It can be hard to understand what the hell is going on with the global energy market. Since Russia’s invasion of Ukraine in March, the news has been a non-stop churn of confusing updates about oil prices, gas supply, and a stew of acronyms (OPEC? SPR?). The whole thing can be intimidating to think about, even to energy reporters and folks who think about this issue professionally.
“It’s one of the most confusing and hard-to-analyze situations that I’ve been in,” said Clark Williams-Derry, an energy analyst at the Institute for Energy Economics and Financial Analysis.
As we’re heading into winter—and the U.S. midterms—rhetoric from all sides is bound to amp up with the cold weather. Here’s what you need to know.
What’s going on with natural gas?
Natural gas powers about 25% of Europe’s overall electricity needs and has been the central weapon in Russia’s war on the continent. After Russia cut off gas supplies in March during its initial invasion of Ukraine, Europe has been scrambling to find alternate sources of energy and stockpile gas before winter and the increased power use that comes with cold weather.
While the summer hasn’t been as bad as it could have been, thanks in part to the continent’s renewable energy sources, there were some stumbling blocks during intense heatwaves in July and August, when increased power use and the lack of hydropower due to drought forced countries to turn back to coal. As we’re getting toward the cold season, experts say, Europe has stockpiled just enough natural gas to avoid certain catastrophe.
“Europe has been importing LNG [liquid natural gas] like crazy in order to fill up its storage of gas to get through the winter,” said Lorne Stockman, the research director at Oil Change International. “It may have enough gas to get through the winter, but it’s going to be very precarious.”
If anything happens this winter—like an extreme weather event—Europe could find itself with skyrocketing energy prices. Countries across the continent have released plans for potential short-term blackouts. (UK officials have said that blackouts are “extremely unlikely,” and households could lose power for 3 hours in the worst-case scenario.)
“The uncontrollable factor is weather,” said Stockman. “Europe could squeak through, but a prolonged cold spell could trigger a crisis again. We could see another big price spike and potential shortages as Asia and Europe compete to import the energy out there to keep people warm. It’s a precarious situation. It’s not great.”
What’s going on with the oil supply?
There’s a slightly more complex situation with the world’s oil supply. Over the past year, the price of oil has rebounded from its pandemic bottom—when oil prices briefly reached negative dollars—shooting back up to pre-pandemic levels and skyrocketing even higher. Earlier this year, oil briefly reached a whopping $120 a barrel.
While this summer began with soaring oil prices and analysts predicting the worst during a heavy travel season in the U.S., prices have actually remained lower than expected through the past few months. A key factor here was a lack of demand for oil in China due to enforced covid-19 shutdowns and travel bans there. “That really gave a cushion to global oil markets,” Stockman said.
But another player has re-inserted itself into the mix to keep oil prices high. The Organization of the Petroleum Exporting Countries, or OPEC, is the world’s leading cartel of oil producers, representing nearly 80% of the world’s oil-producing capacity; the group guides policies for its 13 member countries, including oil giants Saudi Arabia, United Arab Emirates, Venezuela, and Iran. The cartel’s decisions often have outsize influence on the global price of oil.
Earlier this month, OPEC said that it would cut oil production by 2 million barrels per day, causing oil prices to jump up to $4 a barrel. Since the pandemic, OPEC has been operating in what can be seen as a scarcity mindset—like going on a diet after a long binge.
“Going into winter there could be another covid outbreak in China or the U.S. that could impact demand,” Stockman said. “OPEC is very wary.”
The Biden administration has publicly criticized the move, which caused gasoline prices to rise after a summer of working to bring them down and comes just weeks before the U.S. midterm elections. One of the administration’s key responses is to potentially release more barrels of oil from the Strategic Petroleum Reserve (SPR); this week, the administration wrapped up the largest-ever release of oil from the reserve, begun in May. But the SPR is a finite resource, and it’s next to impossible for a presidential administration to actually change something as global as oil prices—even if they’re often a key predictor of political success.
Can’t we just produce more fossil fuels?
Since the war in Ukraine began and energy prices skyrocketed, the U.S. fossil fuel industry has been pushing the idea that production needs to be ramped up and that that can only happen if the Biden administration removes onerous environmental regulations. The American Petroleum Institute, the industry’s main lobbying arm, has been busy this week claiming that the Biden administration’s limits on offshore leasing are hampering the industry’s ability to meet demand and that the U.S. needs to tap even more of its fossil fuel reserves rather than draw from the SPR.
However, there are several problems with these claims. First, many American fossil fuel companies are ramping up production, churning out more fossil fuels than ever before. “When the crisis hit, many companies started producing as much as they could, not out of the goodness of their hearts but because companies were making shit tons of money,” said Williams-Derry. “[U.S. natural gas producers] are producing about as much as they’ve ever produced, maybe a little bit more.’
It’s also important to understand the financial context of how fossil fuel companies are operating right now. This energy crisis comes on the heels of years of turmoil in the industry, fueled in large part by the fracking boom of the past decade in the U.S. That boom flooded the market with incredibly cheap fossil fuels—but also was terrible news for investors, many of whom lost money on the glut of cheap energy; those investors are now eager to recoup their money. During the pandemic, when producers were forced to tighten their belts thanks to bottoming prices, investors finally figured out that more production does not necessarily equal more profit.
“The oil industry does not want to lose money like it has for the past 15 years, and what it realized, finally, is that the shale industry started producing cash in the third quarter of 2020,” Williams-Derry said. “Companies stopped drilling so much, and because they were not spending so much money on drilling, their operations started generating cash.”
Most of the administration’s climate policies have little to do with stalling production in the short term (and some actually make allowances for even more production). However, they’re a great rhetorical scapegoat for an industry that’s nervous about the long-term implications of the energy transition and wants to keep generating as much profit as possible.
“The biggest myth out there is that the Biden administration is somehow stymying oil production, that environmental regulations are holding us back—that’s not the case,” said Stockman. “What’s holding the industry back is the fact that fracking is expensive, it’s subject to the same supply chain labor constraints that the rest of the economy is experiencing, and they’re not prepared to raise production to the point where costs skyrocket.”
What about the energy transition? Can’t renewables help?
First, some good news: They’re already helping. Aggressive renewable and solar installation across the world has helped keep fossil fuel demand lower than it usually would be during an energy crisis; the International Energy Agency found this week that renewables helped keep the rise in carbon dioxide emissions much lower this year than it was last year. And many of the initiatives passed in Biden’s Inflation Reduction Act will go a long way toward making the energy transition a reality.
But the energy transition is long and complex, and we’ve wasted a lot of time propping up fossil fuels. “It’ll be a couple years before we see the investments [in the Inflation Reduction Act] pay off and get to a point where what OPEC does does not impact us consumers that much because we’re reducing the amount of oil and gas we use,” Stockman said. “We’re on the edge of that, but it’s still very difficult for the average consumer to make those choices.”
And as the industry continues to push for its own self-interest, the real elephant in the room is how our over-reliance on fossil fuels is what brought us to this crisis to begin with.
“We really got sidetracked by the allure of the fracking boom bringing so-called energy independence, and it hasn’t worked,” Stockman said. “The energy industry says we need to be unleashed, but thinking of the last decade, trillions of dollars have gone into extraction, infrastructure, pipeline, energy terminals, energy tankers. We’ve plowed literally trillions of dollars, and a war on the other side of the world has brought us back to a crisis point. It’s time to stop pretending that more investment in oil and gas will solve the problem. It couldn’t be clearer that that just doesn’t work.”