Why $100 A Barrel Oil Could Be Bad For The Energy Transition – ValueWalk Premium

Why $100 A Barrel Oil Could Be Bad For The Energy Transition

With oil costing more than $100 a barrel, and Russia’s war in Ukraine underscoring the risk of relying on fossil fuel, it would seem like a great time to speed up the transition away from the polluting fuel. The reality isn’t so simple.

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Public support for climate action is higher than ever in most countries, but that doesn’t ease the economic pain when everything from food to transport gets more costly. “This is an unfortunate downside of the economy we’ve got that runs on fossil fuels,” said Charlie Donovan, a visiting professor of finance at University of Washington.

That reliance makes any imbalance between supply and demand a source of price volatility, including the current spike. In 2020, oil giants drastically pulled back on investments to increase production on the assumption that Covid-19 lockdowns would depress demand for their product. But the quick rollout of vaccines in developed nations led to a faster-than-expected recovery and a shortfall in supply.

Now Russia’s invasion of Ukraine has added risk to oil supply, with economic sanctions growing. Analysts say the longer the war goes on, the greater the chance the price of oil remains above the $100 mark.

There is another theory that oil companies may have been investing less in production over the last decade, pushing the price higher, because their investors are pressuring them to pivot to green energy. Though not everyone agrees with that. Even after discounting the upward pressure the war adds, the high oil price is “all due to things that happened during the pandemic,” said Ed Morse, global head of commodity research at Citigroup Inc. But what do elevated crude costs mean for the transition to clean energy going forward?

One argument is that high fossil fuel prices are a good thing — consumers might be incentivized to switch to more fuel-efficient or electric cars, take fewer flights and consider replacing oil-fired boilers.

Read the full article here by Akshat Rathi and Will Mathis, Advisor Perpespectives

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