RUTHFULLY YOURS

The day after Joe Biden announced that the United States would ban imports of Russian oil and gas, a group of 11 powerful European investment funds that includes Amundi, Europe’s largest asset manager, outlined plans to force Credit Suisse, Switzerland’s second largest bank, to cut its lending to oil and gas companies. The juxtaposition of these two events dramatizes the fundamental disunity of the West. At the same time as the Biden Administration is sanctioning Russian oil and gas producers, Western investors are sanctioning Western ones. Under the banner of ESG (environmental, social and governance) investing, the West’s capital is being deployed to create an artificial shortage of oil and gas produced domestically  and reward non-Western oil and gas producers such as Russia and Iran with higher prices. In doing so, the West is undermining its own security interests.

Before Russia’s invasion of Ukraine, energy markets were already extremely tight. In the past, high oil and gas prices stimulated a supply-side response leading to increased output and to prices falling back. This relationship has broken down. According to analysts at JP Morgan, capital spending by S&P Global 1200 energy companies peaked in 2015 at just over $400 billion and shrank to around $120 billion last year—less than half its previous trough of $250 billion in the aftermath of the 2008 financial crisis, even though global demand is now around 15 percent higher than it was then.

Over the past decade and throughout the pandemic, investors could earn higher returns elsewhere, such as in tech—but with soaring prices, that assumption doesn’t hold any longer. In remarks to oil executives at the CERAWeek energy conference in Houston last week, Secretary of Energy Jennifer Granholm pointed the finger at Wall Street. “Your investors are demanding climate action,” she told an audience filled with executives of energy firms. To ESG investors, climate action means deliberately starving oil and gas producers of capital for non-financial reasons, leading to under-investment and rising prices.

Granholm is being a lot more honest than Fatih Birol, executive director of the International Energy Agency (IEA). “The current high energy prices are nothing to do with net zero,” Birol told the Guardian last month. “This is not a clean energy crisis, or a renewable energy crisis. These claims are irresponsible and are being used to attack public support for the net zero transition.” In fact, it is Birol who is being irresponsible. He understands as well as anyone that the net zero transition involves ramping up investment in renewable energy and throttling investment in new oil, gas, and coal production down to zero. He knows this, because in May of last year, the IEA released its Net Zero by 2050 roadmap for the energy sector, arguing for exactly this.

The IEA’s net zero scenario for 2050 relies heavily on “ever-cheaper” wind and solar. Nuclear barely gets a look in, and the IEA magically solves the intermittency problem of wind and solar by not mentioning the word “intermittency” once in the report’s 224 pages. By ignoring the inherent limitations of weather-dependent electricity generation, the IEA gave its imprimatur to a green fantasy of near 100 percent renewable electricity generation, with fossil fuels playing an insignificant role in keeping the electrical grid stable and the lights on. This fiction was necessary to justify the report’s most quoted passage. “Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development,” it said of its net zero pathway, meaning that “the focus for oil and gas producers switches entirely to output—emissions reductions—from the operation of existing assets.”

ESG investors and climate activists seized on the IEA’s call to stop all investment in new oil and gas production. “This is a huge step forward for the IEA and an important signal that the world must move away from fossil fuels today—not tomorrow,” the World Resources Institute blogged. “1.5C means no new fossil fuels, says the IEA,” ShareAction, the group co-ordinating the Credit Suisse proxy fight, declared, referring to the 1.5-degree maximum warming target. “The new scenario will make uncomfortable reading for many companies—and those that finance them.”

The same position was adopted by Climate Action 100+, a group of 615 global investors with $65 trillion of assets under management, including the world’s largest asset manager (BlackRock) and America’s three largest pension funds (CalPERS, CalSTRS, and the New York State Common Retirement Fund). “The IEA’s pathway shows a huge scale-up in clean energy investment and an end to investment in new fossil fuel projects,” Stephanie Pfeiffer, Climate Action+ CEO, wrote.

When making big investment decisions, investors are supposed to conduct due diligence and dig beneath the headlines. Not so with the IEA report, which is built on a mountain of implausible propositions. Despite no new investment in oil and gas production, the IEA assumes fossil-fuel prices are either in long-term decline or will remain around depressed 2020 pandemic levels. The IEA projects the price of oil—$37 a barrel during the pandemic year of 2020—to be $35 in 2030, though recently it has been trading well over $100 a barrel. It projects natural gas, priced at $2.1 per million BTU in 2020, to fall to $1.9 per mBTU in the United States in 2030 (it is currently trading around $5 per mBTU) and rise to $3.8 per mBTU in Europe in 2030, falling back to $3.5 per mBTU in 2050 (the price touched $36 per mBTU at the turn of the year).

The net zero pathway also needs to assume that high carbon dioxide prices will be immediately imposed across all advanced economies, reaching $75 per metric ton in 2025 and rising to $130 in 2030. For major emerging economies such as Russia, China, Brazil, and South Africa, the IEA assumes $45 per metric ton in 2025, doubling to $90 per metric ton in 2030. This is fantasyland. Nonetheless, the existence of high, rapidly rising and near universal carbon pricing is essential to the IEA’s net zero pathway. Without stringent and deeply unpopular government interventions to suppress demand for oil and gas—carbon prices being the most effective—rising demand will push up the price of energy, the more so when supply is constrained in exactly the manner we are now experiencing. Thus, ESG investors are using a report chock full of invalid assumptions to shut down the West’s production of oil and gas, inflicting immense collateral damage on the economies of the West and imperiling global recovery from the pandemic.

Birol has already walked back one of the main planks supporting the IEA’s no new investment in fossil fuels position—namely its unstated premise that the intermittency of wind and solar generation can be solved without fossil fuels. “The interdependence between gas and electricity security is not going to disappear anytime soon,” Birol wrote in a January LinkedIn post. Anytime soon? That sounds like it could be a long time. “Gas is expected to retain a major role as a source of flexibility and back-up for many years to come,” Birol continued, in a warning that those advocating 100 percent renewable energy in response to Russia’s aggression ignore at the West’s peril.

Birol’s concession to reality is far from sufficient, though. As a first step, the IEA should formally withdraw its May 2021 net zero report. The suppositions underpinning its conclusion that new investment in fossil-fuel production is unnecessary have proved wrong, and the IEA’s failure to square up to the intermittency problem of renewables makes its recommendation highly dangerous, especially during the gravest international crisis in decades.

The IEA originated as a Western club of energy-consuming nations in response to an initiative Henry Kissinger made in December 1973, when the world was experiencing its first energy crisis. The Yom Kippur Arab-Israeli war had ended seven weeks earlier. In retaliation for America resupplying Israel with arms, Gulf Arab oil producers increased the price of crude oil by 70% and embargoed oil exports to the United States. In a speech in London, Kissinger proposed an Energy Action Group that should have as its goal “the assurance of required energy supplies at reasonable cost,” including the discovery and development of new sources of energy and giving producers an incentive to increase supply.

Instead of acting to further Western interests, the IEA now behaves as the world’s principal renewable energy lobbyist. Later this month, Secretary Granholm chairs the 2022 IEA ministerial meeting in Paris. She should use the occasion to rededicate the IEA to the goals Kissinger set out and send ESG investors a strong message that banning investment in oil and gas production is contrary to the West’s strategic interests. Then we will know whose side they’re on.