We take a look at the top 10 issues affecting the energy market in 2021.
1. Could Energy Prices Break New Records as the World’s Economy Recovers from Covid?
As of this writing, the July contract price for West Texas Intermediate (WTI) crude oil has broken $70 per barrel, bringing it in line with prices from 2018 – e.g. before the price falls that predated the precipitous cliff edge collapse of oil futures into negative dollar territory last spring during the initial phase of the pandemic.
Will oil prices go higher? Yes, but the question now is by how much and how quickly.
There are still imbalances in the economy – for example, employment is still 7.5 million workers below the pre-pandemic levels, yet many employers are having trouble finding workers. But vaccination rates are going up here in the US, in the UK, and, by summer, in the EU, all of which should help drive up demand.
On the supply side, the upstream oil and gas industry (including the all-important unconventional fracking sector) needs to recover from extensive layoffs, well shutdowns, mergers, and bankruptcies that have taken place over the past two years before it begins firing on all cylinders again.
The Fed is signaling now that we should expect higher prices overall in the coming months. It may even have to raise interest rates this year, and Fed Chair Janet Yellen says we could see inflation rates as high as 3% this year (though she expects it to be a temporary phenomenon).
In this scenario, $100/bbl oil prices may be here quicker than we know it.
2. The Biden Administration Races to Tighten Oil and Gas Industry Regulations Unwound by the Trump Administration
For oil and gas E&P companies, the news out of Washington has to feel like a rollercoaster ride, as regulations loosened by executive orders of the Trump administration have been reversed one by one by the incoming Biden team.
These wide-ranging actions include canceling recent oil and gas lease options, curtailing oil and gas drilling in Alaska, revoking the Keystone XL oil pipeline permit, and seeking to reinstate limits on off-gassing (flaring) methane and other gases at wellheads.
The Biden administration has also pulled back on lawsuits against California and the other states who sought to instate higher mileage and more stringent pollution requirements on new cars and trucks.
Some things don’t appear to be changing: oil and gas exploration off the coast of Florida and the eastern seaboard appears to remain off the table, for now, thanks to Florida’s pivotal role in election politics.
3. Activist Shareholders and Court Challenges redraw the Future of the Fossil Fuel Industry
May 26, 2021, may go down as one of the most remarkable days in the history of the oil and gas industry.
According to Barron’s, that day, a newly-formed environmental activist hedge-fund, “Engine Number 1,” won three of the 12 seats on the board of Exxon Mobil, allowing it to advocate for “energy transformation” at the oil giant from an unprecedented position within the company’s executive leadership.
On the same day, a court in the Netherlands ordered Shell Oil to reduce its greenhouse gas emissions by 45% by 2030, as calculated from 2019 levels.
(This news comes as Shell completes its “Project Reshape” designed to restructure the company to cut the cost of its oil and gas production by 40%. The company anticipates another major round of US layoffs and has recently announced a sale of its Deer Park refinery operations in Houston to Pemex.)
What is the long-term impact of these revelations of May 26, 2021?
Two areas to watch:
One, will financial ratings agencies downgrade oil and gas companies; and two, will Big Oil companies continue to be able to finance expensive oil and gas projects, or will they follow the path of Big Coal and watch the financing spigot dry to a trickle?
4. Energy Policy Returns to the Frontlines of the Culture Wars
Now that the Coronavirus pandemic is on the wane and arguments over wearing masks have lost their impact, new political fights are looming on the horizon.
The energy market has been caught up in the Culture War before; just think about the fights over Hummer gas guzzlers and energy-efficient lightbulbs.
But prepare yourself for another round of fighting over energy policy, rather than an important discussion of how best to make policy that serves our economic and environmental needs.
For example, an oil development company in Colorado took out full-size billboard advertisements trolling the outdoor sports apparel company North Face who wouldn’t sell their employees jackets with the oil firm’s name embroidered on them.
Meanwhile, President Biden was criticized by fans of gas-powered pickup trucks for “virtue signaling” by test driving a prototype all-electric Ford F-150 Lighting pickup truck.
5. Energy Consumption in 2021
According to the latest information available from the government’s Energy Information Administration, domestic energy use during January and February 2021 has generally caught up with usage during the same months of 2020 and 2019, with residential energy use a little bit ahead (possibly due to Work from Home and other factors) and transportation energy use a little bit behind (possibly due to fewer airline flights and less driving before the effect of vaccinations took hold).
Natural gas continues to be the biggest source of electric power generation, with coal continuing to fall steadily, nuclear and hydropower remaining stable, and renewables inching upward.
The EIA predicts that residential electricity costs will continue their seasonal price swings and will continue their long-term upward trend, increasing by 2.3% in 2021.
For more detailed reports, see the EIA’s 2021 Global Energy Review.
6. Will World Leaders Agree to Transformative Climate Change Pledges at COP 2021?
While an increase in energy use indicates an economic recovery is underway, there is bad news for the environment.
2021 has already set a new record for the percentage of Carbon Monoxide gas in our atmosphere, reaching the highest level in the nearly 70 years scientists have been tracking it.
This figure will only put more pressure on world leaders meeting this fall in Edinburg, Scotland, at the COP 2021 United Nations climate conference to agree to new measures to control climate emissions to reduce global warming.
The Biden administration announced in April that it will re-enter the 2015 Paris Agreement and has committed to reducing US greenhouse gas emissions by half by 2030 (based on 2005 levels).
7. How Vulnerable is Our Energy Grid to Foreign Attacks?
The recent cyberattack on the Colonial Pipeline operator set in motion a gas shortage affecting motorists across many of the southeast states as motorists vied to fill up their tanks from the few remaining gas stations stocked with fuel.
According to a study from IBM, ransomware is now the number one cyberattack risk, with manufacturing industries to the top target, followed by finance companies and then energy companies.
Congress has begun an investigation by holding Senate Homeland Security Committee hearings and taking testimony from Joseph A. Blount, Jr., President and Chief Executive Officer of Colonial Pipeline.
The Biden administration has responded by requesting more funding for cybersecurity defenses, including moving the Strategic Petroleum Reserve (SPR) into the Office of Cybersecurity, Energy Security, and Emergency Response (CESER) as well as continuing the high level of FY21 DOE funding for the National Nuclear Security Administration.
In a bizarre twist, there are reports that some of the ransomware payment made by Colonial Pipeline was recovered by cracking the password of a bitcoin account held by the purported criminal masterminds. Bitcoin values have tumbled as a result as investors digest the validity of this news and whether it means that Bitcoin crypto wallets could be seized by government agencies in the future.
8. When Will We Upgrade and Modernize our Energy Grid?
The unprecedented freeze across Texas this past February that contributed to the deaths of hundreds of people was a wake-up call to improve the state’s energy grid.
Or was it?
Since that time many members of the state’s ERCOT board responsible for managing the Texas energy grid have resigned, and new weatherization and other regulations passed by the Texas legislature were signed into law on June 8, 2021.
But critics point out, in a report titled “Never Again: How to Prevent Another Major Texas Electricity Failure,” that more needs to be done to prevent a recurrence and to ensure natural gas systems and power plants don’t fail in subzero temperatures.
The reality is we need to rethink our national power grid systems to make them fit for purpose and to take advantage of new technologies, such as moving power from greater distances away to prevent another recurrence or to take advantage of power generation in the sun and wind belts to reduce our use of fossil fuels.
9. Will we embrace the Renewable Energy Economy?
Could the Biden infrastructure plan help us move to a renewable energy-based economy?
The proposed legislation is the subject of intense negotiations between the parties in Congress, and it’s hard to predict what will happen. But the original plan offered significant funding to improve the nation’s energy grid and increase the use of solar and wind energy sources as well as promote the adoption of electric vehicles (EVs) and the necessary charging infrastructure.
The Biden administration meanwhile is moving forward with incremental changes via executive orders, such as allowing wind farms to proceed in sensitive areas, such as around Nantucket Island and Cape Cod on the eastern seaboard.
Ultimately, consumers will decide if they want to adopt new green technologies – based on their pocketbooks.
For example, if power created by solar roofs and captured in battery storage systems becomes cheaper than energy from the traditional power grid, we will see widespread adoption of these new green energy systems.
Similarly, if electric-powered cars and trucks become cheaper to buy than gasoline and diesel-powered equivalents, the market will grow substantially and quickly.
However, skeptics point out a few possible flies in the ointment. The recent chip shortage, which has caused major disruptions in the production of cars and trucks (both conventional ICE-powered vehicles as well as EVs) is a potential warning flare.
Could we source enough of the microchips, rare metals, and other components necessary to manufacture these new green technology products (and the supporting infrastructure that goes with it) to make the switch over to renewable energy technologies without damaging the economy?
10. How Will International Developments and Foreign Policy Impact Energy Markets?
Finally, we can’t forget that while the US has once again become energy self-sufficient in recent years, we cannot escape the economics of the world’s energy markets.
Oil-producing regions remain in turmoil, including Venezuela, West Africa, and the Middle East. The US is reengaging with Iran after the Trump administration walked away from an agreement to bring the country back into the world’s economy in exchange for controls on its nuclear programs.
Meanwhile, it’s unclear what OPEC and other oil-producing countries (such as Russia) plan to do about setting future production levels.
And the Biden administration has been drawn into a geopolitical dispute over the NordStream pipeline project, which would deliver natural gas from Russia to Germany through an underwater North Sea route, possibly rendering the existing pipeline through Ukraine superfluous – and vulnerable to a future shutoff from Russian gas supplies.
These are just a few examples of the types of geopolitical issues that could yet define the outcome of energy markets in 2021.
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