Investors have made crude producers king again on bumper corporate results from oil’s steady march upwards. And climate risks may only fuel crude’s rise in the short term.
ExxonMobil soared to its highest levels in three years after blowout results this month. Royal Dutch Shell, TotalEnergies, Equinor and BP likewise saw their oil businesses churning out cash. The results had nothing to do with new energy transition strategies. A shortage in crude production pushed up prices over the past year.
But isn’t climate change policy about removing crude from markets? So why does the market value oil rather than holding its nose over a future of stranded investment?
So far, only the pandemic and the result of OPEC-Russia infighting have removed crude from markets. Climate risk has yet to really turn up. Carbon Tracker even took Exxon to task, claiming it failed to properly notify investors of climate risks in its results. There is no doubt risks will come. But timing is key.
In the short term, climate risk may even extend deterred investment and lead to higher oil prices. Russian industry executives have set forth this notion more than once. To understand how pricing got this way requires a look back over the past two years.
OPEC and Russia agreed to a massive output cut about two years ago, as pandemic lockdowns and a supply war created a massive temporary glut. In the U.S., oil prices fell below zero for the first time in history.
Producers in the cartel, in addition to cuts, slashed exploration and production budgets. Corporations outside of the cartel in Europe did the same, uncertain of future prices. Producers of high-cost shale deposits in the U.S. stepped back from the necessary churn in spending to strengthen balance sheets, letting output fall. In general, producers cut output and scaled back future investment due to the pandemic and price.
Policy makers, and mostly publicly-traded oil producers, really only got serious about climate change during the pandemic. In this period, investors and oil producers themselves started reacting to climate change risks by diverting investment towards renewables, gas and power. Renewables powering electric transport would lead to less carbon-emitting fuels.
The writing appeared to be on the wall for crude. And it may still be there. But…
After the pandemic subsided, energy consumers did not return to a futurist world of electric cars powered by solar panels, windmills, batteries and hydrogen. That does not exist in scale – yet.
They stuck the keys in the ignition and turned their cars back on. And with that started the next supercycle in commodities pricing.
OPEC and Russia have been challenged in getting supply back up in line with rising demand. Saudi Arabia is the only nation that can really turn it on and off like a tap. Production elsewhere needs time for investment, drilling, seasonal concerns, etc. U.S. shale producers have been waiting for higher price ranges before jumping back in. Even then, climate risks in loans and investment fund capital, and the recent memory of burnt fingers, will mean more caution.
Meanwhile, during the same period, shares prices for utilities, wind turbine manufacturers, solar providers and hydrogen equipment producer have been in a slide. That’s mostly due to higher input costs from commodities prices, which is actually the same reason driving oil.
The electric future has not disappeared. Consumer tipping points in that direction will likely continue to rely on the pricing and capabilities of batteries. That appears very much on its way to happening, although the exact timing remains unknown.
Major oil producers will continue to rake in cash in the next year or more as oil supply remains tight. But the stakes are getting higher for how they invest this money in the years to come. Each future cyclical turn in oil prices will see a greater chance of the consumer entering into a different world, one where windmills and electric cars present a viable and affordable alternative. And at that point, the cycle may break.