The energy system is in a difficult situation as the cost of oil, gas and coal have recently
risen rapidly. It is actually more complicated than meets the eye. President Biden has been
asking foreign producers to ramp up supply while at the same time, pushing Congress to
address climate change, moving away from fossil fuels and towards renewable energy and
electric cars. Even though Biden has asked, the United States energy executives have however not been doing anything to bolster productions to levels that could bring down prices. Drillers do not want to increase production because they do not want any repeats of the price crash early in the pandemic. Banks and investors have lost huge sums of money in the boom bust cycles that we’ve seen in the past decade. Many also want to lower their exposures to fossil fuels to meet the commitments they have made to fight climate change.
According to Goldman Sachs analysts, energy supplies could further tighten which
potentially could cause oil prices to rise by $10 per gallon before the end of the year. The
cautionary stance of the industry has resulted in the nationwide amount of oil rigs producing oil to be at around half of what it was in 2019. Another reason for the decline in oil drilling is the fact that banks and investors do not want to put more money into the oil and gas sectors as company share prices have been declining for years. Now with the recent oil shortages, share prices have soared and money is being made for investors. Since oil prices are high, companies are afraid to deviate from this strategy to expand oil production. Many companies are now focused on cutting emissions and increasing renewable energy. Investment firms are beginning to start moving their investments into companies that are committed to removing as much carbon dioxide from the environment and reaching net zero emissions.
Oil executives are insisting the market is not structurally short on oil supply. That is why
OPEC and others have been careful not to raise oil production since they are fearful that prices could fall if they flood the market with more oil.
But it is affecting us. Americans are spending a dollar more per gallon of gas as they were a year ago. Natural gas prices have shot up more than 150% over that time. We are seeing a trickling effect as the prices of food, chemicals, plastic goods and heat are really rising. We have even seen it first hand at school as the prices of our lunch were raised right before our eyes. Head of global commodity strategy at RBC capital markets, Helima Croft said that she expected that OPEC would be willing to raise production if they saw the balance between supply and demand tighten. Let’s hope that the government and the energy executives do what is right and produce more oil if necessary to prevent further crises.