Fears of an energy price surge percolate through sector

Hello and welcome back to Energy Source.

On Tuesday we highlighted Xi Jinping’s visit with Vladimir Putin in Moscow as a key moment in the country’s energy ties, and in the broader reordering of the global energy trade after Russia’s invasion of Ukraine.

What does Putin have to show for the visit? On the energy front, not much. As our colleagues reported, each side made some vague gestures towards “studying and agreeing” plans for a big new gas pipeline, Power of Siberia 2, that would help offset Russia’s loss of the European market, but little concrete progress appears to have been made. The energy trade is almost certain to continue growing, but the visit did not yield the sort of breakthrough that Putin would have wanted.

In today’s newsletter Equinor’s chief economist tells Derek that under-investment in energy spells disaster in the years ahead. In a new video, Myles reports on the push to green the aviation sector. And Amanda maps out the Republican ESG backlash.

Thank you for reading — Justin

Energy under-investment poses a key risk, says Equinor chief economist

Global energy markets are heading into a “self-inflicted train crash in slow motion”, said the chief economist of Norway’s state-owned oil company Equinor, as investment in renewables and fossil fuels falls short of ever-rising demand.

Annual clean energy spending is running at about a third of the $3.5tn needed to speed a shift away from fossil fuels to meet global climate targets, Eirik Wærness told me in an interview in Houston.

As a consequence, global demand for fossil fuels is continuing to rise even though investment in new oil and gas supplies has slumped to a level envisaged in some rapid decarbonisation models.

“We’re currently spending about $400mn or $500mn a year globally in oil and gas. That’s exactly what we have to do if we’re on our way to the net zero emissions scenario,” said Wærness.

But slashing oil supply only works if an increase in clean energy infrastructure drives down oil demand at the same time — and that is not happening, says Wærness: transition investment is nowhere near the level needed to wean global economies off oil.

“This is a self-inflicted train crash in slow motion, because we don’t have the investment. It is a recipe for an energy crunch,” he said.

Wærness’s comments echo those from both clean energy and fossil fuel analysts who say a dearth of capital spending will leave the world vulnerable to price surges of the kind seen in Europe last year after Russia’s full-scale invasion of Ukraine. On Monday, the latest IPCC climate report also called for a rapid scaling-up of clean energy investments.

While Wærness welcomed US and EU efforts to accelerate the rollout of clean energy supply, he warned political efforts to break dependence on Chinese supply chains and reindustrialise western economies could slow the shift and make it more costly.

“This is about hardware, steel, and cement . . . That is fundamentally manufacturing capacity, which you have to build up,” he said. “What’s the reality of having American iron turned into American steel by organised labour in North America?”

Meanwhile, relying on subsidies to deliver new clean energy capacity or spur electrification in the US without measures to curb consumption of energy, such as a carbon tax, could lead to other distortions, Wærness argued.

“If we hide the true costs [of carbon] or energy from consumers, we don’t get an extra incentive to make things smaller, more energy efficient,” he said.

Norway’s experience with electric vehicles provides an example, Wærness suggested. Subsidies to buy battery-powered cars had rapidly increased their number, and Norway has been repeatedly cited as an example of how quickly customers could switch to EVs.

But the overall car fleet had swollen too, Wærness said. “We’ve kept a lot of the diesel cars and gasoline cars, and we’ve added EVs, and it took 10 years before gasoline demand went down,” he said. “We’ve bought an EV instead of taking the bus, or it becomes the second or the third car.”

True global decarbonisation to keep warming within 1.5C would take a “massive revolution”, Wærness suggested, and would require a carbon price, including a border tax to reflect the climate impact of traded goods and materials. (Derek Brower)

Video: The push towards greener jet fuel

Aviation is a big contributor to global greenhouse gas emissions. But how to decarbonise the sector has long eluded scientists.

Yet as the urgency around tackling climate change intensifies, the industry is keen not to be left behind — and branded a pariah.

The answer, it reckons, is to pivot towards “sustainable aviation fuel” — using biofuels to power aircraft and slash their carbon footprint. But a wholesale shift to SAF presents a host of technical and economic challenges. Widespread usage remains a long way off.

I headed to Seattle to hear the industry’s pitch. (Myles McCormick)

Data Drill

US president Joe Biden issued his first veto on Monday, rejecting a Republican-led attempt to ban private retirement funds from considering issues such as climate change in their investment decisions.

The move comes as efforts to crack down on environmental, social, and governance (ESG) investing increase across the US — particularly in Republican-led states.

More than half of US states have taken action against using ESG factors in public retirement plans or targeted funds that have boycotted certain industries, such as fossil fuels, according to a tracker by law firm Ropes & Gray. At least 50 anti-ESG bills have been introduced by states this year, more than double the number introduced in the entirety of 2022.

Florida’s Republican governor Ron DeSantis has been among the loudest critics of ESG investing, or what he calls “woke” capitalism, arguing the practice politicises investment decisions while compromising financial returns. Last week, DeSantis announced an alliance with 18 governors committed to curtail ESG investing at the state level.

“From a national debate standpoint, [limiting ESG investing] has very little to do with retirement assets,” said Josh Lichtenstein, partner at Ropes & Gray, adding that historically, states sided with the federal government’s definition of fiduciary standards.

Proponents of ESG investing argue that issues such as climate change can have a significant impact on portfolios and should be a factor in decision-making. More than 250 investors and companies led by climate groups Ceres and the We Mean Business Coalition released a statement today urging policymakers to protect their freedom to consider the material financial risks of climate change in their investment decisions.

“If we don’t pay attention to the accelerating frequency of severe weather disasters and the hundreds of billions of dollars they cause, nor to scientists’ forecasts for severe risk of more of that, and to entrepreneurial companies’ innovations for solving the resulting market needs, then we are not fulfilling our fiduciary duty,” said Anne Simpson, global head of sustainability at Franklin Templeton.

For more on ESG themes — and the backlash it has produced — sign up to the FT’s Moral Money newsletter. (Amanda Chu)

Power Points

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Energy Source is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg. Reach us at [email protected] and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.