World Leaders Have To Face The Truth About Oil Demand

• Across the world, politicians are grappling with the reality of expensive energy

• Price shocks, scarcity and energy poverty are on the cards after two consecutive years of underinvestment in the oil and gas industry

• World leaders might have to acknowledge that oil and gas demand are here to stay for the foreseeable future

"Our products make the world run." This is what Chevron's chief executive Mike Wirth said at this week's World Petroleum Congress in Houston. The statement echoed a sentiment expressed by other oil executives attending the event—oil and gas are indispensable and will continue to be indispensable for the observable future and beyond it.

This is not something that a lot of people want to hear. It is certainly not what environmentalist organizations want to hear. It is certainly not what the Biden administration and the EU want to hear. Yet, it appears to reflect a hard reality.

Europe is struggling with record gas prices, and yet its gas inventories are being depleted at the fastest rate in about a decade because of a colder than usual start of the winter across much of the continent. In the U.S., gasoline prices have become a top priority for an administration that came to power with the promise to reduce the country's consumption of fossil fuels. Whether everyone likes it or not, quitting oil and gas will not be as easy as some hope.

"I understand that publicly admitting that oil and gas will play an essential and significant role during the transition and beyond will be hard for some," said the chief executive of Aramco, Amin Nasser, also at the World Petroleum Congress. "But admitting this reality will be far easier than dealing with energy insecurity, rampant inflation and social unrest as the prices become intolerably high and seeing net zero commitments by countries start to unravel," he said, as quoted by the Financial Times.

The price of electricity is already getting intolerably high in many parts of Europe that were until recently used to affordable and secure energy. This, unless it is tackled urgently, could indeed lead to social unrest—there are few things more flammable than public opinion in the middle of winter amid an energy shortage and the risk of blackouts. 

"Oil and gas continue to play a central role in meeting the world's energy needs, and we play an essential role in delivering them in a lower carbon way," Chevron's Wirth said, as quoted by the Wall Street Journal.

If the news from Europe since September is any indication, Wirth is correct in his prediction. However, supply may be tight due to underinvestment, which is at least in part the result of the rush to replace oil and gas with renewable energy.

Price shocks, scarcity and energy poverty are on the cards after two consecutive years of underinvestment in the oil and gas industry, a report by IHS Markit and the International Energy Forum said this week. This year's investments in the industry would be about $341 billion, which is 23 percent lower than pre-pandemic investment levels of $525 billion, and that's despite rising global demand for the commodities, the report noted.

"Oil and gas investment will need to return to pre-Covid levels and stay there through 2030 to restore market balance," the report's authors wrote, with the secretary general of the IEF saying, as quoted by Upstream Online, the "energy crisis in Europe and Asia this winter is a preview of what we can expect in the years ahead".

This would certainly not sit well with renewable energy proponents like the head of the International Energy Agency Fatih Birol and the EU's green deal chief, Frans Timmermans. Yet, it wasn't too long ago that Birol called on OPEC+ to produce more oil and on Russia to pump more gas to Europe, and Timmermans was forced to admit gas had a part to play in the energy transition.

"Underinvesting in oil and gas before renewables and other low-carbon technologies that are ready to scale up to meet energy demand could create recurrent energy crises of the kind we saw in Asia and Europe over the last few months," said IHS Markit's Daniel Yergin in comments on the report. He added that these crises could lead to adverse economic consequences. These, in turn, will in all likelihood spark the social unrest Aramco's Nasser talked about at the WPC.

The big energy problem appears to be one of prematurity. The buildup of renewable generation capacity in Europe and the U.S. was accompanied by a premature retirement of fossil fuel generation capacity, leaving countries short of baseload energy when they need it.

It is no coincidence that some countries such as the UK and Sweden had to restart coal plants: in the UK's case, to fill a gap between demand for electricity and supply amid the gas crunch, and in Sweden's case, to export the electricity to Poland in order to help it avoid blackouts. What caused the shortage in Poland? Low wind and shutdowns at some power plants.

The premature shift to relying on wind and solar is leaving countries vulnerable to the weather and effectively increasing their dependence on fossil fuels. Perhaps the current crunch will teach some important lessons to those willing to learn. Otherwise, the scenario outlined by Aramco's Nasser and IHS's Yergin may well materialize in the not too distant future.