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Biden’s dilemma over Strategic Petroleum Reserve release

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Two things to start:

  1. The US and China made a joint declaration to co-operate in efforts to combat climate change. The commitment was a little vague on details.

  2. And inflation is stalking the US economy, with consumer prices in October rising at the fastest pace in three decades.

Welcome back to Energy Source.

Inflation is behind the White House’s concerns about rising oil prices. The Biden administration said again this week that it was studying ways to drive down fuel costs, including looking at any evidence of market manipulation and asking the Opec oil producer group to increase supplies. Neither avenue looks promising at the moment.

And that is why the possibility of a release from the Strategic Petroleum Reserve, the US’s stockpile of stored crude oil, remains on the table. Our first note offers a primer.

Our second note is about the economics of the transition. New academic research spells out the implications of the shift for big oil producers, from Brazil to Canada. We’ve also got another round-up from COP26 and Data Drill picks out some demographic disparity in clean energy jobs.

Thanks for reading.

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Will surging inflation trigger a release from America’s strategic oil stockpiles?

Inflation in the US rose in October by 6.2 per cent and is running at its fastest annual rate since 1990. Surging prices threaten to undermine the economic recovery and are already exacting a hefty political toll on President Joe Biden and his Democratic party.

Biden has placed the blame squarely on rising fuel prices.

“The largest share of the increase in prices in this report is due to rising energy costs,” the president said of the new figures. “Inflation hurts Americans’ pocketbooks and reversing this trend is a top priority.”

However, Biden does not have a lot of tools at his disposal to make prices fall at the pump.

The president reiterated that the White House’s National Economic Council was monitoring the situation and antitrust regulators were scouring the country for signs that fuel prices are being manipulated. Neither of these are likely to yield anything meaningful for prices. Opec+, meanwhile, has been unmoved by pleas for more crude.

A release from the Strategic Petroleum Reserve, a stockpile of around 610m barrels of crude held by the federal government, is left as the most significant tool at Biden’s disposal.

The administration has been holding a potential release over the market for weeks but there are some strong arguments against such a move.

For one, while oil prices are up sharply from the lows during last year’s crash in demand, they are not spectacularly high — making a release from supplies set aside for emergencies hard to justify.

US oil prices are around $82 a barrel, not much higher than the $75/b hit in the summer of 2018 — Brent crude prices actually surpassed $80/b at that time. Compared to today, prices were consistently higher from 2010 up until the 2014 market crash.

The last big release from the SPR came in 2011 when civil war erupted in Libya, causing a supply disruption that sent oil prices above $100/b. The Obama administration tapped into the strategic stocks as part of a co-ordinated effort with the International Energy Agency, releasing 60m barrels from government-held supplies across the US, Europe and Asia.

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While some banks have said $100/b oil is possible again, the Energy Information Administration, an independent agency that sits in the Department of Energy, gave a more bearish outlook this week.

It predicted prices would stay around current levels through the end of the year and start falling early in 2022, to around $60/b by the end of next year, as demand growth cools and supply picks up. That is hardly a ringing of the alarm bells.

It’s also not clear that an SPR release would be all that effective. Most analysts argue it would cause a short-lived fall in prices.

Looking back at that 2011 release, oil prices dropped sharply initially, but they were back above $100/b within a few months. That was with widespread co-operation among consumer countries that amplified the scale of the action. There does not appear to be a similar appetite within the IEA today for such a co-ordinated action.

Japan and Turkey are among countries that could be involved. But this would hardly wow the world’s oil markets. And any temporary release from consumer governments could be offset by Opec deciding to slow down its own oil supply increases.

But perhaps the strongest argument from the administration’s perspective is political. An SPR release would project an image of action in tackling one of Americans’ most pressing concerns. Even if it did not deliver lasting relief at the pump, the administration could argue it had done what it could while calling on Opec+ and others to step up action. (Justin Jacobs)

Transition spells trouble for high-cost oil producers

High-cost fossil fuel producers like the US, Canada, Russia and Brazil need to plan for a rapid decline in exports in the coming years, or they risk being left in the lurch as the energy transition takes hold.

That is the key takeaway from a new academic paper by Jean-Francois Mercure, senior lecturer in global systems at the University of Exeter, and his co-authors.

The authors argue that we need to reassess how we frame conversations around the transition away from fossil fuels.

Traditionally, the shift from dirtier forms of energy has been framed as an economic hit for those countries that pursue it — while others free ride. But that is too simple, Mercure and co argue. In reality, how countries will be incentivised to act in the coming years depends on where they sit in the supply chain.

The paper breaks countries into three groups, with distinct motivations:

  • Fossil fuel importers: Countries such as China, India and Japan (and the EU) are better off decarbonising, with renewables allowing them to cut reliance on imports.

  • Low-cost exporters: As demand dwindles, exporters like Saudi Arabia and other Opec members who can produce cheaply will be incentivised to flood the market, pricing out competitors with higher costs.

  • High-cost exporters: This group risks exposure to stranded assets and the pitfalls of a lack of investment in decarbonisation technologies.

“This suggests that comprehensive plans for regional redevelopment are probably needed, along with economic diversification towards new technology sectors, which include low-carbon technology exports,” the authors write.

If those countries fail to quickly decarbonise, the transition could trigger “a period of global financial and political instability owing to the combination of deep structural change, widespread financial loss and reorganisation in financial and market power worldwide”.

You can read the full paper here. Do you agree with the authors? Let me know what you think at myles.mccormick@ft.com. (Myles McCormick)

COP26 Round-up

Tomorrow marks the last day of COP26 and tensions are running high as negotiations enter their final stretch.

A draft version of a deal was released yesterday with significant revisions expected before the summit concludes on Friday evening. The draft urged countries to “revisit and strengthen” 2030 targets by the end of 2022 to maintain warming to 1.5C. 

A new analysis by Climate Action Tracker found that despite new Glasgow pledges, the world is still on track for 2.4C temperature rise by the end of the century. In 2030, emissions will be twice the limit necessary to meet Paris climate goals.

While the US, UK, and EU are in support of updated targets, big emitters such as China and Russia have resisted revising their original five-year timeframes. The divide represents a continuing battle among top emitters over how best to tackle emissions.

While the US and China yesterday made a rare joint declaration to co-operate on climate change, there was no shift on the latter’s emissions goals. (Amanda Chu)

Data Drill

President Joe Biden has promised that America’s energy transition will create a boom in clean energy jobs. But diversity in the sector remains an issue, a new study has found.

Over 60 per cent of the clean energy workforce is white, compared to 58 per cent of the US population, according to the report by E2 and other energy groups. Black workers make up just 8 per cent of clean energy jobs, despite comprising 13 per cent of the total population.

Women are also significantly under-represented in the sector. Only 27 per cent of the total clean energy workforce are women, according to the report. Diversity only decreases further up the ranks, with black workers making up 2 per cent of senior executives and women making up 20 per cent.

“As the United States looks to build back a better, cleaner, more equitable economy, a renewed focus on increasing diversity in the clean energy sector should be an economic imperative,” the authors wrote. (Amanda Chu)

Bar chart of Per cent of demographic showing Women and black Americans are underrepresented in clean energy jobs

Power Points

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.

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