A Call for Energy Policies that Embrace Renewable Development

Sean Deresh is an undergraduate student in the Vagelos Integrated Program in Energy Research studying Earth Science in the College of Arts and Sciences and Chemical and Biomolecular Engineering in the School of Engineering and Applied Science at the University of Pennsylvania. He is a volunteer advocate with the Clean Air Council, a member of Penn Sustainability’s Student Advisory Group for the Environment, and a research assistant at Penn’s Kleinman Center for Energy Policy. 

Sean is interested in the future direction of the global oil market and what factors might help reduce our reliance on oil as a primary energy source. 

Recent fluctuations of the oil industry: a call for energy policies that embrace renewable development

Given the magnitude of the impending effects of climate change, many sectors have begun to explore alternative avenues for energy consumption that either reduce or eliminate greenhouse gas emissions. Crude oil, one of the primary fossil fuels, has proven to become a driving force in the US energy industry due to its high energy density and low cost. The current US energy policy landscape is still in a transitional phase, and as the Biden administration continues to set goals for expanding renewable energy supply in the US, it is only a matter of time before oil dependency is minimized. The volatility of the global oil market due to drastic fluctuations in supply and demand and recent geopolitical tensions are clear indicators that energy policy must be restructured to help foster a landscape that is not so dependent on oil and can withstand potential changes in energy resource supply. Oil prices are currently hovering around $100 per barrel due to a combination of upward pricing pressure on concerns of reduced Russian oil supply and fears of a renewed COVID-19 economic attenuation in China²⁴. A decline in US oil inventories is putting even more pressure on the price of oil as the nation’s strategic reserve is depleted and the Russia-Ukraine war continues. Through time, mass electrification will inevitably emerge as one of the primary solutions to high gas prices, as global oil trends favor enhanced clean development. 

The current dilemma

The balance of international power is a key factor in the oil industry, with the future fortunes of countries such as Russia and Iran tied to crude oil. Geopolitical tensions and the disparity between supply and demand have led to an increase in the price of crude oil. Prices increased by more than 15% in January, as the global benchmark price crossed $90/b for the first time in over seven years, as fears of Russian invasions in Ukraine grew¹⁴. Upon the Russian invasion of Ukraine, the price of crude oil rose to nearly $96/bbl and Brent crude — the global benchmark for oil prices — went as high as $105.79 for the front-month contract²⁰. The tension between Russia and the West is growing and President Putin is willing to take geopolitical risks to assert his power. If Russian production is interrupted, the US, Japan, European countries, and China could release mode crude oil from their reserves in the event of a crisis. This invasion has caused many entities such as the EIA and investment banking firms to increase their oil price predictions. 

Energy experts and E.U. Officials have expressed that Russia’s invasion of Ukraine is poised to add more urgency to Europe’s efforts to reduce its dependence on Russian oil and gas and to compel Europe to speed up its transition to renewable energy. Discussions of accelerating the transition toward alternative sources of energy began months ago as oil and gas prices began to rise and recently intensified as tensions grew closer to war with Russia. The recent invasion of Ukraine then increased the risk of Europe’s reliance on Russian gas. For instance, Germany, which has been ramping up its wind and solar capacity and shuttered coal-fired and nuclear facilities, has viewed natural gas as a reliable fuel that can get the country through the transition. However, Germany currently receives about half of its gas supply through pipelines from Russia and does not have the infrastructure to take shipments of liquefied natural gas (LNG) from other sources. As Russia’s gas flows have slowed, Germany’s feeling of reliability has shifted. 

The energy transition will be easier for some countries in Europe than others. Some countries could actually return to polluting fuels such as coal-reliant Poland, as renewables still have a long way to go there and it might not seem feasible to meet demand amidst such heightened geopolitical tensions and risks. If the alternative is to stay on course with decarbonization at the expense of high energy prices or vulnerability, this will be hard to achieve, and compromises that will soften climate ambitions set out by the E.U. will have to be established. A European gap without gas could mean relying more on coal and sources such as nuclear by bringing them back online or reducing demand among households and the industry. An E.U. plan to tax carbon-intensive imported goods could have costly impacts on countries such as China and Russia, which have weaker environmental regulations. Absolutely everything could change if the invasion expands beyond Ukraine, and depending on how long this conflict lasts, it could affect U.N. climate talks when countries revise goals for reducing emissions. Geopolitical tensions could drive Russia toward China or even into isolation. If sanctions affect Russia’s access to the markets in the West, they will have to seek other economic opportunities. Losing Europe as a major customer would leave Russia with few options to sell its gas in the short term. 

The crude oil landscape

         In recent years, American consumers have been facing a sustained increase in prices for oil products¹. As a global commodity and primary source of fuel for the global economy, crude oil has a price that is determined by both supply and demand, reflects buyer-seller interactions¹, and has recently experienced an unprecedented shift amidst the COVID-19 pandemic. The primary activities required to move crude oil from source to consumer include production, refining, distribution, and marketing¹, and such activities take place in the global marketplace. The world currently consumes over 97 million barrels of oil per day², and its proven reserves are equivalent to 46.6 times its annual consumption levels, suggesting that planet Earth has 47 years of oil left under current consumption rates². This would be the equivalent of going above and beyond the “business as usual” emissions scenario of global circulation models, resulting in the strongest possible set of climate change effects¹⁸.

The global oil market is complex. Various countries currently produce oil, but only a few of them dominate production³. Nearly 100 countries produce crude oil around the globe, but in 2020, only five of them accounted for 50% of the world’s total crude oil production: United States with 15%, Russia with 13%, Saudi Arabia with 12%, Iraq with 6%, and Canada with 5%⁴. There are three types of companies that supply crude oil in the global market⁴. International oil companies (IOCs) such as ExxonMobil, BP, and Royal Dutch are investor-owned. National oil companies (NOCs) are extensions of government or government agencies and include companies such as Saudi Aramco (Saudi Arabia), Pemex (Mexico), the China National Petroleum Corporation (CNPC), etc. The Organization of Petroleum Exporting Countries (OPEC), an international cartel of oil-producing countries, is the most powerful production-level entity. In 2020, OPEC’s members held 71% of the world’s total proven crude oil reserves and accounted for 36% of total world crude oil production⁴.

Crude oil is bought and sold throughout a chain of distribution and its price is a function of supply and demand conditions, which are more important in determining the price of oil than trade flows in the long term. Recent changes in supply and demand have increased the prices paid by retailers and consumers for crude oil.

Looking ahead

         The burning of gasoline and diesel are primary forces for global warming. As the years progress, the world will indubitably continue to perpetuate the transition toward clean energy sources and reduce its reliance on oil. Fortunes could be made or lost from shifts in the energy economy, which is controlled by some of the largest private and state corporations in the world. Oil companies will be at the forefront of change and undercut their own businesses. Regardless, there are still clear indications that the global demand for oil will peak and decline by the late 2030s¹¹. 

Electric vehicles certainly have the potential to drive the crude oil market towards a new trend against its perpetuation as an energy source. Federal transportation and energy officials recently detailed where the first millions of the government’s $7.5 billion funding for electric vehicle charging infrastructure will go, laying the foundation of a system that could establish where Americans fuel for decades to come¹⁹. 

Western oil companies, under pressure from investors and environmental activism, are drilling less oil wells than before the pandemic restrained supply increases. Biden has been urging OPEC to pump more oil, and OPEC’s members and their allies have recently agreed to plan to increase production¹⁴. The Biden administration also announced that it would release 50 million barrels of oil from its strategic reserves to relieve pressure put on consumers. These recent calls for OPEC to increase production amidst increased demand is not consistent with his ideals of carbon neutrality and emissions reductions. The Biden administration continues to refuse to confront the oil industry even though it continues to develop at an outstanding pace. As the uncertainty of the future oil market grows given recent events, the Biden administration must consider environmental justice in its development of new initiatives to reduce the intensity of the instability of the oil industry. 

Recent changes in supply and demand have increased the prices paid by retailers and consumers for crude oil. By the end of 2022, the price of crude oil will have increased due to the recovery from strained supply caused by the COVID-19 pandemic, the initiation of increased production from OPEC members, and tensions between foreign nations. Near 2030, oil demand will begin to peak as consumption growth diminishes and global inventories are greatly replenished, causing the price of crude oil to decrease. It might sound like a long time, but in the grand scheme of things it would be beneficial for the Biden administration to develop regulatory reforms that limit or inhibit oil extraction and development so as to initiate a decay in the Nation’s dependence on the source. 

Energy policy outlook²³

1. We must develop novel energy policies that embrace renewable energy for electricity generation to achieve significant carbon pollution reductions by midcentury.

The US needs to do more to avert the impacts of climate change. Meeting climate goals will require the implementation of new policies that control emissions of carbon and other greenhouse gases. The US cannot simply rely on fossil fuels in the way it has in the past. By adopting sustainable policies, the US has the potential to generate a large portion of its electricity from zero-carbon emitting sources by the target dates. Strong domestic cooperation will be needed to facilitate international action. The US electricity sector is responsible for a large percentage of the nation’s carbon dioxide emissions. Long-term dependence on fossil fuels for power generation is incompatible with the response needed to mitigate the impacts of climate change. Renewable energy is booming but still lags behind traditional fuels. Policymakers must promote the rapid decarbonization of the power sector and the deployment of renewable energy technology.

2. We must invest in safe, resilient, and reliable energy infrastructure. 

Decisions that policymakers make today will last for decades to come. The modern electricity grid must accommodate expanded and diverse generation from renewable energy sources and provide reliable service. In the future, reliability will go hand in hand with ensuring that our energy infrastructure is resilient to the impacts of climate change, such as extreme weather. All energy infrastructure (pipelines, railroads, production facilities, etc.) should adhere to the highest standards of public safety so as to ensure proper climate action.

3. We must reduce the transportation sector’s dependence on oil. 

In order to meet the nation’s emission reduction goals, the US needs to continue to make cars and trucks cleaner and more efficient. The US should envision moving away from a transportation sector that is highly dependent on oil to one that relies on alternative energy sources, electricity being one of them. Manufacturers have already developed low-emission or zero-emission vehicles, and new technologies are appearing every year. Policymakers should provide consumers and governments with incentives to continue the transition to a cleaner transportation system.

4. We must empower the energy consumer by ensuring equitable access to clean energy.

Energy policy is about more than supply and demand and market interactions. As technology and innovation change to the energy industry, consumers will have new opportunities to benefit from clean technologies to lower their energy costs. Consumers should be free to make sustainable energy decisions, such as installing solar panels or purchasing an electric car, without paying ridiculous fees that are designed to inhibit development. A clean energy economy must also be inclusive in that consumers from all income levels should have the opportunity to experience the benefits of clean energy technology.

5. We must balance the impacts of energy production with the protections of citizens’ public lands and fair returns to taxpayers. 

Oil and gas drilling, coal mining, and even renewable energy production in some cases, all have environmental costs associated with them. Policymakers should minimize these impacts by deciding which locations are appropriate for development and which are simply not feasible. Energy development should be balanced with protections for landscapes, the reinvestment of energy revenues in the conservation of land, water, and wildlife, and the enforcement of mitigation and reclamation requirements. Public lands and waters belong to all citizens, so taxpayers should be compensated for the extraction and development of their energy resources.

Email: sderesh@sas.upenn.edu

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