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Pump jacks drill for oil in the Monterey Shale, California
Energy: The revolution continues
Many experts have forecast the shale revolution will soon produce diminishing returns and overall production will begin to fall. Not so fast. The US Energy Information Administration reported on Tuesday that US oil, which set a record in 2023, will break that record in 2024 and again in 2025. That’s also true for dry natural gas production.
If we’d told you five years ago that in 2024, Europe would refuse to buy Russian energy exports in response to an invasion of Ukraine and that the Middle East would face a serious risk of regional war, you’d probably have predicted oil prices shooting to $150 per barrel. Yet, oil has recently settled into a tight trading range between $75 and $80.
What’s keeping the price lower? You know about the surprisingly weak oil demand that results from China’s tepid economic recovery. But it’s also a product of the extended life of the US energy production revolution.
This is not good news for those hoping a surge in oil prices would drive investment in green energy in coming years, but it’s heartening for those who fear the impact of higher energy prices on consumers and governments in both wealthy and developing countries.
A person walks past a "#COP28" sign in Abu Dhabi, United Arab Emirates.
Controversies at COP28 and the future of climate change
Global climate talks are kicking off at COP28 on Thursday amid revelations that its host, the United Arab Emirates, is using the event to lobby for fossil fuel production. On the one hand, no one is surprised. Climate activists were already outraged and suspicious that one of the world’s largest oil and gas producers was hosting a meeting meant to move the world away from their production. On the other, as scientists uncover that climate change is progressing faster than expected, are the few global institutions meant to be speeding up our transition to carbon neutrality actually working against it?
For answers, we looked to Eurasia Group Vice Chairman Gerald Butts, who was a part of Canada’s delegation when the Paris Agreement was adopted at COP21 in 2015.
What was the Paris Agreement, and what has been your experience of COP meetings in the past?
Gerald Butts: The Paris Agreement was really about countries agreeing to take their own path to a common outcome. Every COP since then has been an attempt to fill in the blanks of how different countries are going to get to [carbon neutral] and serves as a reporting and accountability mechanism of how much progress each country has made.
I think that from a big-picture dynamic, the really hard issues still haven't been settled. Like, what is the role of oil and gas in a net zero world and in a decarbonized energy system? Like, who is going to pay for all of the negative consequences? Or, who is going to pay for poorer countries to be able to absorb the most negative consequences of climate change?
Those three big issues that haven't been sorted. And they're kind of coming to a head for obvious reasons because a country whose economy is dominated by oil and gas is hosting COP for the first time.
Speaking of which, what do you think of the recent revelations that the UAE is using the event to prompt fossil fuel negotiations?
I think actually the story is kind of a Rorschach test. The people who had always been suspicious of the UAE's motives for wanting to host COP will point to it and say, “Aha, that's what we were suspicious of!” And on the other hand, the UAE will say, “Well, we're an oil and gas producer, of course, we're going to try and sign oil and gas contracts.”
And that just kind of makes the point of the ... dare I say it, GULF between one side and the other. The UAE doesn't see anything wrong with what it's doing. While advocates for more rapid decarbonization see everything wrong with what the UAE is doing.
And we're kind of coming to a head here. The International Energy Agency released a really important report last week on the role that oil and gas can play in the transition. And it rightly rendered a judgment that oil and gas has been an impediment to decarbonization rather than a facilitator of it. And we're long past the day where you can say one thing and do another.
And whether from that report or in your own opinion, do you see a role for oil and gas in the decarbonization transition?
I see a theoretical one for sure. I mean, I think that an enormous amount of capital from the existing energy system has been absorbed by existing providers of energy and that if they were to deploy that capital to expedite decarbonization, that would be positive. In a nutshell, that's what the IEA's 150-page report says, if I can summarize it. But when you look at the balance sheets of these companies, what they're actually deploying capital to do, it's not that, it's to develop oil and gas.
Keeping on this subject, do you think revelations like these [about the UAE] hurt the momentum of the climate change movement? You said we're at a breaking point at this controversial COP28. What do you think the effects are going to be?
I always think it's a good thing when hard questions get clearly put on the table. And that's what's happening here. I think it'll feel like a setback in the short term, but it's actually a good thing that we're talking about real things at COP.
I think the next big COP will be, not next year, but the year after that, when Brazil will be hosting. Constructing a positive path between this COP and the Brazil COP30 will be a really important thing for the future of COP.
Some say that progressive candidates haven't proven they can win by pushing an aggressive climate change agenda. Do you think this is a problem? How could climate change become a more winning campaign platform for progressive candidates?
Butts: Well, I wouldn't agree with that assessment, actually. I think there are lots of examples of successful candidates who ran on aggressive climate agendas — Joe Biden, Justin Trudeau, Emmanuel Macron.
I think the challenge is this inflationary environment is really bad for incumbents. It's coincidental that a lot of those incumbents tend to be pro-climate forward, so to speak. But inflation doesn't discriminate against governments of any ideological stripe. It's just really bad if you're in power when it happens.
You’ve said that you remain optimistic about climate because the youth around the globe will vote or push their leaders to act in their best interests. I wonder if we will be given enough time to do that when you read about climate change progressing faster than anyone thought.
I think that's still true, actually. I think the people that are being hurt most by the inflation environment are homeowners, right? There are people who have mortgages. Sadly for your generation, you haven't been able to break into that market en masse yet. Which may turn out to be in the short term, a good thing, right, that you're not going to be trying to scramble to find 30 to 40% more of your monthly budget to pay your mortgage.
But I think in the short term, it's going to be hard because people are going to be focused on, short term, keeping their heads above water. Not long-term about keeping everybody's heads above water.
What do you think of President Joe Biden skipping this year's COP to focus on the Middle East and the upcoming election?
I think it's a bit of a sign that he thinks that this COP is not something he wants his brand associated with. I think that says a lot about the dynamic that we talked about 10 minutes ago. The United States this year will break a record for oil and gas production, but at the same time, they've got the most aggressive climate legislation in the history of the United States and one of the most aggressive anywhere in the world.
So they're trying to ride two horses. It's a domestic example of the global problem that the time for riding two horses is coming to an end.
I think if this COP was in Brazil, he'd be there.
59.5 billion: US oil major Exxon Mobil on Wednesday paid $59.5 billion to acquire Pioneer Natural Resources, a major producer of shale oil in West Texas.
Hard Numbers: Exxon bets on shale, Netflix makes an unchill choice, Google floods the zone, digital tax plans advance
25: Netflix is planning to raise subscription prices again, starting with the US and Canada, as soon as the ongoing US actors strike ends. The precise cost increase isn’t known yet, but it comes after Netflix and other ad-free streamers have already raised their fees by 25% over the past year.
800: Is a flood on the way? As the weather gets more and more extreme, the answer is, increasingly, yes — but where and when? Google Maps has an answer for that: a new prediction service called Flood Hub. In the US and Canada, it will cover 800 river areas inhabited by some 12 million people.
32 billion: The OECD this week released a new draft treaty on global digital taxation that could raise as much as $32 billion annually by enabling governments to tax tech companies in the countries where they operate, rather than just where they are headquartered. It’s unclear whether it will be ratified by enough countries’ legislatures to take effect — but Canada is charging ahead unilaterally with its own digital tax, despite threats from US lawmakers.Emergency workers during an emergency response drill to simulate the aftermath of a dirty bomb explosion outside Madrid.
What We’re Watching: Fact vs. fiction in Ukraine, Petro vs. Big Oil in Colombia
Information wars in Ukraine
The Russian and Ukrainian governments are working hard to persuade the world that the other side is planning to commit an atrocity. The Kremlin has claimed more than once in recent days that Ukrainian forces intend to set off a so-called “dirty bomb” as part of a plan to bolster Western support for Kyiv and add pressure on Moscow by blaming Russia for the attack. Ukrainian and Western officials warn that Russia has invented this story to hide its own plans to use banned weapons and that Russian forces are planning a radioactive “terrorist act” with material stolen from the Zaporizhzhia nuclear power plant it continues to occupy. This is a reminder of two things. First, both sides know that information remains a powerful weapon of war. Second, international monitors are badly needed on the ground inside the war zone to separate fact from fiction. Russia’s credibility with Western governments is now close to zero, but nothing can be taken at face value during the active phase of a war.
Petro takes on Big Oil in Colombia
On the campaign trail, Colombia’s recently elected leftist President Gustavo Petro was perfectly clear about his intention to wean the country off of oil and coal exports. Now, just two months into his term, he’s taking steps to make good on that, setting up a big fight with the Colombian extractives industry. Petro wants oil and coal companies — which account for nearly 10% of Colombia’s GDP and half of exports — to foot almost half the bill for a massive new tax hike meant to fund expansive social spending plans. Critics worry that the move will stifle investment in the sector, but supporters say that’s precisely the point — to move beyond fossil fuels. The fight with the industry comes as Petro’s approval rating is suffering. It has fallen 10 points — to 46% — since he took office in August, and the peso is one of the world’s worst-performing currencies this year. See our recent interview with Petro here.ECB President Christine Lagarde addresses a news conference in Frankfurt.
Hard Numbers: ECB rate hike, China-India thaw, Indigenous oil drilling pause, Nigerian donkey penises
75: The European Central Bank on Thursday raised interest rates by an unprecedented 75 basis points, which means some Europeans will shell out more for their mortgages. Following the US Federal Reserve’s path, the ECB also warned of further hikes until inflation cools.
16: After 16 rounds of commander-level talks, China and India have finally begun withdrawing their troops from a key friction point along their disputed Himalayan border. Two years ago, Chinese and Indian soldiers had their first bloody clash there since the 1960s.
16: Ecuador's government reached a deal with Indigenous groups to stop drilling at 16 oil blocks located on their territory and to suspend approvals for new projects. In return, President Guillermo Lasso hopes Indigenous leaders will call off broader protests over soaring inflation that have slowed oil production to a trickle.
7,000: After noticing a pungent stench from the packages, Nigerian customs officials seized 7,000 donkey penises bound for Hong Kong. Traditional Chinese medicine believes the genitals of certain male animals — especially tigers — can boost sexual virility.Angolans (finally) get an interesting election
On Wednesday, Angolans will go to the polls to vote in the most competitive parliamentary and presidential election since the oil-rich country’s 27-year civil war ended 20 years ago.
For the first time, the opposition UNITA party has a shot at (peacefully) beating the ruling MPLA party, which has governed Angola throughout its entire independent history. But the MPLA has no plans of handing over the reins to its longtime enemy — whatever voters decide.
Why does this election matter? For one thing, the former Portuguese colony in southwestern Africa has a long history of internal strife. Its 1975-2002 conflict began as a proxy fight during the Cold War, with the Soviets and Cuba backing the MLPA and the US and apartheid South Africa supporting UNITA.
The 1990s saw Paul Manafort (!) lobby Washington on behalf of UNITA leader Jonás Savimbi. In the early 2000s, China entered the fray by offering the cash-strapped MLPA huge loans in exchange for crude to fuel the Chinese economic boom. By the time it ended with Savimbi's death, Angola’s civil war had already spilled over into the neighboring DRC and internally displaced over a million people.
But Angola is really a big deal because it’s literally swimming in offshore oil and natural gas. In May, it briefly overtook Nigeria as Africa's top oil producer, and Europe wants to buy more Angolan crude and gas to diversify its energy options away from Russia.
Yet Angola is hardly tying its fortunes to the West. It’s one of the 17 African countries that abstained in the UN vote over Russia's invasion of Ukraine, partly due to the MPLA’s longstanding ties with Moscow. Luanda is also so deep in the red with Beijing that a big chunk of its crude revenues go toward paying off Chinese loans. China is by far Angola’s No. 1 oil customer, accounting for almost three-quarters of its crude exports in 2020.
The ruling party's candidate is milquetoast President João Lourenço, who took over in 2017 after longtime strongman José Eduardo dos Santos stepped down. Dos Santos died last week in Spain, and his body arrived this weekend in Luanda — just in time to grab media attention away from the vote.
Lourenço's main pitch to voters is that the economy has done well on his watch due to high oil prices and big infrastructure spending. But he's waffled on his promise to end the rampant corruption of his predecessor.
(Dos Santos' oil-soaked kleptocracy was the stuff of legend. In 2013, his daughter Isabel became Africa's richest woman … until last year, when Forbes magazine dropped her from the list after most of her assets had been seized or frozen by Lourenço's government and some European countries.)
Meanwhile, UNITA leader Adalberto Costa Júnior is regarded as a breath of fresh air. Costa Júnior — famous for his slick social media videos to appeal to young voters — promises transparency, separation of powers, and more social spending in a country where one-third of the population lives in poverty despite the vast oil wealth.
His message is resonating with the electorate, says Eurasia Group analyst Shridaran Pillay: “For the first time in Angolan history, the opposition has provided voters [with] something to consider.”
With a tight result all but assured, the MPLA is putting its thumb on the scale to keep Lourenço in power. The ruling party has appointed most members of the (technically independent) national electoral commission, which has banned the opposition from running as a single party. With the MPLA calling all the shots, the process will be anything but free and fair.
If, as expected, Lourenço wins in what is perceived to be a rigged vote or Costa Júnior does but his victory is overturned, the opposition will likely challenge the result in court. Protests will follow, but we probably won't see post-election violence on a scale that would trigger a national uprising.
Lourenço "has been far less heavy-handed with protesters" than Dos Santos was, "which we expect to continue as he seeks endorsement from the international community," says Pillay. Still, the president won't hesitate to respond with force if he feels threatened — as he did in October 2021, when pro-democracy activists took to the streets to protest the changes in the electoral law.
If things do go south, expect Brussels and Beijing to react differently. Unrest following a disputed MPLA victory "would likely have a greater effect on the relationship with the EU than with China because of the human rights angle," explains Pillay, "but it could also see oil majors pull back from Angola."Hard Numbers: Saudi oil windfall, Castillo's friends, Chinese map raid, Truss ahead
48.4 billion: Saudi Aramco, the (almost entirely) state-owned Saudi oil company, made a record $48.4 billion in profits in the second quarter of 2022, up 90% year-on-year thanks to high global prices. Fist bump notwithstanding, US President Joe Biden’s call for Crown Prince MBS to pump more oil has so far fallen on deaf ears.
4: In a joint statement, four Latin American governments — Argentina, Bolivia, Ecuador, and Mexico — backed the embattled Pedro Castillo to continue as Peru's president. Castillo has already survived two impeachment attempts and is under six separate criminal investigations, including for obstruction of justice, after little over a year in power.
23,500: Chinese customs officials seized 23,500 "problematic" maps intended for export over their drawing of China's official national borders. The maps didn't accurately represent Beijing's vast maritime sovereignty claims in the South China Sea and the East China Sea.
22: UK Foreign Secretary Liz Truss is leading former Chancellor of the Exchequer Rishi Sunak by 22 percentage points in the race for Conservative Party leader and next British PM, according to a new poll. Truss is widely favored to win the contest as she's more popular with the Tory base than Sunak, who's coming under increasing pressure to drop out.An oil pump is seen at sunset near Reims, France.
Does the world really need more oil right now?
We’ve heard dire warnings in recent weeks from oil industry analysts and professionals about how already-high oil prices could rise to record levels in the coming months. Goldman Sachs has increased its price forecast for the second half of the year to $135 per barrel. Trading giant Trafigura predicted that prices could rise even higher to over $150 per barrel.
Underpinning these alarms are fears that the war in Ukraine will lead to a big fall in Russian crude production and exports. Ever since Russia invaded its western neighbor, markets have been on alert for signs of acute disruptions that would squeeze crude supplies.
But what if they are looking in the wrong direction? What if the fixation on the risk of a supply shock (losing Russian barrels) is diverting attention from a very real weakening of global demand for oil?
Recent data suggests that may be the case. Global oil supply has held up remarkably well since the Ukraine war began. Forbearance and sanctions have forced Russia to find alternative buyers for its crude exports. But it has not stopped the flow of Russian oil. The total volume of world oil production is more than sufficient to meet demand.
In fact, weaker-than-expected demand for oil means that the world is actually oversupplied at the moment, to the tune of around 1 million barrels per day, and this overhang is likely to extend through the summer.
Lockdowns in China, a traditional powerhouse of global demand growth, have hit consumption levels there. Given Beijing’s adherence to zero-COVID, tough restrictions seem likely to continue for several months.
Meanwhile, rising interest rates and high inflation are hitting economic growth worldwide, which will further reduce demand for oil. A recession in the US or Europe would only make this situation worse.
To be fair, acute levels of uncertainty and a lack of clear data are clouding markets’ crystal balls, making the future even harder to predict than usual. The fog of war, political pressure to put tougher sanctions on Russia, and very low levels of spare oil in OPEC are creating a dizzying array of political risks.
But once markets start paying more attention to fundamentals, prices could drop. If this attention shift is prompted by signs of even-greater demand weakness, the falloff could be steep. Prices started their latest upward climb from just over $70 per barrel in late December. Demand tends to be stronger in the summer, so prices are unlikely to fall to those levels. But overall, underlying market conditions are not all that different than they were then.
This is not to say that predictions of higher prices will not yet materialize. An EU ban on European and UK insurance companies from providing coverage to worldwide cargo-carrying Russian oil could hit exports hard when it comes into force in late 2022.
But with time to arrange alternatives, Russia and its customers are likely to find workarounds that would keep a lot of oil flowing. The EU ban is also facing political pushback from countries that are taking advantage of discounted crude imports from Russia.
India has been lobbying EU governments to either annul the ban or offer exemptions, and the Biden administration would rather that Europe take steps to deny Russia access to export revenue than force Russian oil off the market completely.
An oil price fall, however, will offer little relief from high gas and diesel prices in the near term. Skyrocketing prices at the pump are the result of a fall-off in refined product exports from Russia, which has prompted emergency hoarding in Europe and China, and from a drop in the world’s refining capacity over the past few years. Cheaper crude prices will do nothing to alleviate these logjams. Neither will higher volumes of oil production.
Reversing refining shortfalls will take increased investment over a number of years. In the meantime, the best hope for bringing down petrol prices would be a significant fall in demand. But as that might mean the world is in recession, it would be little more than small mercies for consumers.