Mission Impossible?

But would a Joe Biden White House, even with a Democrat controlled House and Senate, ever nationalize US oil and gas? The idea sounds preposterous. It is not. In fact — as will be explained here — nationalization could actually be imminent.

Share values may fluctuate, but the US oil and gas sector is currently mired in a chronic debt crisis. A wave of bankruptcies seems extremely likely. The debt crisis is the result of the combined impact of global oversupply of oil and gas before the pandemic, and a massive slump in demand as a result of the lockdown and its economic fallout.

In April 2020, oil industry advisor Art Berman announced it was “game over” for most of the US oil industry. According to Berman, “Large segments . . . will have to be nationalized before the year is over. The price of oil is too low to justify the cost of extraction even if storage were available.” Oil and gas is not an industry that can be “bailed out” in the same way as the “Big Three” auto companies were in 2008. Extending companies’ “liquidity” so that they can “restructure” and position themselves for the economic recovery will not matter if global oil and gas prices remain below production costs for a protracted period.

But could a Biden administration sit back and watch major companies declare bankruptcy and then live with the consequences of the United States being increasingly dependent on imported fuels? At the end the day, the financial viability of oil and gas is less important than the energy these concerns generate, which reflects just how dependent the entire economy is on fossil fuels. In other words, there may be no choice but to nationalize the sector.

Comet COVID?

Climate movement opinion leaders often get very twitchy when anyone raises the question of nationalization. Many entertain the idea that such “radical” measures are unnecessary. They believe that simple economics will drive the energy transition; our job is simply to speed things along. Along these lines, divestment organizers have been using the pandemic’s effect “to demonstrate just how dire the need to remove pension fund and other investments from the struggling [fossil fuel] sector really is.”

Listening to the liberal buzz around the pandemic might lead one to believe that it will have a similar impact on dirty energy that the massive space rock that crashed into the Yucatán 66 million years ago did. This single event triggered enough “global cooling” to dramatically alter the course of the earth’s natural history and wipe out the dinosaurs. Similarly, the economic fallout of the pandemic will, some suggest, precipitate the economic ruin of the fossil fuel companies, and allow cheaper and cleaner energy to thrive.

This “Comet COVID” view has been sustained by a string of “good news” stories. Analysts are predicting an annual fall in CO2 emissions that will be larger than the combined impact of the 2008 economic crash and the two world wars. And according to the International Energy Agency (IEA), “Renewables have claimed a greater share of electricity generation as a result of lockdown measures and depressed electricity demand,” which generated headlines like “ . . . Renewables Are Taking over the Grid.”

The Rocky Mountain Institute cheerfully reported that US solar had recorded a 22.5 percent increase in market share during the early months of the pandemic. The International Renewable Energy Agency (IRENA) claimed that the plunging cost of renewables would soon mark “a turning point in a global transition to low carbon energy.” In early April, the Guardian reported that the pandemic “will permanently alter the course of the climate crisis . . . pulling forward the date at which demand for oil and gas peaks, never to recover, and allowing the atmosphere to gradually heal.” In other words, Comet COVID has kicked up so much disruption that, when the dust finally settles, a new energy landscape will be clearly visible.

Green Slump

This “watch in wonder” mentality encourages political passivity and complacency. First, the dip in greenhouse gas (GHG) emissions will provide only a temporary respite if energy demand and emissions are allowed to creep back up to pre-pandemic levels.

According to the IEA this could happen by late 2021, although predictions such as these are based on the so called “V-shaped recovery” scenario, which could turn out to be wildly off. Divestment movement leaders might also want to reflect on the IEA’s recently released (May 2020) World Investment Outlook. A total of $1.8 trillion was invested in the energy sector in 2019. In 2020, investment is expected to fall by $400 billion — a 20 percent decrease.

Investments in fossil fuel exploration and extraction, refinery upgrades, and so on, have taken a 29 percent hit — down $156 billion from 2019. In the United States, analysts predict that shale and “tight oil” investments will fall by 52.2 percent in 2020. So what’s the point of encouraging activists to go to extraordinary and time-consuming lengths in their organizing efforts only to sprinkle lighter fluid on a conflagration?

As for the great leap forward for US solar, the much-celebrated 22.5 percent increase in market share took solar to — wait for it — 2.6 percent of US electricity supply. Wind is doing better, but wind and solar combined supplies just 11 percent of US electricity.

Currently gas and coal together generate almost 63 percent, and nuclear another 20 percent. And due to the sharp fall in demand for electricity, US renewable energy interests reported 600,000 layoffs in March and April. All the job gains in renewables over the last five years have disappeared.

Power utilities, already struggling to remain solvent, will also be hit by a major loss in revenues. The IEA estimates that global investment in renewable projects will fall 10 percent in 2020, accompanied by a 16 percent decline in spending on electricity networks over two years. As the IEA notes, “These trends are clearly misaligned with the needs of sustainable and resilient power systems.” In fact, renewables were in big trouble before the pandemic. Investment levels were falling, led by Europe and more recently in China, and annual levels of deployment had flatlined.

But why? In the IEA’s words, recently, “Renewables generally do not offer opportunities that investors are looking for in terms of market capitalization, dividends, or overall liquidity . . . Market and policy signals were not leading to a large-scale reallocation of capital to support clean energy transitions.” Activists take note: It is not easy for capitalists to make money from investing in renewable energy. And it just got a lot harder.

Triple Trouble

Meanwhile, US oil and gas today faces a three-sided crisis. First, the sector has become dependent on hydraulic fracturing (fracking). Fracking accounts for about two-thirds of US oil production, and 75 percent of gas production. A decade ago oil prices were above $100 per barrel, and it was those prices that made fracking for shale oil attractive to investors, and marked the start of the US shale boom.

However, production costs for frackers are considerably higher than they are for conventional “vertical” drillers. For fracking to be profitable, global oil prices must not fall below $45 per barrel or so. In mid-June 2020, the price was still below $40, and it’s likely to stay at $40 or so at least until the turn of the year.

Second, companies were already in trouble as a result of a massive global oversupply, the result of a price war between Saudi Arabia and Russia. Oil prices had already slumped almost 50 percent before the pandemic. Gas followed a similar pattern. As a result of overproduction, gas prices dropped by a third in 2019. Cheap gas stimulated a dramatic growth in demand, particularly from China and Europe, for US liquefied natural gas (LNG). And while the production costs of US shale gas amounts to less than $15 per barrel of oil equivalent, other countries are also producing gas at even lower prices.

Many US gas companies have for some years failed to generate enough revenue either to cover the costs of production or to pay the interest on billions of dollars in loans. Investors have therefore moved away from shale gas. In the months before the pandemic more than forty US fracking companies had filed for bankruptcy. By June 2020 global gas prices hit rock bottom, thus making the situation even more dire.

World Oil reported that “the $600 billion global gas market remains extraordinarily oversupplied.” US fracking operations can remain viable when gas prices stay above $3 per million “thermal units” for domestic use, and above $5.50 for exports. As of this writing, both global and domestic prices were hovering around $1.80.

Third, the pandemic has led to a slump in global oil and gas demand — one that is expected to be seven times larger than the 2008 financial crisis. As a response, US oil and gas companies hastily “turned off the valve” and, by late May 2020, the number of active rigs had fallen roughly 65 percent from the year before.

According to Berman, “The only option for many producers is to “shut in” their wells. That means no income. Most have considerable debt so bankruptcy is next.” In May, US refineries were handling 25 percent less crude than a year earlier. More than 100,000 oil and gas jobs had disappeared.

Consolidation or Liquidation?

So what will happen next? For US oil and gas, three outcomes seem possible. First, global energy demand might recover quickly, taking us back to “business as usual” marked by higher prices and, of course, higher emissions levels. Second, the supply–demand imbalance will persist, triggering a wave of bankruptcies and industry consolidation. According to one source, as many as 70 percent of the 6,000 shale drillers could go bankrupt if gas prices remain too low to cover costs or service debt. A handful of larger corporations might then buy up the assets of the smaller ones. Third, the global levels of demand will remain depressed for a longer period, forcing some of the larger companies (known as “majors”) into asset sell-offs or bankruptcy.

Significantly, the big players in oil and gas — represented by the American Petroleum Institute (API) — are gambling on the first two outcomes. As of this writing, they are not asking the federal government to intervene. The API is concerned that this would open the door to government influence and greater control. While tweeting, “The free market is the best arbiter,” the API nevertheless appealed to the Trump administration to pressure China to agree to purchase large volumes of the United States’ surplus fossil-based energy. (Nothing like a bit of diplomatic hard ball when the free market lets you down.)

Failing this, the API would be happy if the likes of Exxon end up buying the assets of smaller players. But, according to the accounting firm Deloitte, only 27 percent of shale companies would offer enough value for buyers, and “only large independents or supermajors such as Chevron and ExxonMobil still have the financial strength to make acquisitions.” But the third outcome — protracted losses and widespread bankruptcies — could force the federal government to consider nationalization.

Their Nationalization, and Ours

A Biden-style nationalization might involve the federal government playing a ringmaster role, negotiating purchasing agreements where the government buys gas and oil at above global prices in order to preserve the industry in a way that perpetuates current corporate control. If domestic production is allowed to collapse simply because production costs exceed revenues, then the United States will need to import more gas and oil, while trying to deal with fallout in areas of the country that have become economically dependent on the shale boom.

A Biden White House would probably not want to see that happen. In the electricity sector, the federal government could instruct states to support failing IOUs by way of power purchase agreements or capacity payments. Subsidies to renewable energy could also be beefed up.

But none of these measures add up to the kind of nationalization the Left can or should support. Our goal is not to preserve the current corporate structure, or to rescue Wall Street lenders and private energy companies. For us, nationalization can provide a platform for the restructuring the entire energy economy, including the renewables sector.

But “our nationalization” will need to be clear about two things. First, what we are witnessing today is not a crisis of fossil fuels, but a crisis of profitability. We are as dependent on fossil fuels as we ever were.

Second, the profitability crisis spans the entire energy sector. Without government intervention, many refineries, energy transportation companies, pipeline interests, and so on, may no longer be able to operate as viable businesses. The electricity sector, too, is facing a deluge of red ink, and utilities and subsidies-dependent wind and solar companies are hanging on by their fingernails.

It would therefore be a major mistake to imagine nationalization as a “clean up operation,” a means of winding down the production of domestic shale gas and oil on the basis that, well, they are currently economic basket cases — so what’s the problem?

The unfortunate reality is that the US economy will consume large volumes of coal, oil, and gas for the foreseeable future. Until low-carbon energy and energy conservation can be scaled up, an accelerated phasedown of gas and oil would simply mean that the United States will import more energy from overseas. And if large parts of US production were to permanently come offline, then global prices will increase, and the winners will not be the climate, or workers; the winners will be the United States’ current competitors.

If nationalization is going to serve both workers and the climate, we will need to accept that a phaseout of oil and gas is not a ten-year proposition. The transition to a low or zero-carbon energy system will take considerably longer than a decade. The entire economy has been built around fossil fuels, and it is impossible to change that in such a short amount of time.

Nationalization can, however, allow the country to develop pathways to decarbonization that are socially just and also make ecological sense. It will not be quick and easy — but it’s the only way the vision of the Green New Deal can ever become a reality.

COVID-19 was not a comet crashing into planet Earth, but it could be a lightning bolt in terms of its policy implications, both domestically and internationally. Both the climate movement and progressive labor should support a comprehensive and transformative nationalization, and without reservations.

If the United States — the world’s largest oil and gas producer — nationalizes its energy systems, it could instigate a tectonic shift in the way the world handles the climate emergency. The country’s power as an energy producer and consumer can be leveraged in ways that can remodel and redirect global energy toward a truly sustainable future.