It's raining energy taboos

Coal could serve as a bridge fuel to renewables. That’s right, not gas, but coal. The gracious allowance comes from the European Commission’s vice president and the man in charge of the Green Deal, Frans Timmermans — the same man who says fossil fuels have no viable future over the long run and who only grudgingly accepted gas as necessary in the transition period to all-renewable energy.

"Things have changed. I mean, history has taken a very sharp turn a week ago, and we need to come to terms with that historic change," Timmermans said in an interview for BBC Radio 4’s Today programme earlier this month.

"Poland and several other countries had plans to transit out of coal, and then temporarily use natural gas and then move to renewables. If they stay longer with coal, but then immediately moved to renewables, it could still be within the parameters we set for our climate policy," the Green Deal chief explained.

Then Belgium joined the U-turners in admitting nuclear energy may have to remain in the country’s energy mix. The U-turn came from none other than Belgium’s energy minister, a member of the Green party. In all fairness, the decision to shorten nuclear plants’ lives was a flexible one, with a provision that speeding up their retirement did not lead to energy supply shortages. Even so, the change of position is telling.

To quote a favourite literary character, well, I’ll be mogadored. After Germany’s Chancellor openly took a stance against a ban on Russian oil and gas imports despite a pro-renewable environmental policy, and after he also suggested Germany may stick with coal and nuclear for longer than previously planned, now this.

Of course, Timmermans is quite right in his assertion that “history has taken a very sharp turn”. This assertion is one more example of the complacent view European governments have been having towards Russian energy supplies for decades. The view has been along the lines of “Whatever we do, they’ll keep supplying us” and indeed the EU has done quite a lot to aggravate bilateral relations, especially with regard to Ukraine, as those with greater memory spans would certainly remember.

Now, it has turned out that Russia doesn’t even need to turn off the taps. Western sanctions for its incursion in Ukraine have done that almost as successfully: traders are shunning Russian oil cargos because of port access and payment problems, and we are seeing the results in oil prices.

Gas prices, meanwhile, are soaring, even though Gazprom continues to deliver volumes consistent with its contractual obligations with Europe. How come prices are so high? Because Europe is looking for alternatives in fear of a supply disruption amid the fighting in Ukraine and as part of that is talking about such disruptions a lot, which acts like a flare gun shot on market speculators. Europe is also talking about coal, and Germany and Belgium are talking about nuclear. Europe, in short, is panicking.

There are pretty good reasons for that. The threat of a supply disruption is a real one as both sides in the Ukraine conflict are quite well aware of the criticality of energy infrastructure. The oil and gas price trends have substantially heightened the danger of a recession, and not only in Europe. That would be quite unfortunate as economies have yet to fully recover from the fallout of the pandemic-related lockdowns.

Sadly, little can be done, except lift Russian sanctions, which is obviously not happening any time soon. And yet instead of looking for ways to minimize the damage, one of which would be accepting that the whole EU may need to stick with fossil fuels for a while longer, Brussels is pushing wind and solar again.

In a series of tweets about sanctions and energy, EC president Ursula von der Leyen said that Brussels was going to “repower the EU by investing in renewables.” That would be the same renewables that require vast amounts of land, substantial amounts of metals, energy to process these metals into components, and whose output varies with the seasons, the time of day, and atmospheric pressure patterns.

The EC then released a document called RePowerEU, in which Von der Leyen said “The quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent and master our energy system.”

A continued focus on renewables is hardly a surprise despite the recent U-turns by individual governments. Renewables are still at the heart of EU transition plans. What has changed is the cost of those plans because if anyone expects the oil and gas price rally to be over by April, they are in for a big surprise. And with energy prices high, everything else’s prices will go even higher. These trends, if they continue for long enough, might give a whole new meaning to “cost overruns”.

Amazingly, by the way, there are still analysts who chant the “low costs” mantra. I just saw this in an FT article: “However, the desire to be more self-sufficient, combined with the lowered cost of renewables and ambitious national climate targets, should trigger a ramp-up in domestic clean energy, analysts said.”

They are saying this while polysilicon prices are hitting record highs, steel prices are surging (and steel plants are cutting output rates), and aluminium is reaching for the sky. And copper? Copper just hit an all-time high last week. None of these metals, nor polysilicon, will be declining soon.

Panic is rearing its head in Washington, too. Last week, Energy Secretary Jennifer Granholm basically pleaded with U.S. oil companies to ramp up production. Addressing attendants at the CERAWeek conference in Houston, Granholm said “We are on a war footing,” adding that “The DOE and the Biden Administration is ready to work with you,” and that “We need oil and gas production to rise.”

Stating a need is invariably easier than satisfying this need and that’s even without considering the U-turnish nature of the Energy Secretary’s — and the whole administration’s — latest energy policy moves. Using a somewhat peculiar metaphor Granholm said that “We can walk and chew gum at the same time,” referring to the White House’s energy transition agenda in an apparent attempt to reconcile it with a short-term boost in oil output.

However, the emphasis that is being put on the short-term part of the output boost hopes will hardly be welcomed by the industry, which has prioritized returns to shareholders over production growth at least in part because of the renewables pivot of the federal government. But that’s not the worst part.

The worst prt was summarised by Occidental Petroleum’s chief executive Vicki Hollobu, also at CERAWeek.

"Nobody really anticipated needing to grow significantly," Hollub said. "If you did not plan for growth, you are not going to be able to achieve growth today."

Yet not only did shale drillers not plan for growth. They have also been hit with the same labor shortages that industries across the United States are struggling with, and on top of that certain materials and oilfield equipment are also in short supply. The drilled-but-uncompleted well inventory has fallen sharply, which means raising output, even if everyone is enthusiastic about it, will take quite a while.

Washington is also reaching out to OPEC, yet again, and has so far hit a wall of unwillingness because, perhaps surprisingly for Biden’s team, the era of unconditional Middle Eastern support for U.S. foreign policy appears to be over. Also, the de facto ruler of the de facto leader of OPEC appears to be a man with a grudge, ready to hold it as long as necessary for his demands to be satisfied.

This is not a good place to be for a government that bet on a fast transition away from fossil fuels. It is an especially bad place to be in an election year. No wonder, then, that the Biden administration is ready and willing to offer an olive branch to the industry it has pointedly been working against since the start of Biden’s term. It also appears ready to offer an olive branch to countries such as Venezuela and Iran, both sanctioned by the previous administration and with sanctions upheld by this one. Talk about U-turns

At home, the Keystone XL cancellation, which took place on Biden’s first day as U.S. president, the federal land drilling moratorium, the annulment of an oil and gas lease sale that the Department of Interior was more or less forced to hold despite its unwillingness, and the cancellation of another lease sale were all clear signals that the Biden administration will not work with the oil and gas industry… until it had to.

Abroad, the Trump administration’s sanctions on Venezuela and Iran were among the few things that the next administration kept untouched even though it did signal a willingness to negotiate a new deal with Iran. And then it reached out to Venezuela after the ban on Russian oil and fuel imports.

That move amounted to nothing less than breaking yet another taboo and as such it couldn’t go down well with lawmakers with a strong belief that the White House has no business handing olive branches to authoritarian governments. It didn’t. But it was one more instance of the simple truth that when push comes to shove, pragmatism trumps considerations such as how other governments are running their countries.

RBC Capital Markets’ Helima Croft said it quite poetically with a charming mixed metaphor: “The White House has embarked on the oil equivalent of a scavenger hunt,” she said, as quoted by the Wall Street Journal. “Given the potential magnitude of the Russian losses, the White House will need something akin to a straight flush to pull it off.”

That energy taboos are falling is certainly a positive development. It suggests that some politicians at least are not too proud to rearrange their priorities when real life shows that the previous arrangement has been less than optimal. Energy security is more immediately important than emission reduction and it is good to see that even Timmermans is inclined to agree. But then again, any politician would agree with anything if failing to do so threatens to cost them the next elections.

Yet the fallen coal taboo and the White House signal that relations with Venezuela are not exactly beyond repair without major reforms on the part of the Venezuelans is only one step in a direction that decision-makers in Europe and the U.S. might need to consider exploring.

This would be the direction of pragmatism, which leads to addressing the most pressing problems of bill-payers first. These would include inflation and food security, ensuring reasonable living standards, and making sure there are no blackouts. As I like to say, if you’ve ever been cold you’d know that when the temperatures drop ideology and climate change anxiety die very quickly.

Image credit: Ken Mull