursuing that route isn’t likely to suceed in influencing price. And in this case, it’s unneeded, if one just leaves well enough alone.
U.S. shale producers (which are not part of OPEC) are mindful of previous price crashes and prioritize cash flow over production. Yet, all the same, they are edging back into the picture with volumes. Its not “drill baby drill,” but according to Baker Hughes, the U.S. has 253 more oil rigs in operation than the same time last year and it added seven more in the past week.
And even with shale as a wild card, OPEC’s own plan to increase supplies may lead to surpluses early next year, according to Bloomberg strategist Julian Lee. That hardly seems like such a long time.
Left to its own devices, oil supply and demand will rebalance as OPEC continues to increase production from pandemic-related cuts. And even if OPEC and Russia fail, higher prices naturally stimulate shale production in the U.S.
Biden should provide leadership in the energy transition by backing wind, hydro and solar generation. Renewables remove the nation from market dependencies, external politics, provide local jobs, compete on price and overall deliver a superior, cleaner solution across a wide range of industries.
And those are the notions that should really spook any oil traders getting bullish on oil.