The Revenge of The Fossil Fuels

Originally published at Forbes

Tilak Doshi Contributor
I analyze energy economics and related public policy issues.

ExxonMobilXOM -1.8% Corp. shares rallied to a new all-time high this week, exceeding the previous closing record from 2014. The company’s shares gained 71% since January 1st in a stellar year for conventional energy stocks. Last month, Saudi Aramco overtook AppleAAPL -3.9% as the world’s most valuable publicly traded company. These stock results reflect the sharp increase in crude oil prices. International bellwether Brent crude exceeded $120 per barrel recently. On Monday, Goldman Sachs published a report that revised its oil price outlook higher (again), raising its peak summer price forecast for Brent crude from $125/barrel to $140/barrel. But it is not only crude oil prices that are likely to remain stronger for longer. Energy prices across the board — from thermal coal and natural gas to diesel and gasoline — have surged over the past year and have only been accentuated by the financial sanctions on Russia after its invasion of Ukraine.

Countries around the world are struggling with energy shortages and price spikes as energy security and affordability are propelled to the policy centre-stage after Russian tanks rolled into Ukraine. Yet it would be myopic to view surging energy prices merely as a result of the Russian invasion. The recent price spikes in fuels are a cumulative result of government policies in the West that have focused obsessively with the speculative, model-based forecasts of the climate impacts of carbon emissions. The climate industrial complex has vilified fossil fuels over the past few decades in the name of a presumed impending climate apocalypse. It starved the oil, gas and coal sectors of capital investments and diverted trillions of dollars of public funds to subsidize wind, solar and electric vehicle industries.

What Stranded Resources?

Mark Carney, the “rock star” ex-central banker, is a member of the Foundation Board of the World Economic Forum and became the UN Special Envoy on Climate Action and Finance in 2019. He was appointed finance advisor for the UK presidency of the COP26 United Nations Climate Change conference in Glasgow held in November. Mr. Carney spent the last few years persuading the world’s financial institutions that fossil fuels – accounting for over 80 per cent of global primary energy supply – are “stranded assets” on a one-way trajectory to zero value as the world races to “net zero (carbon emissions) by 2050”.

Mr. Carney isn’t the only illustrious professional on the “fossil-fuels-are-stranded-resources” bandwagon. A short list would include U.S. Treasury Secretary Janet Yellen, BlackRockBLK -6.4% chief executive Larry Fink and Fatih Birol, the Executive Director of the International Energy Agency. They assert an “existential threat” of climate change caused by the combustion of fossil fuels. These leaders in finance and public policy circles are joined in the popular media by climate Cassandras such as Al Gore, Bill McKibben and Prince Charles who have used their bully pulpits to encourage divestment from fossil fuel companies.

One year ago, ExxonMobil gained much media attention as it was forced to concede three board seats to climate activist investor Engine No. 1 in the industry’s biggest and most closely watched corporate contest. Critics of the company’s business strategy railed against the company’s “lack of attention” to alarmist climate concerns. The company had fallen out of favour of the “Woke Inc.” Wall Street hedge funds and was ditched from the Dow Jones index in 2020. And now, the company is the darling of Wall Street as it spews cash for shareholders. According to analyst Stephen Richardson cited by a Bloomberg piece on ExxonMobil’s remarkable turnaround in its stock price, “every conceivable headwind has become a tailwind” given the “structural deficit” in crude oil markets.

The Green Pain is “Worth It”

But the revenge of the fossil fuels is hardly restricted to ExxonMobil’s resurgent stock value. It is no small irony that a vast swath of the U.S. — from the Great Lakes to the West Coast, covering some two-thirds of the world’s richest country — is at risk of blackouts this summer according to the North American Electric Reliability Corporation (NERC).

As expected, progressive commentators and NERC itself blame this on predicted extreme heat and drought. Yet the US has had extreme weather before. After decades of shutting down reliable (i.e. dispatchable power 24/7) coal and nuclear generating plants and replacing them with erratic, weather-dependent solar and wind power, the US national grid is now destabilized and vulnerable to surges in demand and supply. Last year’s near-catastrophic blackouts in Texas after a sudden cold snap is illustrative. As one editorial of a major national newspaper put it after NERC’s warning: “Summer is around the corner, and we suggest you prepare by buying an emergency generator, if you can find one in stock… Welcome to the ‘green energy transition’.”

Europe and the UK, global leaders in the “energy transition” efforts, also face potential blackouts as aggressive retirements of nuclear, coal and gas-fuelled plants have been replaced by unreliable renewables over the past two decades. A shortage of gas this winter could leave six million homes in the UK without power, the UK government recently warned. True to “the revenge of fossil fuels” theme, the government has asked coal power stations it had previously ordered to close down to remain open.

As if putting salt into an open wound, the IEA’s executive director Fatih Birol warned that Europe could be forced to start rationing energy this winter especially if the winter is cold and China’s economy rebounds. This is the same person who announced the astonishing Net Zero “roadmap” — published by the IEA with much fanfare in May 2021 — which called for the global cessation of all new investments in fossil fuels.

While Europe’s sanctions on Russian energy exports have accentuated the energy crisis in the continent, the EU’s rapid and forced transition away from fossil fuels towards reliance on renewables constitutes the essential backdrop to the dire state of affairs in energy security and affordability.

Perhaps most astonishing in the self-inflicted energy crises in the West are the surreal statements made by members of sanctimonious policy and business elites. Speaking about small and medium businesses in the recent Davos summit, Norwegian bank DNB ASA CEO Kjerstin Braathen said the energy transition will create energy shortages and inflationary pressures, but this “pain” is “worth it.” This is comparable — in its sheer cluelessness as to what really matters to ordinary people — to U.S. climate envoy John Kerry expressing his regret that the war between Ukraine and Russia is “distracting people from climate change”.

The World Needs Fossil Fuels

In the incessant and often fawning mainstream media coverage of renewable energy technologies, in particular wind and solar power, the big picture in global energy affairs is left out. An estimated 3.5 billion people – the poor of the developing world, primarily in sub-Saharan Africa and South Asia — lack access to reasonably reliable and adequate electricity supply. In the five-year period to 2019 (prior to the onset of the pandemic), developing countries accounted for almost 90 per cent of global demand growth for primary energy; the Asian developing countries claimed nearly three-quarters. As the developing world, especially the rapidly-growing populous economies of Asia, emerge out of the pandemic lockdowns, access to affordable fossil fuels will be critical to their development prospects over the next several decades.

From this point of view, it is encouraging that “Giant global asset managers are still dumping tens of billions of dollars into new coal projects and hundreds of billions of dollars into major oil and gas companies,” according to a recent report from Reclaim Finance. This organization tracks financial sector investments in fossil fuels. In a statement released with the report, an obviously disappointed Lara Cuvelier of Reclaim Finance asks “Is the asset management industry changing its investment practices in line with climate science, reducing investments in coal, oil, or gas expansion? Unfortunately, the answer is an emphatic ‘no’”. For Ms. Cuvelier, evidently, “climate science” is settled. Meanwhile, green stocks became flops in 2021, lagging even airlines.

Vaclav Smil points out in his recent magisterial book – “How the World Really Works” — coal, oil and gas have powered urbanization, industrialization and agricultural productivity; going up the conventional energy ladder has led to improvements in the standards of living for the vast majority of the global population including the now developed countries. As the rational optimist Matt Ridley stated some years ago, “fossil fuels will save the world, really.”

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Tilak Doshi