KSA: Unmanaged Energy Transition To Cause Oil Price Spikes

The shift toward renewable energy has to be managed very carefully in order to prevent a surge in oil prices as energy demand continues to rise, according to Saudi Arabia’s finance minister.

“We have very serious concerns that the world could run short of energy if we are not careful in managing the transition,” Mohammed Al-Jadaan, the finance minister of the world’s largest oil exporter, said on Monday.

“In Saudi Arabia, we have an interest in maintaining demand. We are also worried that demand is increasing and there are no alternatives to fill that gap and we don’t want oil prices to go too high,” Al-Jadaan added.

The minister reiterated recent warnings from other officials and industry executives in Saudi Arabia that the world should not rush to an unmanaged energy transition.

Last week, for example, the chief executive of Saudi Aramco, Amin Nasser, warned at the World Petroleum Congress in Texas that a rushed transition into renewable energy would cause spiraling inflation and social unrest. Investments in oil and gas still need to continue in order to avoid such a scenario, Aramco’s top executive added.

“I understand that publicly admitting that oil and gas will play an essential and significant role during the transition and beyond will be hard for some,” Amin Nasser said as quoted by the Financial Times.

Oil and gas investments post-COVID are still lagging behind pre-pandemic levels, industry officials and analysts have warned in recent weeks.

Upstream oil and gas investment must rise to the pre-pandemic levels of around USD 525 billion per year through the end of the decade so that the industry can ensure a demand-supply balance, Saudi Arabia-based International Energy Forum and IHS Markit said in a report last week.

This year, upstream investment is still depressed for a second year in a row and is estimated at around USD 341 billion, they added.

OPEC Secretary General Mohammad Barkindo warned the audience at the World Petroleum Congress last week that cutting investments in oil and gas production is misguided. Insufficient investment in new oil and gas supply would lead to energy shortages, as well as market imbalances and higher prices, Barkindo added.

Across the Atlantic, the Biden administration worsened the inflation of gas prices by both restricting the supply of oil and pressuring banks and asset managers to divest from traditional energy projects. The result of these policies that are considered as flawed by criticizers is weakened purchasing power for consumers and more reliance on foreign countries to keep the United States powered.

President Biden is seen as partially restricting America’s ability to produce its own oil and is instead relying on foreign countries, some of which have governments run by totalitarian regimes, to produce more oil to lower gas prices. Biden’s decision to cut off avenues for more domestic supply of oil by canceling the Keystone XL pipeline and limiting exploration on federal lands and waters gives the OPEC significant leverage over American energy consumption.

Sen. John Cornyn hit the nail on the head by stating that, “begging the Saudis to increase production while the White House ties one hand behind the backs of American energy companies is pathetic and embarrassing”.

According to the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers rose 6.2 percent from October 2020 to October 2021. Specifically, energy prices increased by 30 percent in the past year, “its largest 12-month increase since the period ending September 2005”. At the same time, gas prices rose 49.6 percent. Additionally, the Personal Consumption Expenditures Price Index rose by 5 percent from October 2020 to October 2021.

Inflation is eroding purchasing power for low-income households and the Biden administration is seeking to choke off capital to the oil and gas industry, limiting the United States’ energy supply.

In October, Blackstone CEO Stephen Schwarzman stated that part of the reason why energy prices are so high is that financing for fossil fuel companies is “almost impossible” to attain. Moreover, BlackRock CEO Larry Fink also admitted that policies that restrict the “supply of hydrocarbons has created energy inflation” and that it is not transitory — in fact, it may stick around for a long time.

The mismatch between demand and supply for energy could get worse. Wood states that the issue is the oil price is going to get higher in a fully reopened world because nobody’s investing in oil but the world still consumes fossil fuels. The rise in prices can be attributed to political pressure from the administration to reel back oil and gas production.