Although this month’s Glasgow COP26 climate summit involved ambitious statements by both right-wing and left-wing politicians as to the urgency of climate change, these lofty ambitions are trumped by more pressing matters. Consumers across the world have noticed the rising gasoline prices. With the winter getting close, more fossil fuels will be needed soon to keep everyone in the Northern hemisphere warm. Rather than take the rising prices as a welcome incentive to reduce fossil fuel consumption, governments across Europe and in the rest of the world are doing whatever they can to halt the rise in energy prices, except for tightening monetary policy. In a time were climate change is seen as an emergency, it is, for better or worse, superseded by short-term considerations.
In September the French government instituted price controls on natural gas and electricity. The same government that tasked the ECB with reducing the spread between German and French bonds is now taking heavy-handed steps to fight the effects of inflation it brought upon itself. In the Netherlands the government is borrowing additional money from the ECB to compensate households for higher gas prices. There seems to be a pattern of inflationary effects being solved by solutions that in turn exacerbate the inflation problem.
The specific inflation of fossil fuel prices however, is being handled as a separate issue. Last Tuesday US president Biden decided to release his strategic oil reserve. The high prices are being seen as a strategic crisis. In the associated press release the Biden administration describes how citizens are losing purchasing power due to higher prices, despite the government’s unprecedented expenditure. Of course, keen observers will recognize that exactly the higher spending is responsible for the lower value of the USD. Interestingly, the release in strategic reserves is orchestrated in cooperation with China, India, Japan, South-Korea and the United Kingdom. Reminiscent of mutual arms decreases, the US is trying to prevent diminishing reserves while others hold on to their oily arsenal.
In the house of representatives meanwhile, Democrats are urging Biden to take even more steps. One of the requested measures is a full ban on crude oil exports. This sounds more significant than it is. For starters, the US previously had a crude oil export ban between 1975 and 2015. The ban only excluded crude, unrefined oil for exports to be refined elsewhere. The US produced crude could still be refined domestically and later exported abroad. In fact this is more a measure to help American refineries rather than a strategic move towards isolationism. Be that as it may, it will be a blow to supporters of free trade.
A more meaningful move has already been announced during COP26. A group of more than 20 countries, headed by the US, Canada and the UK, committed to stop financing fossil fuels abroad. Once again a statement that sounds impressive but does not tell the full story. American investors can rest assured that they will not be banned from owning shares in BP or Total. Rather, the financing involves government support for American companies exploring, producing and maintaining oil reserves abroad. As these reserves are often located in countries with significant security and political risks government support is instrumental to take some of the risk burden. This practice is soon to end for the US-led group.
Although this measure is touted as part of the green movement towards renewable energy a realist will see the strategic aspect. In a time of energy security it is advantageous for the governments of Canada and the US to divert more investment to their own oil and gas fields. It should come as no surprise that oil-poor China and Japan are missing from the list. What should however surprise you, is that some European countries, without domestic oil fields to speak of, have joined the group. While Denmark does have significant domestic resources to invest in, Italy and Finland do not. For those countries the financing stop looks highly irrational.
The Netherlands, which has natural gas resources but is winding down production, has become a signatory as well. This despite their world famous hydrocarbon sector that includes Royal Dutch Shell and also a plethora of companies in exploration and offshore development. The effect of this measure is set to be especially destructive here, with only the largest companies surviving without government support. Even Royal Dutch Shell is considering leaving the Netherlands to become a fully British company. To add insult to injury, the company is planning to drop “Royal Dutch” from its title.
The lesson should be clear. That a certain policy measure is described as “green” should never be the only consideration. Once that becomes the case those who do understand that any issue has multiple sides will always take advantage.
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