Reality Check

By: Dr. M. Ray Perryman
Published in syndication March 09, 2022

Oil prices are touching an altitude not seen since the spike in summer 2008, pushing gasoline prices into uncharted territory and raising other costs in their wake. The situation in Ukraine and efforts by financial markets to predict it are driving the immediate spurt in prices, but even before Russia invaded, prices were trending upward as the global economy rebounded from COVID-19 and demand rose faster than supply.

Russia is the third-largest producer of oil (after the United States and Saudi Arabia), and the military action raises the potential for supply disruptions. In addition, because oil and natural gas are the mainstay of the Russian economy, some countries (including the United States) are just saying "no." This action is effective in decreasing financial resources supporting Russian aggression, but it also takes a significant portion of the global supply of fuels off the market (at least for some countries for some span of time).

The geopolitical risk of relying on Russian energy has become readily apparent, and measures should be taken to permanently mitigate the situation. The only practical path toward true energy security for the foreseeable future is supporting the development of oil and gas resources even as we address very real climate issues and foster renewable energy development. Facilitating increased supply is also the optimal mechanism to keep prices in check over an extended period.

Supply responses have lagged for myriad reasons, ranging from OPEC policy to financial recovery of firms devastated by the pandemic-driven price collapse. There have also been challenges raising necessary capital for small and medium-sized energy firms (driven in no small measure by climate-oriented requirements and policy pronouncements). Various federal policies have hampered development, discouraged capital formation, and raised perceived risks of future exploration and production.

Simply stated, it's time for a reality check. Renewables are critical to meeting climate goals and must expand rapidly. However, they can be implemented neither rapidly enough nor with adequate consistently to meet global requirements. In fact, the Department of Energy's baseline forecast reveals the need for a 34% increase in petroleum resources by 2050, even as renewables almost quadruple. It's incontrovertible that conventional fuels burned cleaner will be essential, and the Permian Basin of Texas and New Mexico has by far the lowest carbon footprint among the world's major onshore fields. Until there is greater acceptance of this inescapable fact, we'll see production grow slower than necessary, with the inevitable outcome being higher prices, greater uncertainty, and increased geopolitical risk.

Rather than stifling the domestic industry, we should advance the technologies to burn conventional fuels cleaner. As the current disruption has brought home, it is imperative that this shift happen now. Stay safe!