By Garrett Delk, Pickering Energy Partners
The views expressed by the author are their own and do not represent the views of Energy Workforce & Technology Council.
As of the penning of this article, Monday 8/12, news broke that Ukrainian forces captured the Russian Sudzha gas metering station (the sole entry point into the Ukrainian transport system for Russian gas headed for Europe) and a likely imminent and direct Iranian response to Israeli strikes. Both pieces have already impacted energy markets, with oil hitting above $80 a barrel. The timely example is a microcosm of a larger theme for U.S. energy. The devolution of the geopolitical landscape to a multipolar environment is conducive to a more globally volatile world where fat-tail risks impacting energy are increasingly likely. Better said, “the unpredictable is increasingly probable”.
The current geopolitical landscape is increasingly characterized by multipolarity, where multiple powerful nations (i.e. U.S., Russia, China) with differing agendas make it difficult to achieve rules-based multilateralism, leading to greater global volatility. The rise of smaller, more frequent, and somewhat predictable disruptive events, is increasing due to this geopolitical shift, leading to events that occur more frequently and with growing impact on commodities prices.
However, this is not to say geopolitically driven swings in price always equate to a subsequent correlation in valuation. In fact, it’s of course very much the case that running a good business matters. Capital discipline, efficient capital allocation, strategic shut in production (when necessitated), etc. all remain particularly cogent for investors and markets.
This is to say, however, that this new macro geopolitical background sets the stage for long term energy industry relevancy, hydrocarbons specifically. Fraught geopolitics looks to ensure that energy security particularly remains a high priority for lawmakers in the U.S. and around the globe. A prominent example of this dynamic is European demand for U.S. LNG post Russian invasion of Ukraine. After the bloc dramatically reduced its purchasing of Russian energy, the fragility of EU energy security (the ability to acquire/produce energy and do it affordably) was on full display. As such, in 2023 the U.S. was the largest exporter of LNG globally, most of that heading to EU countries, and Asia looking to be underpin demand for LNG into the 2030s. Additionally, the primacy of energy security also surpasses nation state ambition on climate targets. Said simply if faced with deindustrialization, soaring energy costs, and popular protests, countries will choose energy security over meeting arbitrary climate goals.
In the U.S., energy security is also top of mind. We remain a hydrocarbon-based economy with roughly 83% of U.S. energy consumption being derived from petroleum products, natural gas, and coal. With echoes of the 1973 oil embargo in mind, a forced energy transition or move to renewables too rapidly makes net zero by 2050 in the U.S. a dubious prospect. In tandem with growing energy demand both globally and in the U.S., and the growing relevance of AI both for consumer sectors and national security, quick changes to established hydrocarbon infrastructure will become harder to make without compromising some measure of energy security and affordability.
So what does this all mean for U.S. energy companies and investors? It means that U.S. oil and gas is here to stay, for decades to come – and for both companies and investors that is a good thing. The macro geopolitical backdrop ensures industry relevancy into 2050s (and likely beyond) as traditional hydrocarbons remain key to maintaining energy security through an increasingly elongated globally turbulent period. So, although the industry in the U.S. faces incredibly zealous and well-funded Non-Governmental Organizations (NGOs) that wield significant influence and leverage advanced technologies, there’s an inherent backstop to how low that 83% of hydrocarbon use can pragmatically drop to.
Not all energy is created equally. Developing conventional energy projects is resource intensive, impacting land, air, water, and communities, in order to extract subsurface reserves. Among the ten largest producing countries, the United States and Canada are the clear leaders in environmental protection, minimized corruption, and human rights as opposed to obvious opposites, Russia and Saudi Arabia. American oil and gas producers will continue to have an important role in the energy mix as we believe there is market demand for low cost, efficient volumes, that are adhering to stringent environmental rules – over time driving a highly profitable industry that will eventually be rewarded with increased investor attention.
- https://www.bloomberg.com/news/articles/2024-08-11/asian-stocks-eye-mixed-start-as-volatility-wanes-markets-wrap?srnd=homepage-americas
- https://www.eia.gov/todayinenergy/detail.php?id=61683#:~:text=The%20countries%20that%20imported%20the,of%20all%20U.S.%20LNG%20exports.
- https://www.bloomberg.com/news/features/2024-01-11/natural-gas-boom-to-hit-warming-world-trying-to-quit-fossil-fuels?srnd=premium
- https://www.bloomberg.com/news/articles/2023-10-04/germany-orders-three-old-lignite-plants-to-operate-in-winter
- https://www.eia.gov/energyexplained/us-energy-facts/
- https://www.pickeringenergypartners.com/media/june-2024—commentary-from-dan-pickering
Energy Workforce partner Pickering Energy Partners provides insights on ESG due diligence, disclosures and reporting. Garrett Delk is Associate, Consulting & Advocacy.
