Close this search box.

Reality forces the Biden administration to backtrack on its campaign against oil & gas

The Biden administration backtracks on its campaign against oil and gas

Seeking Alpha, 25 October 2021

The Biden administration’s climate agenda has reached a crossroads. After nine months of trying to make life difficult for the oil-and-gas industry, the administration has turned to it for help in addressing the energy challenges that confront the nation.

Late last week, the administration was reported to be in discussions with oil and gas executives, presumably to assure that the U.S. has adequate supply for the approaching winter. On the midstream front, the administration is searching for ways to improve energy “logistics.”

It shouldn’t take the president and his National Security Council long to recognize that pipelines are the only feasible answer on the scale required for the U.S. economy.

The new tack by the administration was born of political necessity, not a change of heart toward oil and gas.
In fact, the administration had to exhaust the alternatives available to it before caving to the reality that the industry it vilified is needed to bolster its election prospects amid falling approval ratings.

Over the past few weeks, the administration requested more oil from OPEC. It suggested tapping the Strategic Petroleum Reserve. It even went so far as threatening to ban U.S. crude oil exports, apparently failing to recognize that such a move would precipitate a domestic energy catastrophe.

The Key Principle

The significance of the Biden administration’s pivot isn’t limited to practical issues in the here-and-now. Even more importantly, it’s hammering home a central principle of modern political economy, namely, that when climate policies cause adverse economic outcomes, they are scaled back to preserve economic wellbeing.

The principle can be seen today anywhere there’s an energy crisis. For instance, it has taken effect in both China and throughout Europe.

As the Biden administration’s self-preservation instincts kick in, the principle has become operative in the U.S. At the moment, U.S. consumers are being pinched by the near doubling of domestic oil and gas prices over the past year and the ensuing increase in inflation. They are also reading headlines about global energy crises and are concerned that sooner or later it may arrive in the U.S.

If the administration wishes to forestall its falling approval ratings, it has to be seen as supporting consumers’ economic wellbeing. And if an energy crisis is in the offing, the administration’s only recourse for staving it off is to partner with the domestic oil-and-gas industry.

To fully appreciate the force of this principle, it must be viewed in the context of what the administration has done to impede domestic oil-and-gas industry activity. The following is a partial list of measures taken over the past ten months.

On President Biden’s first day of office in January, he revoked the permit granted to TransCanada that is necessary to construct the Keystone XL pipeline, which was planned to bring 800,000 bpd of Canadian crude to the U.S. Gulf Coast refinery and export complex.

One week later the President issued an executive order placing a moratorium on oil and gas leases on federal land. While a federal judge later blocked the moratorium, the administration instead slow-walked the issuance of new permits, which have fallen by more than 75% from year-ago levels.

Despite the oil and gas industry’s progress on reducing methane flaring – which we witness every quarter on midstream earnings conference calls – President Biden signed a Congressional resolution tightening restrictions on methane leaks from fossil fuel production and is likely to introduce additional regulations through the EPA that will make production more expensive. The regulations may be prohibitively expensive for smaller independent operators in Colorado and New Mexico. The new regulations would also apply to oil and gas infrastructure.

The administration is increasing financial regulation on the oil and gas industry. Based on the theory that climate change is a financial risk, the President passed an “Executive Order on Climate-Related Financial Risk.” The order instructs federal bureaucracies to incorporate climate-related financial risk into their regulatory and supervisory activities, mitigate climate-related financial risks, and take actions to “protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk.” It also directs federal agencies to weigh climate-change financial risk in how they provision credit through grants and loans.

The FERC is taking climate into account in the agency’s rulemaking and environmental reviews. The agency is being urged by other governmental agencies to incorporate the cost of carbon in its environmental reviews. The FERC is reportedly considering requiring an environmental impact study before approving even the smallest infrastructure upgrades.

The administration is trying to pass its “Made in America Tax Plan” in the latest reconciliation bill. The plan is punitive to oil and gas companies. It seeks to eliminate expensing of most new well costs and the depletion allowance, while also restoring taxes levied by the EPA.

The fact that after all this the administration is forced to go hat in hand to the industry for help in mitigating an energy crisis shows the extraordinary extent to which economic wellbeing trumps the climate agenda.

Oil and Natural Gas are Here to Stay

The problem the administration faces is that oil and gas demand continues to increase while climate policy has stymied the supply system. Moreover, demand is likely to continue increasing over the next few years and for many years thereafter. The transition to other forms of energy will be measured in decades, similar to previous transitions, as oil and gas demand continues to grow with the population and economy, even as its share of the energy mix shrinks.

The physical and economic properties of oil and natural gas – including their abundance, energy density, portability, and low cost – are simply too valuable to be quickly pushed aside by other energy sources that lack them. Meanwhile, oil-and-gas alternatives have their own issues. Solar is reaching the physical limit to its efficiency.

There is only so much wind and it is intermittent. Batteries will be constrained by commodity economics until some major breakthrough. Converting to hydrogen will take decades.

As long as the powers that be are incentivized to maintain the modern standard of living by outcomes at the ballot box, they will be incapable of weaning the economy off fossil fuels by government decree as rapidly as they hope. In a more gradual, market-based transition, the newly emerging energy sources are likely to complement oil and gas as opposed to outright supplanting them.

Full post