War in Ukraine puts oil industry in the crosshairs - Albuquerque Journal

War in Ukraine puts oil industry in the crosshairs

Methane flares near Jal in 2019. Environmentalists are urging the Biden administration to rapidly ramp up efforts to transition the U.S. to a non-carbon economy. (Roberto E. Rosales/Albuquerque Journal)

Copyright © 2022 Albuquerque Journal

Editor’s note: This is the second in a three-day series.

Russian bombs are ripping up Ukraine, but the repercussions are exploding across the U.S. and igniting heated national debate over the future of the oil industry.

The war in Eastern Europe is wreaking havoc on world oil markets, sending prices sky high. That’s now pounding consumers here at home and endangering the nation’s economic recovery from the global pandemic.

And with midterm elections fast approaching, political battles are intensifying over state and federal energy policies.

Environmental organizations and progressive politicians are now clamoring for President Joe Biden’s administration to aggressively accelerate federal efforts to transition the country to a non-carbon economy, both to combat climate change and to ensure the nation’s energy independence and security free from the boom-and-bust cycles that plague the oil and gas industry.

In contrast, industry representatives and conservative politicians say opening the oil and gas spigots to increase production is the best way to lower prices and protect the U.S. against geopolitical crises like the war in Ukraine. They say adverse federal policies and state-level regulation in places like New Mexico – the nation’s second largest oil-and-gas-producing state – are restricting growth and endangering national security.

With the war raging and price volatility unlikely to subside anytime soon, the Biden administration is struggling to balance the need for immediate action to alleviate consumer pain at the pump while still pursuing the broader Democratic agenda to rapidly replace fossil fuels with clean energy – a foundational goal that underlies Biden’s political platform.

For now, political and economic urgency have the upper hand, encouraging the president and his Cabinet to urge producers to ramp up fossil fuel production. But that, in turn, is generating more pressure from clean-energy advocates to press forward on renewable development.

Green pressure growing

In response to the president’s call for more oil and gas, some 200 environmental and clean-energy groups around the country called on Biden in mid-March to invoke the Defense Production Act aimed at rapidly building more renewable technology to alleviate strained energy markets. The act – which both Biden and former President Donald Trump used to ramp up ventilator and vaccine production to fight COVID-19 – provides executive power to pump up production of everything from wind turbines and solar panels to energy efficiency devices that lower consumption and heat pumps that can replace gas-burning appliances in homes and buildings.

The 100-member Congressional Progressive Caucus joined in as well, calling on Biden last week to declare a “national climate emergency” to radically increase renewable manufacturing through the Defense Production Act, and to push forward with efforts to restrict oil and gas production by limiting or banning new leases on federal lands and waters.

In a separate action, nearly 90 congressional Democrats also urged the president to immediately restart Senate negotiations over the $2 trillion “Build Back Better” legislation, which includes $550 billion in tax incentives and spending to advance clean-energy development. That bill has been stalled in the Senate since the fall.

In a news conference March 16, Sen. Martin Heinrich, D-NM, said the war in Ukraine has elevated the clean-energy transition into a “national security issue” and a “global security imperative.”

“This whole scenario has demonstrated just how dangerous – and just how costly – our dependence on fossil fuels has become,” Heinrich said. “We need to be clear that the right answer to lowering energy prices for Americans and our allies is not ‘drill baby, drill.’ That is never going to address the root of this challenge. We need to quite literally focus our energy on clean alternatives to fossil fuels if we ever want to break away from this paradigm.”

Fossil fuel pushback

Industry leaders and Republicans, however, say exploiting the nation’s abundant mineral resources provides the best path to energy independence and affordable fuel prices. They contend green policies being proposed at both the federal and state level are impeding energy security and driving up costs for consumers.

In New Mexico, for example, new state regulations to control methane emissions from oil and gas production – plus forthcoming rules to improve air quality by cracking down on ozone-causing industry contaminants – are threatening the state’s current and future prosperity, according to conservative politicians.

House Republican Leader Jim Townsend of Artesia called Gov. Michelle Lujan Grisham “tone deaf” on March 9, one day before the state Environmental Improvement Board opened rule-making proceedings that will lead to stricter controls on ozone pollutants.

“On the day that New Mexico broke the record for the highest gas prices in state history, Gov. Lujan Grisham has directed her political appointees to double down on limiting not only oil and gas operations, but our entire state economy,” Townsend said in a prepared statement. “Our state is uniquely positioned to provide energy independence for our country. … In just two months, fuel and energy prices have skyrocketed in this state, and certainly Lujan Grisham’s political decisions will continue to force working families to make very difficult decisions due to the rising cost of simply driving to work.”

New Mexico Oil and Gas Association spokesman Robert McEntyre said regulatory uncertainty at both the state and federal levels is casting a shadow over the entire industry, contradicting the president’s call for companies to produce more to offset today’s price instability.

“The industry wants some regulatory stability, especially with the White House encouraging it to ramp up production,” McEntyre told the Journal.

Market forces, not regulation

Most economists and industry experts, however, say it’s not current government regulation but market forces that are limiting industry growth and causing high prices.

Even before war exploded in Ukraine, oil prices climbed to 10-year highs because world production is still only slowly rebounding from the global pandemic, which sharply curtailed output everywhere as demand plummeted. Domestic U.S. production, for example, isn’t expected to reach pre-pandemic levels again until year-end 2022.

And, like most industries, supply chain bottlenecks and labor shortages are impeding growth, while inflation is driving up costs across the board.

Now, with restrictions on trade with Russia – which accounts for about 10% of global oil supplies – prices have skyrocketed. But the industry can’t ramp up overnight, and even if it could, domestic producers are wary of flooding the market and causing prices to crash again.

In addition, oil companies are under immense pressure from lenders and investors to return more profits to shareholders through slow but steady growth, rather than pursue unbridled expansion as they did before the pandemic, said Raoul LeBlanc of global energy consultant IHS Markit.

“A lot of people want to blame the government for slow U.S. production, but it’s simply not true,” LeBlanc told the Journal. “It has nothing to do with the regulatory situation.”

There’s a lot of misleading information by media analysts and others that may be influencing public opinion, but blaming low production and high prices on federal or state government is “ridiculous,” said New Mexico State University economics professor emeritus Jim Peach.

“Laying the blame on Biden is almost as stupid as blaming Jimmy Carter for oil shortages in the 1970s,” Peach told the Journal.

The Biden administration is indeed seeking to overhaul rules and regulations governing industry activity on federal lands. That could significantly raise leasing and bonding costs for producers to return more revenue from operations to taxpayers and better protect public lands. It could also mean more restrictions on where producers can drill as the government seeks alternative, environmentally friendly development and use of federal property.

But that regulatory overhaul is currently stalled. And industry operators already hold some 13 million acres of publicly leased property they have yet to develop, plus about 9,000 unused permits to drill on those lands, according to the U.S. Interior Department.

“The industry has stockpiled enough leases and permits on federal lands that drilling is not a problem,” LeBlanc said.

Oil industry secure at least for now

In fact, in New Mexico, oil and gas production is booming, with non-stop record output each year since 2017, despite the pandemic.

And the future looks bright – at least for the next five to 10 years, if not more – even if the federal government accelerates renewable energy development, because the world remains highly dependent on fossil fuels, and the transition to clean energy will take years.

“Fossil fuels today still supply 80% of global demand,” LeBlanc said. “That’s only down slightly from 85% 30 years ago.”

The midterm elections may well determine the future pace of societal efforts to build a non-carbon economy. But in the long term, the oil and gas industry knows the world is moving to alternative energy, and the pressure to transition will grow over time, Peach said.

“Industry responses vary widely from firm to firm, but all of them are aware that we’re coming to the end of the fossil fuel age,” Peach said. “Everyone’s aware of it, but the time horizons differ considerably (among analysts). And everybody recognizes that we’ll still need oil for years to come.”

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