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January 2022

Energy production has become highly politicized.  At present, it appears as though politics is exerting upward pressure on oil and natural gas prices.  Furthermore, it is likely that the policies that push oil and gas prices higher will remain with us for a while yet!

Political Will and Energy Prices

Energy production has become highly politicized.  At present, it appears as though politics is exerting upward pressure on oil and natural gas prices.  Furthermore, it is likely that the policies that push oil and gas prices higher will remain with us for a while yet!

The climate change movement believes that climate change has evolved from a naturally occurring phenomenon over the last 50 million years, to a largely ‘man made’ phenomenon in the last 50 years.  Ergo climate can be to some extent directed by man.  They believe that they can dial down the temperature of the planet by reducing fossil fuel usage.  This belief system has allowed political parties to play a greater role in the market place for energy.  So much so, that it is very difficult to measure the economic benefit of one energy source against another.  Each source of energy - coal, oil, gas, nuclear, solar, wind, wave etc. is subject to an incredibly complex cluster of taxes, tarriffs, regulations, fees, levies, grants and subsidies.


The Most Efficient Source of Electricity?

Although it is  outside the purview of this commentary, it is worth taking a quick look at the complexity of energy pricing.  The chart below is from Wikipedia.  It shows the estimated cost of electricity by source. The research entities providing the estimates are

·        Lazard – An Investment Bank

·        BNEF – Bloomberg New Energy Finance

·        IRENA – International Renewable Energy Agency

·        IPCC – UN Intergovernment Panel on Climate Change

·        NEA – This is an OECD entity – Nuclear Energy Agency



If you look at the bottom left of the chart you can see the variation in estimates for solar energy. Does 1 MegaWatt hour of solar energy cost $36 to produce, or does it cost $110 to produce? Which expert analysis do you believe – Lazard or IPCC? And what happens after we factor in government taxes and subsidies? Frankly, the Great O’Neill has no idea and we wonder does anybody really know?

Suffice to say coal, oil and gas are penalised by most governments via taxation and other regulations. Whereas solar, wind and wave are assisted by grants, subsidies etc.  The rights or wrongs of these policies need not concern us.  We care about price.

Production Politics

Irrespective of whether one energy source is economically superior to another, a very strong trend in energy policy is serving to increase the price of traditional fossil fuels.  By preferring green energy, governments are discouraging investment in oil and natural gas production.  In 2020 BP announced plans to reduce its production of oil and gas by 40% before 2030 and to scrap exploration in new countries.  Other European majors, Shell, Total, Equinor and Eni have announced similar plans. Governments are even targeting pipelines.  The Keystone oil pipeline system serving Canada and the United States was stopped (phase IV) by President Obama, revived by President Trump and is presently stopped again by President Biden.  

Anecdotal evidence of reduced investment by certain companies and countries does not mean that production will decrease.  The world is a big place and there is no reason to believe that other companies / countries will not take up the slack. However, we are seeing that many of the members of OPEC+ are presently unable to increase production to their desired level.  The 23-nation alliance has been promising production increases of 400,000 barrels per day from November to December and now into January.  In reality, they are delivering only half of that.  Why? Venezuela may provide a clue.

In 1998 Venezuela produced 3m barrels of oil per day (bpd).  Hugo Chávez launched his ‘Bolivarian Revolution’ in 1999 and everything changed. Today, despite its vast reserves, Venezuela produces 1m bpd.  The management expertise, the technical expertise and the investment dollars required to maintain production at its peak level became unavailable.  Venezuela can only increase production by continuously investing in production.  Lower rates of investment inevitably lead to lower production.

2020 Demand Shock  

The demand shock in March 2020 led to a collapse in oil prices and a concurrent drop in production investment dollars.  A lot of small players in the Oil and Natural Gas industry were bankrupted.  Lockdowns prevented vital staff from visiting production and distribution facilities etc. Supply lines for Oil and Natural Gas are struggling to recover.  Price action in 2021 tells us that demand for oil and natural gas bounced back more quickly than supply.



The objective of government legislation is to impede exploration and production in Oil and Natural Gas.  They are succeeding, the green energy movement is winning.  In fact, it could be argued that higher fossil fuel prices vindicate their arguments for green energy.  The Green Team believes that political will can force a speedier transition from fossil fuels. Threats of rolling blackouts in the European or US power grids is not an impediment to the resolve of green energy promoters.  To them ‘climate change’ is a matter of life or death – hence their determination.  

Although there are a myriad of factors influencing Oil and Natural Gas prices, the green energy movement is proving to be one of the most influential and enduring.  In my view, climate politics will continue to provide a persistent tailwind for higher prices in Oil and Gas in 2022.

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