President Biden worries about fossil fuels

Gas and oil prices have been tumbling in recent days due to concerns about the spread of the Omicron variant of Covid-19. This has provided some welcome relief on the inflation front.

| 6 min read

This year saw a rapid rise in the price of both gas and oil on world markets. The sharp recovery from the lockdowns of the pandemic last year raised demand substantially.

Opec continued to limit its supply of oil to help boost prices. Gas experienced a large uptick in orders this autumn as China scrambled to buy more to keep the lights on, and as wind and hydro energy disappointed in various parts of the world – leading to yet more replacement demand for gas. Gas prices of around $2.50 per million but earlier this year shot up to more than $6 and are still at a relatively high $3.80. Oil reached a peak of $84 a barrel for West Texas a few days ago and is still at $66, well above the level it was a year ago.

Recovery demand boost

Some of this was to be expected, as demand was artificially depressed last year by the sharp contraction in activity thanks to lockdowns. Aviation was especially hard hit, road and rail travel were also much reduced and some industrial requirements were also down. This year has seen more of these unlock with the resumption of additional travel and industrial need.

The EU has become dependent on Russian gas.

As the leading advanced countries turn more to renewable energy for their electricity generation, they from time to time need to suddenly buy in much larger quantities of gas as the preferred stop gap to keep the lights on. Light winds, winds that blow too much and poor sunlight can all cause an upsurge in gas demand. This can lead to paying much higher prices for occasional large quantities and makes managing the gas supply more difficult.

The EU has become dependent on Russian gas. This has worried successive Presidents of the US as the leading NATO ally. Some of the gas for western Europe has come via a pipeline that passes through Ukraine, which earns a useful income from hosting it. Germany's decision to encourage the construction of a second Nord Stream pipe to route more gas directly from Russia to Germany under the sea instead of via eastern Europe was opposed by both President Trump and President Biden, as granting more power to Russia and undermining Ukraine, a western ally.

The politics of pipelines

Germany has not yet signed the contract for gas using the new pipe, and the EU too is involved in approving the regulatory framework for the likely transaction and is taking its time. Germany is seeking to place as much of it as possible under German and EU law but will still need to manage an often-difficult relationship with Russia with a history of using energy supplies as part of the diplomatic pressures that can be applied to western countries.

The US has recently released Intelligence reports showing a massing of Russian troops on the eastern borders of Ukraine close to the provinces where many people sympathetic to Russia live. There is no direct NATO military guarantee for Ukraine in the way there is for the Baltic Republics, although NATO offers political support and help for Ukraine’s self-defence.

Russia will want to fill its pipeline and increase its leverage over Germany and the EU.

The EU and the US have continued to protest about the annexation of Crimea and to warn Russia not to consider an invasion. All the time Russia thinks Germany will sign the gas deal an invasion is unlikely. Russia will want to fill its pipeline and increase its leverage over Germany and the EU as a result, whilst weakening the revenues of Ukraine. It is a double win for Russia.

President Biden has shown he is worried about higher gas and oil prices. He is speaking against the inflation he has presided over. He has said he will sell some of the country’s stockpiles of oil to try to weaken prices. He has warmed his relationship with Saudi to try to get Opec to pump more to curb prices.

Balancing the cost of transition

Though Mr Biden claims to be a keen advocate of decarbonisation policies, which need higher prices to get people to switch away from fossil fuels, he recognises that current levels are difficult for people to afford and are part of the reason why his popularity has plunged. Leading Democrats are also claiming the domestic oil and gas industry is profiteering, which deters the industry from more drilling and expansion.

So far, the winter has been relatively mild – and the short-term forecasts are benign. When Omicron became a concern, the oil and gas markets sold off in anticipation of a fall in activity once more. This has provided some welcome partial relief on the inflation front, where high energy costs were a major driver of the rising index.

The position of Ukraine will be weakened.

The events of recent weeks are a reminder that, as the advanced countries rely more on renewables their systems are less stable. It has reminded us all that the principal oil and gas producers include some large countries that will seek to use their market power against the West and for political ends. It means more political risk in markets generally, and a weaker position for the EU assuming they sign the Russian gas deal.

The position of Ukraine will be weakened. Russia is more likely to infiltrate and whip up dissent against the EU amongst the Russian friendly eastern population than to commence an early invasion. It is likely to be more of the same with Russia provoking and probing western defences but falling short of a major attack.

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President Biden worries about fossil fuels

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