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Is sustainability causing higher gas prices?
Market Mysteries of the week
Is sustainability causing higher gas prices?
Answer:
President Biden threatened to tax oil companies' record profits if they don't pump more oil, but the world has been asking them to pump less. High energy costs may be the short-term sacrifice for long-term sustainability.
Why the tax?
President Biden has threatened to impose a one-time "windfall" tax on oil companies t
o incentivize them
hoping that will bring down prices at the pump, but it has sparked a lot of
.
Energy companies are making more money than ever before.
Every oil major, from Exxon Mobil to Shell and BP, has
, with oil and gas prices at their highest level in years. Over the past twelve months, the energy sector has grown its profits by
The
fossil fuel giants have spent billions rewarding their shareholders
with profits, buying back their own stock and increasing dividend payments.
Since energy prices are such a significant and visible component of inflating living costs, t
he timing of these record profits has come under criticism.
Prices at the pump have come down from their
, but the increase in energy prices accounts for about
. In Europe, where energy costs are an even bigger problem,
have already imposed windfall taxes, including Greece, Hungary, Italy, Romania, Spain, and the United Kingdom.
People are looking to blame someone for inflation
, but as we've discussed, c
What's causing high gas prices?
Supply and demand primarily drive gas prices.
As we've discussed,
, pushing prices of everything higher, and then Russia made everything worse, particularly for energy.
Between speculators, geopolitics, and long production timelines, it's not easy to say who's influencing oil prices the most.
Investors can exacerbate price changes from supply and demand disruptions.
Oil prices are based on futures traded in financial markets, attracting much speculation. It's almost as if Pepsi's stock price determined the price of a 2-liter soda. The price mostly moves with expectations of consumer demand over the long term, but there's also
a lot of volatile trading and investors trying to make money in the short term.
Oil companies
and speculating.
Oil supply is also affected by geopolitical conflict and long production timelines.
In
, governments determine how much to pump. Some nations can "turn the pump on or off," but in the United States, increasing production can require years of investment and construction.
Oil demand has typically been a function of economic activity, but now sustainability plays a factor.
In the past, as the global economy flourished, more people traveled, industrial output grew, and demand for oil and gas grew with it. Now, energy demands are shifting towards cleaner and renewable sources.
How has the clean energy transition affected oil prices?
The world is moving away from fossil fuel consumption and divesting from fossil fuels companies, so
it's become less financially attractive for oil companies to keep investing in production.
As the world looks to slow climate change and transition away from high-emissions energy sources, the International Energy Agency expects
. It can take up to twenty years to recoup the cost of building a new refinery, so most prominent energy companies have
It's not a good investment for them.
Investors have also made it clear that fossil fuel companies won't get their backing if they increase production.
More than 1,500 institutions worldwide, representing over
(with a T), have committed to divesting from fossil fuels. Energy companies
While most of the record profits have been distributed to reward shareholders,
some energy companies have started investing in transitioning their businesses to clean energy.
this past quarter to expand into renewable natural gas. It has ramped up clean energy investment, targeting net-zero emissions by 2050. That goal
, the bulk of its footprint, but it's a start.
Shouldn't we just stop using fossil fuels?
High prices have already accelerated our transition, but we are far from ending our reliance on fossil fuels.
Renewable energy is
, but its use still has limitations. Wind and solar energy depend on weather conditions and are less reliable for on-demand power than burning coal or gas. Energy storage and battery technology is advancing quickly but is heavily reliant on rare minerals and is
Most of our energy use cannot yet be solved by wind or solar.
Electricity only accounts for
We still need to burn fossil fuels to heat our homes, fuel our cars, and power our industrial production, heavy machinery, and more. We can
and
in industrial manufacturing, but those changes are still in their infancy. The United States'
will take years to play out.
So while
warrant demonization
, it's on us to stop buying what they're selling.
We're reducing our consumption of fossil fuel energy, but we're still demanding a lot of it. High prices in the near term are likely the cost of transitioning to a more responsible form of capitalism. Unfortunately, as with most things, the most vulnerable are feeling the most pain through this transition.
âš¡The Share Scoops Team
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