Popular ESG Funds Do Little To Curb Oil Demand

Interest in companies with substantial environmental, social, and governance (ESG) credentials hit a record high in 2021.

With ESG-focused exchange-traded funds attracting about $120 billion globally last year, oil and gas producers can no longer afford to ignore the trend. So far, U.S. producers have responded by cutting spending on new drilling projects and allocating more capital on decarbonization and low-carbon – read “clean energy” – ventures.

While a stepped-up effort to reduce carbon emissions is needed if we have any chance of meeting national climate goals, the popularity of ESG-based funds has done shamefully little to reduce demand for fossil fuels. This has created a situation where feel-good investment funds are starving investment in new production – leaving oil markets hurtling toward a supply crunch and price spike.

The Biden administration has made big promises about tackling climate change but implemented few concrete policies to reduce demand for petroleum products. 

Biden aims to make the United States a net-zero carbon emitter by 2050 and promises 100 percent carbon-free electricity by 2035. He has also set a target of a 50 percent electric vehicle sales share in 2030 and recently pledged to slash methane emissions by 30 percent by the end of the decade. 

Biden has also targeted oil and gas producers directly. He killed the Keystone XL pipeline that would have sent Canadian oil across the United States to Louisiana ports, he’s working to block oil and gas leasing on federal lands and waters, and he’s urged the OPEC cartel to increase supply to reduce rising oil prices rather than turning to domestic producers for help. 

The net effect has been twofold. It’s intensified investors’ interest in companies with high ESG scores by putting climate policy above energy security on the White House agenda, and it’s made U.S. oil companies wary of investing in new drilling. Investment rates are expected to remain near record low levels in 2022.

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That’s not the message an administration wants to send a critical business sector during a global pandemic and a period of rising inflation. At the same time, crude prices are steadily marching toward $80 a barrel, consumer gasoline prices are at a seven-year high of nearly $3.50 a gallon, and inflation is at over 7 percent. 

Back to those climate targets, Biden has shown little follow through on how he plans to achieve them. 

Biden’s Build Back Better legislation was stripped of its most aggressive climate proposals, including a clean electricity standard and carbon tax, by members of his own party worried about how they would play with voters back home.

His leasing ban was rejected by a federal court as an overstep of executive authority – though the administration is expected to redouble its efforts to restrict access to federal areas by fossil energy companies in the new year. Biden’s pleas to OPEC for increased production were largely ignored. Indeed, only the arrival of Omicron and subsequent concerns about its potential to impact the global economy have made a dent in demand, and therefore, in rising oil prices. 

The United States is currently producing roughly 11.7 million barrels a day. The nonpartisan Energy Information Administration (EIA) expects U.S production to reach an average of 12.1 million barrels a day by the fourth quarter of next year. While that’s considerable growth, output would still be roughly 1 million barrels a day below the pre-pandemic peak of late 2019. 

Resource adequacy is not the issue. The United States is blessed with abundant natural resources. The oil and gas sector could be doing much more to ensure America’s energy supply was affordable, secure, and reliable if it had the support of federal policymakers and Wall Street. 

As we enter 2022, it’s clear the ESG movement has had a far more significant effect on investors’ psyches than on consumer demand for petroleum products. The disconnect 

The price of oil is set in the global marketplace. The EIA sees worldwide demand rising by 3.5 million barrels a day in 2022 to an average of 100.5 million barrels a day – essentially returning to pre-pandemic levels. 

It’s time policymakers come to terms with the fact that wishing for the transition to universal electrification won’t bring it about. While the growing trend of ESG-driven investment places constraints on the financing of new drilling, consumer demand for gasoline, plastics, and other petroleum products increases. 

If the Biden administration wants to avoid an energy crisis on top of a pandemic and rising the worst inflation in generations, it should acknowledge that the energy transition will take decades to unfold and that fossil energy will be necessary to power the economy for decades to come. 

What better way to achieve the transition than to lean on America’s vast oil and gas resources – an industry that supports more than 11 million jobs – to keep energy prices affordable while policymakers and markets sort out the messy business of changing energy consumption patterns?

Achieving that goal will be a Herculean task for the fossil fuel-dominated energy system, which demands about 20 million barrels of liquid fuels every day. 

Moreover, America’s oil producers are already busy decarbonizing their operations due to investor ESG pressure. ExxonMobil XOM will have net-zero emissions in the Permian Basin of West Texas by 2030. None of the OPEC producers can’t make similar claims.

Source

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