By Christopher M. Matthews and Katherine Blunt
Wall Street Journal, Aug 1, 2022
America is wrestling with the worst energy crisis in nearly five decades, a period of high prices and limited supply. What makes this crisis different than the troubles that roiled the country in the 1970s is how it started and the fixes required to make it end.
This current challenge began with a decade of affordable power that upended the U.S. energy world. The rise of fracking, which extracts oil and gas from shale rock, unlocked cheap domestic supplies while cleaner energy provided by wind and solar farms became far less expensive. Gasoline and oil prices fell while gas-fired power and renewable power pushed aside costlier—and politically less popular—coal and nuclear plants.
It was an era of cheap, plentiful energy. It came undone thanks to a haphazard transition to renewable energy, reduced investment in oil and gas production, political inaction and unexpected economic forces triggered by the pandemic and lockdowns. Russia’s Feb. 24 attack on Ukraine applied even more pressure to global supplies.
The result was evident across the country this summer as demand surged well ahead of new supply. Drivers paid more than $5 a gallon to fuel their cars and trucks for the first time ever. The price of natural gas used to heat homes and offices hit its highest mark in 14 years. Energy shortages now loom as U.S. stockpiles of everything from crude oil to petroleum products fall. Electricity grid operators have warned of controlled outages to balance supply and demand on the hottest days.
The proposed new legislationthat gained key support this past week from Sen. Joe Manchin of West Virginia is in part pitched as addressing some of the causes of the current energy crisis. Its passage is uncertain—and in any case the investments in new energy sources it aims to spur would take years to come to fruition.
The deal would spend roughly $369 billion on climate and energy programs, including tax credits for buying electric and hydrogen vehicles. It provides numerous incentives to accelerate the build-out of wind and solar farms, as well as large-scale batteries to store their output for use when production declines. It also has provisions that benefit fossil fuel companies—requiring the Interior Department to offer oil companies millions of federal acres onshore and offshore over the next decade—as well as support for nuclear power production.
Part of the handshake agreement with Mr. Manchin this past week tackles another issue: construction delays on new energy projects. A separate bill could speed up these projects by making the environmental-permitting process faster. The delays are making it challenging to fill a gap left by the closure of older power plants.
Whether any new legislation brings upward or downward pressure on energy prices depends largely on how fast new regulations and incentives are rolled out and which come first, said Bart Melek, global head of commodity markets strategy at investment bank TD Securities. Energy companies face steeper costs of production when dealing with new regulatory hurdles but are slower to factor in incentives in their investment decisions.
“Once you make changes, you have to convince your board of directors that this is a good idea [and] your investors,” Mr. Melek said.
Politicians of both parties didn’t plan for the possibility of this current crisis, making it more difficult to solve. It is a major political problem for President Biden heading into a pivotal midterm election in which the highest inflation in four decades—driven in good part by soaring energy costs—is a kitchen-table issue for voters.
Energy was a political issue for the president from his first week in office, when he blocked completion of the Keystone XL oil pipeline and froze new oil and gas leases on federal land. He backtracked some as gasoline prices rose, resuming the sale of leases to drill on federal lands, albeit at higher royalty prices and with fewer acres offered, and asking oil-and-gas companies to produce more.
While Mr. Biden has asked for more short-term production, he still opposes long-term fossil fuel investments that will make it difficult for the U.S. to meet carbon-reduction targets. His support for policies designed to reallocate investment from oil and gas to green power amounts to a market signal that fossil fuels are a sunset industry, say executives, making it difficult for them to invest.
Energy prices have tempered in recent weeks, as traders bracing for a global recession bet that lower economic activity will cut energy usage. Gasoline prices have fallen to less than $4.30 a gallon recently, in part because prices got so expensive that drivers have stopped filling up as much. The U.S. also has abundant untapped fossil fuel reserves and remains far better positioned than Europe, where energy shortages this winter appear increasingly likely as imports from Russia dwindle.
But a recession might only dent demand temporarily, say energy executives and analysts, and won’t reverse long-term supply issues. Demand is expected to increase for the rest of the decade, according to S&P Global Commodity Insights.
Fracking’s Fall
This crisis was unimaginable for many before 2020, when investors were plunking hundreds of billions of dollars into new petrochemical facilities and natural-gas power plants to take advantage of cheap American energy. The rise of fracking—which involves blasting underground shale rocks with a mix of water, sand and chemicals—had unlocked vast new domestic supplies of oil and gas.
From 2010 to 2019, while overall consumer prices rose 19%, energy prices paid by consumers—including gasoline, electricity and natural gas from utilities—rose just 11%, according to Labor Department data. In other words, the real price of energy fell by about 7%. During the prior decade, real energy prices rose 41%.
Coal power, which had been the leading source of power generation in the U.S. for much of the 20th century, was toppled by natural gas in 2016, according to the U.S. Energy Information Administration.
The shale boom transformed the U.S. from a net importer to a net exporter of petroleum and gas. Investors motivated by low interest rates plowed into fracking, and they triggered a gusher: The U.S. became the world’s top oil producer, surpassing Saudi Arabia. U.S. oil prices fell from about $78 a barrel to $58 from 2010 to 2020, lowering gasoline prices.
One shale producer that initially benefited was Bonanza Creek Energy, which attracted hundreds of millions of dollars from Wall Street investors. Between 2012 and 2019, the company roughly doubled its oil and gas production from about 12,000 barrels a day to nearly 24,000 barrels a day. But the Colorado driller burned through so much cash that it was forced to declare bankruptcy.
The same problems rolled across the industry, as many companies drew on gushers of cash to drill as much as possible with little regard to profitability. Many shale wells turned out to be less productive and more expensive than predicted, and the industry lost $300 billion more in cash than it made between 2010 and 2020, according to accounting firm Deloitte. Those losses soured investors, who began fleeing the sector. That raised oil companies’ borrowing costs and shrunk their budgets.
The result is that shale companies and investors are being cautious now. They aren’t producing enough energy to keep pace with rising demand, even as they now reap large profits from high commodity prices. Most shale-company budgets are still below prepandemic levels, and their spending will only equate to a 3% increase in production next year, according to JPMorgan Chase & Co.
Consider Bonanza Creek, which emerged from bankruptcy in 2017. It expanded production in 2019 and predicted more expansion in 2020 but pulled back when the pandemic took hold. It cut planned capital expenditures to around $65 million from roughly $225 million and laid off dozens of employees.
In November 2021, it merged with a rival to create Civitas Resources, which plans to expand production only moderately or not at all and return all excess cash to shareholders instead of plowing it into new projects. Many of Civitas’ peers are pursuing similar strategies, including Exxon Mobil Corp., Chevron Corp. and Occidental Petroleum.
“Financial investors subsidized oil-and-gas companies to grow volume with no regards to profit and essentially subsidized the consumer,” said Ben Dell, chairman of Civitas and co-founder of private-equity firm Kimmeridge Energy Management Co., which owns a nearly 14% stake, according to S&P Capital IQ. “Now, the investors are asking for a return on their capital and, by default, the prices will be higher.”
The Limitations of Green Energy
There was a time when it also seemed like it would be relatively easy to replace many fossil-fuel plants with renewable energy and large-scale batteries that store wind and solar power for use as fossil-fuel production declines.
These energy sources became much less expensive over the last decade due to more efficient production as well as government subsidies that made renewables more attractive for investors. Renewable energy, including hydroelectric power, in 2020 became second to natural gas as a source of electricity generation in the U.S., according to the U.S. Energy Information Administration.
But as U.S. power supplies tighten, developers are struggling to build these projects quickly enough to offset closures of older plants, in part because of supply-chain snarls. Another reason: It takes longer to approve their connections to the existing electricity grid. Such new requests neared 3,500 last year compared with roughly 1,000 in 2015, according to research from the Lawrence Berkeley National Laboratory. Typical time needed to complete technical studies needed for that grid approval is now more than three years, up from less than two in 2015.
One renewable-energy developer, Recurrent Energy, filed more than 20 of these grid-connection requests last year in California, a state that needs more clean power to replace several gas-fired power plants as well as a nuclear plant slated for retirement in the coming years. It took the company seven years to get approval and construct a separate battery storage project in that state.
“It’s only getting harder and harder to get things done in California, specifically, but in every market,” said President and General Manager Michael Arndt.
Wait times can be years for other projects that could also help alleviate energy shortages, such as high-voltage power lines to carry electricity between regions, natural gas pipelines and offshore wind farms capable of generating large amounts of clean power. These require land and ecological studies that many stakeholders say are critical to protecting wildlife, nearby industries and other interests.
The strain is already evident in the Midwest, where Midcontinent Independent System Operator Inc. operates a regional grid across multiple states. One of its biggest challenges, said Chief Executive John Bear, is how to replace coal- and gas-fired power plants that can produce power on demand with wind and solar farms where output fluctuates with weather and time of day.
When electricity supplies get tight, MISO calls on every available generator to produce power in what’s known as a “MaxGen” event, something that rarely occurred before 2016. Since then, MISO has had more than 40 MaxGen events, a number of which occurred outside the summer months, when demand is typically highest.
MISO this past week approved a sweeping plan to build high-voltage power lines to help balance supplies, though the projects aren’t expected to be complete until 2030. It is also considering how to better compensate power plants for operating on standby to slow the pace of closures. “The transition may require some scaffolding, and that scaffolding may be some gas plants,” Mr. Bear said.
Project delays—coupled with higher gas prices—present new challenges for utilities, too. They are paying more to produce or purchase electricity while planning big spending increases to upgrade aging infrastructure and prepare for new energy demands.
Xcel Energy Inc., a Minneapolis-based utility company serving parts of eight Western and Midwestern states, is wrestling with slowdowns on solar projects. Those include contracts with solar farms in Colorado that were scheduled to be online in late 2022 and early 2023.
Xcel, through one of its subsidiaries, is now working on contingency plans to ensure adequate supplies for next summer. It plans to invest $26 billion between 2022 and 2026 partly so it can build more high-voltage power lines to carry more power from new wind and solar farms.
Xcel CEO Bob Frenzel said higher energy prices pose near-term challenges for the company and its customers, but he expects they will fall with time. The war in Ukraine, the pandemic and supply chain snarls, he added, would have been easier to manage if they didn’t converge.
“You put those three factors in a mixing bowl, and you come up with a bigger challenge,” Mr. Frenzel said.
‘No one knows what to do’
The actions of the U.S. government also contributed to this current crisis. Federal decisions made over the last three decades to encourage competition, lower costs for consumers, sell oil and gas to foreign buyers and encourage the development of more renewable sources are having unintended consequences now that the energy market is in turmoil.
It began with the decision to deregulate the electricity industry, a movement that first gained support following the energy shortages of the 1970s and gathered more momentum with the 1992 passage of the Energy Policy Act, which encouraged competition among wholesale electricity suppliers. The federal government also lifted price caps on natural gas and created incentives for more renewable energy sources to take root in markets around the country, hoping to prop up technologies that didn’t rely on oil and gas.
What this new system created in the subsequent decades was a patchwork of markets across much of the country with different regional operators, leaving state regulators and power grid managers to do much of the planning. Coordination across regions became more challenging as states set different goals to reduce carbon emissions.
Consider what happened in California when the state experienced rolling blackouts in 2020 after temperatures rose across the West. The state had substantially reduced its reliance on gas-fired power plants in recent years in favor of renewable energy, giving way to evening supply crunches on hot days when solar production tapers off. California has historically imported a lot of power from neighboring states in times of need, but it was constrained in its ability to do so during the 2020 heat wave because neighboring states also had numerous plants close and thus had less power to spare.
“You had too much capacity come off the market too quickly and now all the markets are scrambling for reliability,” said John Arnold, a former natural gas trader who now is a billionaire philanthropist.
Presidents Obama, Trump and Biden all encouraged U.S. exports of liquefied natural gas. The U.S. became the world’s top LNG exporter this year as it sent huge volumes to Europe to help replace Russian supplies. But those same exports are now driving up domestic gas prices because U.S. consumers are effectively competing for supplies with foreign buyers, say analysts, and will keep prices elevated for years to come due to long-term supply contracts signed by exporters.
The U.S. government has more recently taken steps to help with the nation’s transition to renewable energy sources. For example, it expanded its authority to intervene in state-level permitting processes for high-voltage power lines as a way of helping balance electricity supply and demand across regions. Mr. Biden is also trying to lower high energy prices by asking Saudi Arabia, which he had vowed to treat as a “pariah” after the killing of journalist Jamal Khashoggi, to pump more crude. He traveled there earlier this month.
One former regulator said the current situation reminds him of a period five decades ago when an Arab oil embargo and revolution in Iran led to a rethinking of energy policy in the U.S. and Europe. But it is also different, he said.
“The crisis now is much worse than it was in the 70s,” said Bernard McNamee, a Republican former member of the Federal Energy Regulatory Commission. “Everyone is looking around, and no one seems to know what to do.”
