Tomorrow’s Green Energy Is No Help Today

As we go to press, the world’s leaders are convening for the U.N. COP26 climate summit in Glasgow. The agenda will feature a lively set of discussions about the future of providing energy to humankind. Past meetings have brought progress toward climate targets, though much work remains. While important, the focus on those long-term goals takes attention away from the world’s immediate energy needs. For now, demand for energy exceeds supply in most parts of the world, and that is a very costly situation.

Every source of energy appears to be in short supply at the moment, for a variety of reasons. A hot summer, erratic weather and trade dependencies combined to leave natural gas reserves well below their usual volumes entering winter. Meanwhile, oil prices have steadily climbed this year, now holding over $80/barrel.

Weekly Economic Commentary - Chart 1

Energy prices have reached higher peaks in the past. Under ordinary circumstances, higher prices should compel more investment and production, but the supply side has not responded, aside from OPEC agreeing to a gradual increase in output. Through much of the 2010s, shale oil exploration in North America added to oil supply. However, over the past two years, elevated global production and slow demand during the pandemic kept oil prices below the break-even price of hydraulic fracturing. This put many producers into bankruptcy and burned their investors. The recent memory of those losses is keeping capital sidelined even as prices move up today.

Fracking also carries a high environmental cost, which does not sit well with environmentally conscious investors. Unfortunately, alternative sources are not ready to make up the difference, leaving a supply gap.

Not long ago, climate change was a fringe topic, a concern for environmentalists, a political hot-button that could derail a polite conversation. Those days are over, as most nations have set ambitious climate agendas. The Paris Accords of 2015 required updates to national targets every five years. This year, pledges are rising, even among countries that were not Paris signatories.