The Giant Gap in Fossil-Fuel and Clean-Energy Investment

Late January of last year, a group of economists, analysts, and financial journalists made an annual wager: How much would a barrel of crude oil cost when the market closed on December 31, 2021? Back then, the United States was only beginning to distribute vaccines, COVID-related hospitalizations were at an all-time high, and a futures contract for a barrel of Brent crude, one of the world’s two benchmark oil prices, cost about $55.

Most of the 29 guesses came in between $50 and $60. But last week, on the final day of the year, the price closed at $77.78. Lang Reynolds, a North Carolina–based electric-vehicle (EV) advocate who placed the highest bet of anyone ($85), won the cycle.

If 2021 taught climate hawks anything, it’s that they still need to care about the oil price—at least for another few months. Last year, as oil kept getting more expensive, the high price of gas began dragging down President Joe Biden’s approval rating right as he tried to pass robust pro-climate policy. (Gas prices were high only in an American context, of course—Europeans regularly pay more for their petrol—but in politics, all prices are relative.)

What’s stood out to me lately is that, because of a couple key mismatches in the energy system, this is only the beginning of such energy-related inflation.

The world has started to reduce its investment in producing fossil fuels. Right now, the world’s investment in oil and gas supply looks to be, somewhat shockingly, on track with a pathway of 1.5 degrees Celsius of global warming, according to the International Energy Agency. At the same time, the world is investing as much as ever in cars, power plants, and other products that use fossil fuels. That is, our investment in oil and gas demand still assumes a more-than-1.5-degree pathway. Consumers, companies, and countries seem to be assuming that oil and gas will be just as plentiful in the future as they are now.

The technical way to say this is that there is a mismatch between future oil supply expectations and future oil demand expectations. Let’s call this Mismatch No. 1.

The other mismatch is between clean energy and fossil fuels. Even as the world ramps down its investment in fossil-fuel supply, it isn’t investing enough in zero-carbon energy. According to the IEA, annual investment in clean-energy supply must triple for humanity to reach net zero by 2050. That’s Mismatch No. 2: The world is preparing for a net-zero world on the fossil-fuel side, but not on the clean-energy side.

Put together, these mismatches suggest that, if nothing changes, we can expect energy costs to go up. In the medium term, companies and consumers are going to want more oil and gas than the market can reasonably provide, and the price of both will increase.

Is that a problem?

From the standpoint of businesses, it is at the very least inconvenient. It suggests that the era of cheap energy that has persisted for the past decade is ending, and energy consumers can expect higher prices going forward even if the United States passes no further climate policy. For me, that suggests that passing policy is important, because the country should get off its current, more volatile energy system as quickly as possible. And from the standpoint of the climate-concerned, the price of fossil fuels really should go up, to reflect the damage carbon does to the atmosphere. The timing matters, though: Soaring energy prices can easily waylay the sort of pro-climate policy that could help make these mismatches better align.

That’s the big picture, at least. It’s important to understand. Now let’s complicate it.

Yes, fossil-fuel investment is falling now, BUT: It’s not mainly because of climate concerns. Global oil-and-gas investment fell by nearly a quarter last year because of the coronavirus pandemic, according to Ben Cahill, a senior fellow at the Center for Strategic and International Studies, a think tank in Washington, D.C. And more broadly, fossil-fuel investment has been down since 2014, when the price of oil crashed. It hasn’t recovered since.

Yes, fossil-fuel investment is in line with a 1.5-degree world now, BUT: It’s about to go up. “Since we’ve had this lower supply for six or seven years now, we’re going to have to step it up,” Cahill told me. The rising oil price worldwide, the spike in energy prices in Europe, and the return of geopolitical anxiety will all induce drillers to invest more next year—and to drill more oil as well.

Yes, we need to invest more in EVs and clean energy, BUT: Even subbing in the same amount of clean energy wouldn’t solve the problem. The IEA has some pretty stark beliefs about how the world can limit warming to 1.5 degrees Celsius. It has published a list of behavioral changes that the world must hit in order to zero out carbon pollution by 2050. For the world to reach net zero, highway driving speeds must be capped to 100 kilometers an hour, or about 62 miles an hour, by 2030 around the world, it prescribes. Buildings cannot be cooled to less than about 75 degrees Fahrenheit in the summer nor warmed past 68 degrees Celsius in the winter. By 2050, neither business nor long-haul leisure air travel must happen at the rate that it’s happening right now.

In other words, the IEA doesn’t see the world reaching net zero by adopting EVs alone. Its “demand” forecast entails both technological and behavioral change—in the short term, millions of people must drive EVs and highway speeds must be reduced. So when the agency says that the world is not on a “demand trajectory” for getting to net zero, that’s part of what it means.

On some level, the scale of change that’s already under way is, in itself, somewhat shocking. It’s easy to miss in the IEA report, but the world’s investment in clean energy is already nearly three times larger than its investment in fossil fuels. That makes a certain amount of sense, of course: Countries can run their fossil-energy system on decades of foundational investment, while to spin up a net-zero energy system, they have to build from scratch. We are living in a world where those investments are happening—we’re already doing a lot to reach net zero. It’s just not nearly enough.

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