Oil executives and market analysts are cautioning the globe that too little spending on fossil fuel production in the coming years risks turning the current energy price volatility into a feature of the global economy.
The first full week of December saw a nexus of major industry players and forecasters beckoning stakeholders to avoid underinvesting in oil and gas, insisting that the world will need the two fuels for years to come even as advanced economies accelerate their transitions to carbon-free energy.
“Publicly admitting that oil and gas will play an essential and significant role during the transition and beyond will be hard for some,” Saudi Aramco CEO Amin Nasser said on Dec. 6 during the World Petroleum Congress in Houston. “But admitting this reality will be far easier than dealing with energy insecurity, rampant inflation, and social unrest if prices become intolerably high.”
Darren Woods, CEO of ExxonMobil, asserted separately that “under most credible scenarios … oil and natural gas will continue to play a significant role in meeting society’s need.”
A day later, the International Energy Forum, a coalition of 71 countries that collaborate on informing energy policy, and global analytics firm IHS Markit released a joint report finding that maintaining current levels of investment in the oil and gas development will be woefully insufficient to meet the expected rise in demand in the coming years.
The report noted that investment in upstream activities, or those supporting the exploration or production of oil and gas, stood at $341 billion for 2021, about 23% below the pre-pandemic level of $525 billion. Global levels were also way down last year to about $309 billion globally in conjunction with the pandemic.
Upstream investment would need to boost back up and hold at around the $525 billion mark through the end of the decade to keep the market balanced, the report found.
“While the energy transition proceeds, underinvesting in oil and gas before renewables and other low-carbon technologies are ready to scale up to meet energy demand could create recurrent energy crises of the kind we saw in Asia and Europe over the last few months, resulting in elevated prices and adverse economic consequences,” IHS Vice Chairman Daniel Yergin said in a statement.
The report’s conclusions are not especially new warnings, said Jacques Rousseau of ClearView Energy Partners.
“This is an issue that’s been out there, especially since the rebound off of COVID and the lack of demand,” Rousseau said.
Rousseau emphasized the findings of a new and separate report from the International Energy Agency, which found in December that global crude oil supply is moving ahead of demand and that the world has some 6.9 million barrels per day of spare crude capacity, meaning that underinvestment does not pose the projected difficulties in the near term.
“There’s there’s still a fair bit of spare capacity in the world, so that means that the issue of underinvestment is not an issue quite yet,” Rousseau said.
However, he added, “Then the next question, or at least the way I look at it is, ‘Well, when could it become an issue?'”
As for the Biden administration, officials have insisted that what the industry has at its disposal should be sufficient to carry the market forward.
During a Dec. 14 meeting of the National Petroleum Council, Energy Secretary Jennifer Granholm urged oil and gas firms to “hire workers” and “get your rig count up” in response to high prices. She also urged firms operating on federal lands to utilize more of the drilling permits for which they’ve received authorization.
“By and large, the issues around current production do not stem from decisions made by the Biden administration,” Granholm said. “While I understand that you may disagree with some of our policies, it doesn’t mean that the Biden administration is standing in the way of your efforts to help meet current demand.”
Meanwhile, Amos Hochstein, senior adviser for energy security at the State Department, has said that getting production up and maintaining it is vital, especially for accomplishing the administration’s energy and climate goals.
“Ensuring that we have the consistent supply today to ensure that we have the economic growth and stability so that we can support the energy transition, I think that’s the delicate balance,” Hochstein said during a forum in October.
But he added that “building massive new pipelines doesn’t necessarily make a lot of sense. Building new infrastructures that will last 60-80 years — that doesn’t seem like that’s where the investment needs to be.”
For Rousseau, nations like the United States face a unique risk related to underinvestment in more production.
“I would think that the threat of underinvestment is more so in countries that have started along the energy transition,” Rousseau said. “If the push is to have electric vehicles, major oil companies that operate in those areas are probably not going to be as willing to spend money on long-term projects because they know that that oil is not going to be needed in that particular spot.”
