Any successful energy transition policy for the U.S. will involve political as well as economic considerations. U.S. President Joe Biden clearly understands this. He recognizes that, for many Americans, soaring gasoline prices will quickly turn the Green New Deal into the green bad deal.
Asking Saudi Arabia to pump more oil while reducing domestic production through regulation and taxation is not hypocritical. With his visit to Saudi Arabia this week, Biden is simply recognizing that in the near-term, Saudi oil is essential to maintaining public support for progressive environmental policies.
Hydrocarbons are not going to fade away any time soon. Global energy demand in 2023 is likely to exceed pre-pandemic levels, and 80% of the global energy supply will still come from oil, natural gas, or coal. Likewise, hydrocarbons remain the basis of a vast petrochemical industry, which produces everything from plastics and fertilizer to pharmaceuticals and textiles.
While the number of conventional automobiles may have plateaued in Europe and North America, in much of the world the transition to electric vehicles has barely begun. In large developing economies such as India and China, demand for oil is still growing rapidly, which leads the International Energy Agency to predict that global oil demand will grow for the rest of this decade.
While demand for oil is not falling, supplies may well be. Existing oil fields deplete, and require continuous new drilling just to maintain current production levels. However, environmental efforts have reduced new production. For example, many of America’s oil production involves fracking, which is condemned by environmental activists and has been banned in some states. New oil leases, pipelines, and refineries also are being restricted.
In Europe, soaring energy costs are in part a result of shutting down Dutch gas fields due to environmental concerns. Denmark has ended all new North Sea oil exploration. As climate-aware investors seek to minimize their exposure to hydrocarbons, private oil companies increasingly lack the desire or the ability to maintain production. Concerned about stranded assets, many American oil companies have already slashed their exploration budgets.
Make no mistake, America’s energy transition will be expensive. Installing charging stations, solar panels and wind turbines will require large public and private expenditures. According to consulting firm McKinsey & Co., meeting a 1.5-degree maximum climate-change target will require capital expenditures of $8.5 trillion by 2030.
Providing this funding in the U.S. will require a strong domestic economy, which in turn requires affordable energy. Energy costs affect every aspect of the economy, from transportation and manufacturing to home heating and electricity. Even though the U.S. imports little oil, many of its most important trading partners do. The ability of China, Japan, South Korea and Taiwan, for example, to produce the goods Americans want, and to purchase goods America manufactures, is closely tied to access to stable, affordable oil imports.
Saudi Arabia is by far the world’s largest oil exporter. It holds roughly 20% of global oil reserves and provides 10% of global oil production every day. Saudi oil is also amongst the industry’s least expensive to produce. Even when demand for oil eventually falls, the Saudis will likely provide the last commercially produced barrels of oil on the planet. More immediately, Saudi Arabia is the only producer with enough spare capacity to add large volumes of oil to the market quickly.
Moderate energy costs strengthen our economy. As we saw in both 1973 and 1979, high energy costs can destroy prosperity. The subsequent inflation and recession triggered by high energy costs will undermine our willingness and ability to advance energy transition. Saudi Arabia’s unique role in energy markets can help avoid such negative outcomes. Seeking Saudi cooperation makes sense and makes Biden’s visit to Riyadh worthwhile.
David Rundell is the author of “Vision or Mirage, Saudi Arabia at the Crossroads” and a former chief of mission at the American embassy in Saudi Arabia. Ambassador Michael Gfoeller is a former political adviser to the U.S. Central Command. Both are partners at consulting firm Arabia Analytica, which has advised U.S. companies doing business in Saudi Arabia.