Paul R. La Monica, writing for CNN, projects that a major consequence of the confluence of the coronavirus pandemic and the Saudi-Russian oil price war will be a recurrence of stagflation, a phenomenon last seen in the 1970s that is characterized by an economic slowdown coupled with rising prices. However, like many writers on the economy, La Monica’s analysis is oblivious to the new reality of an existential climate crisis.
Coal is already dead, with many coal-fired plants unprofitable if not already bankrupt; oil is uneconomical in most places world-wide, and natural gas is competitive only because a glut of gas has pushed its price so low that many US shale gas companies are becoming unprofitable despite cutting costs by closing rigs, and they are finding it harder and harder to attract further investment.
The Saudi strategy is to drive prices so low as to force many American shale companies out of business. They tried and failed to do the same thing in 2014-2016, but the odds of success are much greater this time around.
For one thing, Russia, which sparked the current oil crisis by refusing to go along with OPEC’s proposed production cuts, wants to increase its market share at American expense while showing its displeasure at recently imposed US sanctions. For another, the US shale industry is no longer in boom mode, but is a mature industry facing slowing production growth, higher production costs, and increasing reluctance of investors to finance what have been low-return investments. Finally, the macro environment in which the US gas industry operates is vastly different from the last Saudi attempt to torpedo it.
The global transition from fossil fuels to renewable sources of energy is well along, driven mostly by the phenomenal decade-long drop in the cost of wind and solar technologies, and partly by the growing global awareness of a deteriorating climate along with swelling concern for and opposition to the greenhouse gases that are a byproduct of the burning of the fossil fuels produced by the industry most responsible for that change.
Indicative of the new reality is that hydraulic fracturing, known popularly as fracking, the technology which together with horizontal drilling sparked the shale gas boom that made the US the world’s largest oil producer, is now under attack in the political arena. Several candidates for the Democratic presidential nomination advocated a ban on fracking because of its harmful effects on the climate and the environment.
Ironically, the oil price war initiated by Russia and Saudi Arabia, by driving much of the US shale gas industry out of business, may well have the same effect as a ban. If the price war succeeds in raising the price of natural gas, one of its key aims, the few remaining American producers would likely find little market for their newly uncompetitive product. Disruption of the US and global economies as they transition from a high-carbon energy system to a low-carbon one is certain, a temporary recession probable, stagflation unlikely. Creation of a new economy based on endless free nonpolluting energy sources will produce multiple benefits to human health, to the environment, and to the sustainability of the Earth.