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Welcome to the final Energy Source of 2022.
Politics and geopolitics dominated energy this year, from Russia’s invasion of Ukraine, to China’s zero-Covid policy, to November’s midterm elections in the US. The biggest actors in oil and gas markets were governments: Moscow, which launched a full-blown energy war on Europe and then ended 2022 with brutal missile attacks on Ukraine’s heating and power networks; and western governments, which responded with sanctions, an unprecedented release of stored petroleum stocks, and the imposition of a price cap on Russian oil exports.
All the while, energy security concerns and the fear of soaring fuel costs sapped the momentum behind efforts to combat climate change. Europe reopened coal-fired power plants and revived its appetite for liquefied natural gas; the White House administration that entered office with promises of a “transition from oil” ended the year berating Wall Street for not funding more shale drilling.
On climate, there was at least some evidence that a crisis of fossil fuel supply, triggered by an authoritarian leader in a petrostate, would eventually accelerate the energy transition. The Inflation Reduction Act in the US, with its $369bn worth of clean energy subsidies, marked a historic shift — although the US’s European allies already oppose the IRA’s made-in-America provisions. The EU’s decision to accelerate its own energy transition, through the REpowerEU programme, could be a more lasting response to Russia’s petrostate power than its short-term reversion to coal-fired generation. Amid the chaos of a global energy war, the fusion breakthrough may — one day — be seen as 2022’s seminal event.
Today’s newsletter offers up our prediction for the big themes of 2023. Data Drill is on greenhouse gas emissions, which rose steeply last year.
If you read and engaged with us this year, thank you. Keep writing in! Best wishes for the holiday season. Energy Source will return on January 5. (Derek Brower)
Five big energy themes for 2023
Governments will rule energy markets
Government interventionism was a hallmark of energy markets in 2022, marking the start of a new, de-globalising era. The US deployed its strategic petroleum reserve as a tool to influence oil prices; Russia weaponised energy exports to Europe; western consumer countries imposed a price cap on Russian oil imports.
Governments will remain the decisive actors in 2023. Washington’s attempt to reshore clean energy supply chains in the US and the EU’s newly passed carbon border tax, for example, will brew more competition — even among allies. China’s approach to Covid will be as significant in determining oil demand in 2023 as Saudi Arabia’s relationship with the US will be in shaping Opec’s quota policy — and thus global oil supply. Moscow’s actions will be the wild card. Energy’s future is in the hands of governments.
Oil market chaos
Recession is coming (probably) to a developed economy near you, say our Unhedged colleagues. Alongside China’s (latest) fast-spreading Covid wave, this will keep weighing on global oil prices. Any sign of peace in Ukraine would also bring a sudden and deep sell-off in crude futures.
But bulls have plenty to latch on to as well. Despite China’s slowdown and Europe’s energy crisis, the world’s thirst for crude oil will hit a new all-time high of almost 102mn barrels a day on average in 2023, according to the International Energy Agency.
This amounts to growth of 1.7mn b/d for the year. But, crucially, the world will burn more than 103mn b/d in the fourth quarter when demand for the year peaks, says the IEA — a level far above anything seen before at that time of year.
Supply will struggle to keep up. Forecasts for US shale oil growth next year are being trimmed back, as operators contend with soaring oilfield services costs, a shrinking inventory of high-quality acreage, and persistent pressure from investors to hold back capital spending. Outside the US, total upstream spending will remain depressed and new projects slow to come online. The biggest supply risk will stem from Russia, the world’s biggest oil exporter. Putin’s recent escalation in Ukraine means more sanctions on its energy cannot be ruled out. Nor can Moscow’s willingness to come good on threats to unilaterally cut oil exports.
The direction of crude prices in 2023 — and by extension the price of everything else in the global economy — will, therefore, be decided by whichever triggers more fear in the oil market: recession, or insufficient supply? It might be wisest to expect both, with a volatile year building to a chaotic climax as demand soars in Q4.
A bumpy road ahead for clean energy
This past year was a big one for global clean energy: money poured into wind turbines, solar panels and batteries. In the US, the seminal moment was the passage of the Inflation Reduction Act — and its $369bn for clean energy.
But challenges to the green buildout are now more pronounced than ever: clunky US permitting regulations mean big projects — and the transmission lines needed to get their power to market — will be built at a much slower pace than emissions goals demand.
A stand off in the US congress over permitting reform shows little sign of resolution. An unholy alliance of leftwing Democrats, focused on halting more fossil fuel infrastructure, and Republicans focused on foiling a Joe Biden win, killed a push to overhaul the system this year. That will be a theme of 2023 — and beyond — as party politics prevent any further progress on energy. It will have ramifications well beyond America, which will struggle to lead or shape the global green charge if it cannot make progress at home.
Supply chain logjams that have dogged the industry will worsen. Supply of everything from lithium to turbine blades will lag behind supercharged demand. Throw into the mix an emerging protectionist mindset — with battle lines being drawn from Washington to Brussels and Seoul to Beijing — and the future of the clean energy revolution becomes murkier still. These teething problems will be the defining feature of the green energy landscape next year as climate activists struggle to regain momentum in the face of energy security concerns.
Investors focus on the bottom line
Investor altruism, if it ever really existed, will take a back seat to cold hard returns in 2023. The ESG push hit a wall this year. Investor support for climate motions tanked. And the notion that western oil and gas companies might fire up their rigs and ride to the rescue of hard-pressed consumers has been well and truly put to rest.
Climate resolutions at energy groups — which had been rapidly gaining traction in recent years — lost steam this year. BlackRock crunched the numbers after the 2022 AGM season and found overall investor support for green resolutions dropped from 36 per cent in 2021 to 26 per cent, as shareholders baulked at increasingly extreme proposals that could undermine returns. For its own part, the world’s biggest money manager cut its support in half. In December, Vanguard pulled out of the Net Zero Asset Managers initiative, a climate alliance only formed in 2020.
Allegations of “profiteering” from Washington to London, meanwhile, did little to sway oil and gas operators to pump more fossil fuels in solidarity with suffering bill payers. Producers from West Texas to the North Sea kept their spending in check and delivered healthy dividends to their investors. The industry has learned from its mistakes, Scott Sheffield, the shale patch’s top executive told us a few days ago, and isn’t going to repeat them in 2023.
Lower energy prices next year may provide energy investors with more breathing room to throw a vote or two the way of ESG. More likely, in our view, is that Milton Friedman’s theory on investor motivation wins out: “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”
(Derek Brower and Myles McCormick)
The pandemic-driven drop-off in global emissions in 2020 provided some hope that the world could make a serious go at stemming the worst effects of climate change. If economies and industries powered back up in a more sustainable and climate-conscious way, many argued, the aims of the Paris Climate Agreement to keep warming in check were still within reach.
That optimism was misplaced. The Rhodium Group yesterday released its closely watched annual tally of emissions changes, updated with estimates to the end of 2021. It makes for bleak reading.
We have two key takeaways:
The first is that emissions bounced back with a vengeance in 2021. Globally, they were just shy of pre-pandemic levels: 49.5 gigatonnes versus 49.8 gigatonnes before. But in four of the biggest economies — Brazil, India, Russia and China — they were even higher than before.
The other is that for every major emitter save one (China) the rebound in emissions outpaced growth in GDP. In Brazil, emissions grew at three times the rate of the economy. That would seem to damp hopes that the post-pandemic era is a more climate-friendly one.