How high energy prices could help both the climate and the US

The surge in global energy prices triggered by Russia’s invasion of Ukraine certainly doesn’t seem like a blessing. It has pushed up inflation, depressed household budgets and battered President Biden’s approval ratings.

And yet there could be a silver lining for Mr. Biden. Higher prices, if sustained, could reduce global fossil fuel consumption and encourage the transition to zero-emission energy. At the same time, sanctions and boycotts against Russia pave the way for US oil and gas producers to expand their market share. They could thus offer Mr. Biden a way to both tackle climate change and boost the US oil and gas industry.

Like other world leaders, Mr. Biden has pledged to reduce emissions of carbon dioxide and other greenhouse gases that warm the planet by 2050. To accomplish this, Mr. Biden has relied on regulatory and executive action, such as: B. Addressing methane leaks from wells and pipelines and restricting leasing and drilling to federal land. Climate activists, meanwhile, have tried to pressure investors, banks and big oil companies to divest from fossil fuels.

The problem with such efforts is that they will do little to transform global demand for fossil fuels, the ultimate driver of global warming, but will reduce the proportion of that demand that is met by US suppliers, in contrast to Russia and the United States the OPEC. That’s one of the reasons Mr. Biden’s agenda has met fierce opposition from domestic industry, Republicans, the courts and Sen. Joe Manchin (D., W.Va.), who effectively vetoed the legislative agenda of Mr. Biden appeals evenly divided Senate.

A more efficient way to tackle climate change would be a carbon price, such as a tax structured to fall on imports of oil and gas but not on exports. That would make the transition to net zero less painful for US industry. While a carbon price in Congress remains a non-starter, Russia’s invasion of Ukraine could effectively do the same. Some countries are now willing to pay a national security premium for shipments from friendly countries – most notably the US

Europe, which gets about 45% of its imported natural gas from Russia, wants to reduce this to zero. Last week, Mr. Biden pledged to ship an additional 15 billion cubic meters of liquefied natural gas (LNG) to Europe this year, and 50 billion a year thereafter — about a third of imports from Russia last year.

“When Biden took office, LNG was under a cloud, but it’s not missing where the US is right now,” said Kevin Book, director of research at ClearView Energy Partners. In Europe, Mr. Biden has “given LNG a resounding endorsement.”

US export capacities are now almost exhausted. However, future European demand could catalyze investment in US capacity. Mr. Book notes that 21 LNG projects are on the drawing board which, if implemented, would come online between 2025 and 2027 with a combined capacity about five times the LNG increase that Europe by 2030, although he warned: “Final investment decisions will depend on long-term contracts with real counterparties.” Sindre Knutsson, vice president at Rystad Energy, a research group, estimates that the US share of world LNG has fallen to 28% from 19% last year % will increase in 2030.

As for oil, formal and informal boycotts in April will take about 3 million barrels a day of Russian production off the market, the International Energy Agency estimates. Even if Russia can redirect production to willing buyers, some capacity is likely to be shut down. JP Morgan is already forecasting US crude oil and condensate production to rise 1.3 million barrels a day this year to 12.8 million in December.

So the US appears to be benefiting from Russia’s shrunken market share. Will the climate? Past oil price spikes, such as after the 1973 Arab embargo, spurred environmental protection but little permanent migration away from fossil fuels because the alternatives were impractical. Now, however, electric vehicles are rapidly gaining mainstream acceptance. If gasoline stays above $4 a gallon, that will drive the trend.

Meanwhile, as the European Union shifts its gas supplies from Russia to the US, its overall consumption will fall as it presses ahead with its transition to net zero. The Netherlands and Portugal have announced new offshore wind investments, Belgium is delaying the closure of nuclear power plants and France is ending subsidies for new gas heaters and increasing them for electric heat pumps.

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Energy markets are notoriously volatile and a lot could go wrong in this scenario. Shortages of critical metals have pushed up battery and solar panel prices and dulled their attractiveness, while shortages of inputs and labor are hampering US shale production. Rising energy costs and inflation can create a recession, destroying demand and driving prices back down.

And the war could end. A peace deal could weaken Europe’s resolve to replace Russian with US gas. Even without such an agreement, informal boycotts of Russia could fade over time.

But if Russian oil and gas is stigmatized over the long term, it’s a good bet that both the climate and the US will be better off.

The consequences of the tough economic sanctions against Russia are already being felt around the world. WSJ’s Greg Ip joins other experts in explaining the significance of what has happened so far and how the conflict could transform the global economy. Photo illustration: Alexander Hotz

write to Greg IP at greg.ip@wsj.com

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