Russia’s war draws governments into energy markets

This is political theater on one level; Whichever employee came up with “Putin’s price hike” surely got the afternoon off. Gasoline averages more than $4 a gallon and we’re eight months away from the midterm elections. Biden needs to shift the blame — in this case, to Russia and some domestic oil producers. And you have to see him act – from multiple constituencies, from drivers to environmentalists to Senator Joe Manchin (who had called for support for domestic mineral development).

The theatricality theme also extends to the substance of Biden’s actions. While the SPR release comes as a shock and awe, and will impact global oil balances, battery-related actions appear relatively limited compared to Biden’s EV targets. As for the brownfield fee, calling Congress is definitely one thing a president can do.

Still, it would be short-sighted to dismiss all of this as just another day in Washington.

Two trends that will define energy markets in the coming decades are deglobalization and decarbonization. The fragmentation of supply chains does not end with Russia’s isolation. Add to that the growing rivalry between the US and China, underpinning the sudden focus on domestic battery minerals. Support for globalization has waned in the US and elsewhere as concerns about security, domestic resilience and job creation have been spurred by a series of shocks stretching from the 2008 financial crisis to the pandemic and war in Europe extended (see this take for a more detailed description).

The other trend is decarbonization in the face of climate change. While market mechanisms like carbon pricing can work, and are being used in some places, the decades-long delay in solving the problem has led to a push for direct mandates. Also, at least here in the US, there is an apparent preference for labyrinthine subsidies and regulations over transparent price signals.

Markets are also struggling in other ways. In theory, American oil producers should drill like there’s no tomorrow. In practice, the fact that they’ve spent much of the past decade doing just that means today’s investors won’t back Bohr-Baby-Drill, war or no war. Consider that with oil above $100 a barrel, energy’s share of the S&P 500 is still below 4%, roughly where it was at the start of 2020 when oil was closer to $60. The two-step move required to provide enough fossil fuels today, but also deplete them over time — that’s how Biden structured his announcement — is also proving difficult. On the battery side, lithium production forecasts fall short of expansionary targets set by governments and automakers for electric vehicles.

While the exact implications of Biden’s moves are debatable, it is noteworthy that such moves are being taken at all — and setting a precedent for further moves. The Defense Production Act in particular is a political Swiss army knife that, once open, opens up all sorts of possibilities. Also note that Biden is treading a familiar path. His immediate predecessor from the opposite party was not afraid to define energy as a political (or geopolitical) tool or to try to shape supply and demand via executive order. Such impetus for intervention can also be found at the state and local levels, particularly when it comes to a US power grid trying to balance reliability with changing generation and consumption patterns (and extreme weather conditions).

Today’s concerns about national security and climate security are mutually reinforcing – and mirror the situation in 2008, when the energy platforms of both presidential candidates, in the face of high oil prices, recognized the need for increased domestic production of oil and gas while pledging measures to reduce emissions . A lot has changed since then. The US has gone from being a large net importer of oil to a small net exporter. But energy “independence” doesn’t protect Americans from high pump prices. And while Republicans have swung hard to the right on climate change since 2008, they have also acquired a penchant for protectionism and market meddling under the influence of a certain ex-president. We tend to think of interventions in the energy market only in terms of support for cleantech from the left. But that overlooks the impact of state laws from the right that block fossil-fuel phase-out or penalize banks for not lending to oil producers.

Exactly what such greater intervention means is difficult to say, in part because it depends on who holds power. The usual messy contradictions that politics brings are to be expected. The Current Exhibition: States Cut Gasoline Taxes, Boosting Demand To Cope With Tight Prices. Inflation is also to be expected as supply chains collapse and trade barriers rise – including potential emissions-based tariffs. On the other hand, if done right, industrial policy could also encourage further momentum in cleantech innovation and investment, and drive down costs. In any case, as the energy markets scramble to both fight the planet and save it, you must expect governments to increasingly take such matters into their own hands.

More from the Bloomberg Opinion:

• America’s reserve oil weapon risks misfiring: David Fickling

• Markets should lose the “peace in our time” reflex: John Authers

• Putin’s war is eroding Russia’s tech future: Tim Culpan

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He was previously the editor of the Wall Street Journal’s Heard on the Street column and a contributor to the Financial Times’ Lex column. He was also an investment banker.

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