Worldwide, energy prices recently skyrocketed to their absolute highest level in decades, spreading concerns about their ripple effect for consumers, the economic recovery, and energy security.
The reopening of economic activities, along with colder than expected winter forecasts, have contributed to increasing demand for natural gas, crude oil, and coal from the lows of 2020. Meanwhile, however, supply has not returned to pre-covid-19 production levels yet. The consequent increase of wholesale prices is being passed through to businesses and consumers. In the US, major concerns particularly regard the retail price of heating fuels — such as propane, heating oil, and natural gas — that reached their highest point in several years in mid-October.
The energy prices in the US
According to the US Energy Information Administration estimates, households that primarily use natural gas for space heating (which are the majority, accounting for 48% of the overall population) will spend on average 30% more than last year to heat their homes. However, as pointed out by some experts, prices are actually higher on a year-to-year basis, though this reflects the fact that they were extraordinarily low during 2020 because of the covid-19 economic slowdown. If anything, if adjusted for inflation, they are below the average price of the last two decades. Moreover, U.S. natural gas price is much lower than its European counterpart, where price hikes have been accompanied by the fear of power outages due to low supply from Russia.
This notwithstanding, the impact on consumer categories that already bear a high energy burden may be significant. A recent report shows that in 2017, well before the Covid-19 recession, 13% of US households (15.9 million) faced a severe energy burden as they spent over 10% of their income on energy bills, against a national average of 3%. They are part of a broader number of people who are also considered to be struggling with high energy expenditure and that represent 25% (30.6 million) of US households. Among them, a disproportionate number of Native American, Black, and Hispanic households as well as older adults and families residing in low-income multifamily housing face a higher-than-average energy burden.
The economic downturn imposed by the pandemic restrictions and current inflation rates — which have reached a 30-year high — further worsen energy insecurity and lead to higher energy burdens. Against this backdrop, affected families may face a “heat or eat” dilemma, as they struggle with allocating resources and may be faced with the choice of picking between heating their homes and feeding themselves and their children. Emerging research focusing on the US finds that higher heating prices could also affect public health as a byproduct of lower heat use and other health-promoting spending; thereby increasing winter mortality among the most vulnerable households.
From an environmental point of view, one might expect that higher oil and gas prices may encourage — and speed up — renewables’ development. However, without a stringent carbon price, the climate benefits of a reduced use of these fuels are rather limited and can be partially cancelled out with cheaper coal. That is the current scenario, as increased and more volatile natural gas prices have resulted in the US electric power sector generating more electricity from coal-fired power plants, reversing a decreasing trend that had started in 2014 on top of threatening the Biden administration’s emission reduction. Though 2020 was a record year for renewable energy and additions to wind and solar capacity were planned in 2021, coal and natural gas remain the largest sources of electricity generation in the country. Non-hydro renewables accounts for 12.5 percent of total electricity generation.
Biden’s Policies to control prices and foster the energy transition
President Biden has been under pressure to solve the energy price crisis while, at the same time, he has also been trying to pass important pieces of legislation to boost investments and clean energy technology.
Late in November 2021, he announced the release of 50 million barrels from the Strategic Petroleum Reserve as an effort to increase oil supply and push down global prices. Other major oil importers, including China, India, Japan, South Korea, and the United Kingdom have agreed to do the same. The decision came after previous calls to push OPEC+ countries to speed up their production (and give away their profit margins) fell on deaf ears. Crude oil price actually decreased in November and December, though it is still over 30% higher than at the start of 2021. However, fears that the Omicron variant could trigger new lockdowns — compounded by a relatively mild beginning of the winter months — seem to be the real drivers of lower energy prices, rather than the impact of U.S. inflows into the market, which are considered too small to significantly alter supply-demand dynamics. Above all, the White House’ and other governments’ decision risks to further exacerbate relations with OPEC+ countries, which have so far decided to stick to their original plan of gradually increasing monthly supplies. Beyond the fight against energy prices, other ongoing issues, including the Iran nuclear deal talks and the already difficult relationship with Saudi Arabia suggest that energy policy will remain at the top of the US geopolitical agenda in the near future.
Domestically, President Biden faces many challenges, as he has been criticized for prioritizing emission reduction targets and therefore limiting domestic oil and natural gas production. The Biden administration is indeed pushing for substantial investments in the clean energy transition. After a tough discussion, Congress recently passed the Infrastructure Investment and Jobs Act, a bipartisan deal that allocates $500 billion funds for new infrastructure over the next five years, including clean energy infrastructure and climate resilience. The law is the first part of a two-pronged plan, the Build Back Better Act (BBB), whose second part got the House’s approval and is now awaiting to be considered by the Senate. Overall, the Act would provide $2.1 trillion in new spending in the form of grants, loans, credit support, and direct funding to reinforce existing programs as well as launch new ones. Of these, $555 billion will be aimed at redirecting investments toward renewable deployment, clean hydrogen, development of carbon capture and other low-carbon energy technologies, but also improvements of the electrical transmission grid and the construction of charging stations to accelerate the transition to electric vehicles. The Act also establishes programs to support energy efficiency, wildfire mitigation, domestic manufacturing of batteries, solar panels, wind turbines, and research and development. Beyond clean energy tax credits, which represent about 60 percent of the energy expenditure ($320 billion), and clean energy investments ($110 billion), an important piece of the legislation are the resiliency investments ($105 billion) that aims at climate proofing infrastructure to make them more resilient and avoid the kind of disruptions that we have witnessed in previous extreme cold weather events. Furthermore, important measures are planned to ensure a more equitable distribution of the economic opportunities that come with clean energy investments, such as grants and loans for local cooperatives to increase renewables use and energy efficiency and balance the costs of coal replacement.
If passed, the BBB would be the single-largest investment in clean energy innovation and infrastructure in US history, and it is expected to put the country on a pathway consistent with its commitment to reduce greenhouse gas emissions by 50-52% below 2005 levels by 2030. However, the unfeasibility to approve any type of carbon price initiative at the federal level makes the approval of the BBB an opportunity the US can’t miss out on if it wishes to catch up on the global climate agenda and develop an energy infrastructure that is less vulnerable to price changes. Along with other crucial reforms around transport, digitalization, and education, the plan also offers a great potential for the economy and job creation —estimated to amount to 3 million per year. Much will depend on the private sector’s response as well as on bipartisan support to finalize — and implement — it.
Photo Credits: COP26 (Flickr CC)