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The irony is that anyone who understands energy knows that there is no successful energy transition without natural gas and nuclear, and this requires incentives to invest in energy security. Governments will not back down, and they will prefer a decline in energy prices coming from a deep recession to an improvement coming from diversification and investment.

https://mises.org/wire/oil-price-shock-direct-consequence-interventionism

Daniel Lacalle

Oil prices are soaring, and, as always, we read in many articles that OPEC and Russia are to blame. However, if OPEC and its allies were almighty and the drivers of oil prices, why have Brent and West Texas Intermediate (WTI) crude plummeted in 2022? OPEC only reacts to demand, but it is not a price-setter. It is a price-taker.

WTI is up 13% year-to-date, but it only started bouncing in May. WTI is only up 6% in the past year. At $90.7/barrel, it is still far away from the June 2022 high of $122/barrel and barely reaching the levels of November 2022.

What made oil prices plummet from their June ’22 highs? Rate hikes and monetary contraction sent the entire commodity complex down to pre-Ukraine invasion levels despite production cuts, geopolitical risk, and the Chinese re-opening. Commodity prices are driven by monetary factors, and the hawkish stance of global central banks accelerated the decline despite supply chain challenges and limits to production. Added to the decline in the money supply and rate hikes, the United States and non-OPEC production offset the negative impact of Russia and OPEC limits on some exports. Competition works. Finally, oil prices stumbled as Asian demand ended up being weaker than estimated, with global industrial production declining, particularly in developed economies.

The weakness in crude was a combination of monetary factors, increased United States supply, and weaker global demand. Those three factors have now reversed at the same time.

We cannot blame OPEC when prices rise and ignore them when prices fall.

The biggest challenge for the oil market in developed economies in the next five years is self-inflicted.

Governments and financial institutions all over the world declared war on investment in fossil fuels under the misguided view that supply and prices would not be affected. According to JP Morgan, there is a chronic underinvestment in the oil and gas complex that exceeds $600 billion per year. In 2022, with oil prices rising to the previously mentioned $122/barrel, companies all over the world continued to reduce investment in exploration and production. Development capital expenditure was kept to a bare minimum, and even some European oil and gas giants started selling their “net zero emissions” strategy, ignoring the global energy reality. Total oil and gas investment came below depreciation for the sixth year in a row, according to Goldman Sachs.

The energy transition cannot happen through ideological imposition. It requires technology and competition. Destroying the incentives to invest in oil and gas and imposing an ideological, not industrial, view of energy has made developed economies more dependent on fossil fuels.

When politicians decide, they willingly ignore economic calculations because they believe that the political world dictates prices, not supply and demand. Economic analysis has been abandoned, and the result is an exceedingly negative scenario.

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