Night School, Class 1: Green energy’s big year

This is an audio transcript of the Behind the Money podcast episode: Night School, Class 1: Green energy’s big year

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Peter Spiegel
Hello and welcome to Behind the Money Night School. I’m Peter Spiegel. I’m the US managing editor of the Financial Times. BTM Night School is a special series made in collaboration with Blinkist that will serve as a guide to the US economy in 2023. Over the next five weeks, I’ll be joined by FT journalists for conversations around issues like inflation, technology and energy. For your lesson tonight . . . 

Derek Brower
Gasoline prices aren’t just about what you put in your car. They’re actually about the cost of your tomatoes or your clothes or anything that is shipped or trucked or made.

Peter Spiegel
Derek Brower, the Financial Times’s US energy editor, joins us. We’ll cover a lot of ground from gas prices to Joe Biden’s green subsidies, domestic oil production and the role of renewables.

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Hi, Derek.

Derek Brower
Hi, Peter.

Peter Spiegel
When most Americans think of the US economy and energy, I think they probably think, first of all, of the pump going to fill up their car with gas. The interesting thing that we’ve seen over the last year or so is that we had the Russian invasion of Ukraine. The price of gas in the US went to, in some places over $5 a gallon. But now we’ve seen since that peak, it’s actually come down quite a bit, dropped to (inaudile) to an average by about a dollar, dollar and a half. What’s happened over the course of last year?

Derek Brower
Good question. A lot of things happened in probably about six months. The first thing that happened was that the Biden administration got very, very worried. Remember that they were facing midterm elections last year and the run up in gasoline prices was happening in the months ahead of those elections. So the administration became so worried that it began imploring foreign oil producers to pump more oil, it asked domestic shale producers to produce more oil. Those producers in Texas, New Mexico, North Dakota, that have done so much over the past decade to produce so much oil for the US and make the US almost energy independent. And then the third thing it did on the supply side was open the taps of the Strategic Petroleum Reserve and the Strategic Petroleum Reserve was this huge reserve of stored crude oil in caverns, salt caverns dotted around the Gulf of Mexico coast. And it has all this oil stored there for emergencies like hurricanes or civil wars and Libya and so on. And the US government tapped that. Opened the taps, allowed some of that oil to come out, lots of that oil, in fact. And that drove prices, prices down. So it was a political decision by the Biden administration really to get these prices down because it was conscious of just how significant for American voters the gasoline price is.

Peter Spiegel
Now, that’s a big policy change from the Biden administration who actually came into office talking about renewables and not wanting to drill. But before I get to that topic, I just wanted to take a step back and talk about the broader US economy, because obviously what hits consumers at the pump is important. But in the broader US economy, obviously, we are a very energy intensive economy. And there was a lot of concerns of sort of the bad old days of the 1970s and where we headed back to, you know, inflationary spirals and those kinds of things. The difference, I think, is that energy now accounts for a far smaller part of the overall US economy than it did back then. But obviously, high oil prices still have a huge impact on some of these energy intensive industries like manufacturing. What have been the impact on sort of the broader US economy and particularly manufacturing sectors and consumer spending and those kinds of things?

Derek Brower
Yeah, I mean, this is a really, really complex and interesting topic, actually, because, you know, we’re used to the, you know, hearing about the 1970s oil crises where soaring oil prices triggered economic recessions around the world and so on. That’s not what happened last year when oil prices spiked again. And there’s a lot of conflicting, interesting things that are kind of happening in the US economy or have been happening over the over recent years. One of them is that, you know, people spend more on energy these days. In fact, last year, households spent more energy than they ever had before, but they spend a lot less of their personal income as a share of their personal income, they spend a lot less. So the impact is lower.

Now, gasoline prices are really visible to Americans in a political sense. It’s really important because it’s a number that you see driving down the highway all the time. That’s why political consultants say presidents are always so obsessed about gasoline prices because it’s this visible sign of whether the economy is, you know, growing or shrinking or whether prices are going up or prices are going down. But the other thing to remember is that gasoline prices aren’t just about what you put in your car. Diesel prices, the same thing. They’re actually about the costs of your tomatoes or your clothes or anything that is shipped or trucked or made. So last year, the Biden administration was also contending with inflation across the economy that was running at four-decade highs. So underlying that was the cost of energy which was rising. So it’s a very complex thing we’re spending less in the US economy as a proportion of our household spending than we ever have on energy. But energy underlies all the other things that we’re spending at the moment. This is the increase, as oil prices rose last year after the Russia’s invasion of Ukraine, the cost of everything else rose too. And as there was always money coursing through the economy because of all the stimulus spending during the pandemic, you know, that helped inflate these, the cost of energy, the cost of everything else. So it was just really, really complex kind of vortex of forces that were intermingling and affecting the price of everything in the economy. But the biggest single one of them was the cost of energy.

Peter Spiegel
And so it’s most visible when you drive past the gas station. But obviously, if you’re going to your supermarket, you’re going to your closed store. Those things have to get to those locations on trucks, which are fuelled by the same high prices that consumers were seeing. So it had a ripple effect.

Derek Brower
Yeah.

Peter Spiegel
One of the things you said in your opening remarks about the changes of the 1970s is that the US actually has become, largely because of the sort of shale gas revolution, almost energy independent. It’s gone from being one of the biggest importers of crude oil in the world to actually a net exporter. Talk a bit more about that, how did that happen and what are the implications for US economy going forward?

Derek Brower
Yeah, this is the other huge part of this story is that the US used to send a lot of money abroad just to buy oil. It sends a lot less of that money abroad. So that’s just this huge macroeconomic change. And that’s been brought about by this surge in shale production from about 2005 onwards. Oil and gas drillers, especially initially natural gas drillers, figured out a way to bust open these shales, which lie below large stretches of the US and release trapped natural gas. And that caused a huge, huge surge, unprecedented surge in natural gas production, which . . . 

Peter Spiegel
Change in technology.

Derek Brower
Big change in technology. They used two techniques, one called hydraulic fracturing, blasting water and chemicals into these rocks to bust them open. And the other one was called horizontal drilling where they would stick a drill into the ground and then it would turn sideways and go for miles on the ground horizontally. That unleashed this huge wave of natural gas. And then a few years later, from about 2011, they started doing the same for oil. And that was when it really became important for the US economy, because, as I said in the past, US was dependent. US, by the way, is by far the biggest consumer of oil in the world, consumes about one in every five barrels of oil produced in the world. So the US, while its production was declining, was still increasing its, its demand for oil. And so having to import more of it and that often came from Saudi Arabia or from, you know, Russia or Venezuela. Countries that the US had rather uncomfortable relations with . . . 

Peter Spiegel
Iran, with Iran . . . 

Derek Brower
Iran. So when the shale revolution took off and all this oil supply was made available, the US dependence on these other countries declined and it started exporting oil from about 2015. The other thing it did was made manufacturing much cheaper here. So it was this huge transformation in the outlook for the US economy. It gave it a competitive advantage and all came crashing down by the way in 2020 when oil supply, well, prices crashed and oil supply in the US tumbled as well. But up until that point the US had emerged as the largest producer of natural gas, largest producer of oil in the world. It took 10, 10 years to do it. It’s a transformation.

Peter Spiegel
So that gets us into this, back to this conversation about the Biden administration’s energy policies because you, that crash happened. You had the Biden administration coming in on probably the most green focused agenda of any administration. And I think that’s fair to say, even compared to the old administration he was in with Barack Obama. So they come in on on a hard core green agenda, a lot of rhetoric against the oil companies. And then, as you said, almost on a dime, you have the energy secretary flying to Houston, big energy conferences begging to reverse that crash. Let’s start drilling again, we need gas. Talk to me a bit about that change and what went on within the Biden administration to advocate a totally, a 180 on that one.

Derek Brower
Yeah, it’s it’s pretty extraordinary. I mean, as you say, they they entered office with grand plans to decarbonise really quickly. Biden talked about a transition away from oil. He promised no more new, you know, no new drilling, no new fracking. You know, these were big statements to make about an economy that had become so dependent on the oil and gas industry for a start, and one where consumption of oil hasn’t really gone down for, I mean it’s been pretty stable, haven’t gone down for years. So this was a big plan. And then $5 gasoline hit and there was the midterms on the horizon. And they realised that if they wanted to stay in power, they needed to increase supply. And so there was a very, very, very significant pivot by the administration. The energy secretary went to Houston, delivered a speech telling oil and gas producers there that in a time of war they needed to produce more. But they went from promising to restrict fracking to asking for more fracking, issuing more permits, releasing more crude oil into the market. You know, this is all designed to drive down the cost of the fossil fuels that they had said they were going to eliminate from the US economy.

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Peter Spiegel
So this, the critics of this would say that this is evidence that the push for green was a failed policy. And you’ve heard this from Republicans on the Hill that there was this big push by the Democrats in particular to go green, that we were gonna be insulated from an energy crisis A, because of the domestic production we have now. But B, because, you know, renewables have become such a big part of the US energy mix. Electric vehicles now we’re making up nearly 6 per cent of all auto sales, which is, you know, still a relatively small percentage, but it was more than double in the year ago. And the critics would say, hey, look, the war shows that we have overhyped the green transition. Deal with that criticism. Do you think they have a point on this one?

Derek Brower
I think it’s somewhere in between because the US, the Biden administration was contending pretty quickly after it entered office with, you know, several crises, many of which related to energy. There was the invasion of of Ukraine by Russia. Before that, there was an inflation crisis that they needed to deal with. You know, Biden entered office with this idea that climate would be at the center of every decision that he made. But within a few months, energy security became at least as important as that, and climate was somewhat relegated, I think, as all these other crises emerged on, on the radar for the Biden administration. So. I don’t think that means that they have pivoted away for good. In fact, when I ask them that, they say no. They say in order to keep that idea of a transition to a cleaner economy going, we need to retain public support for it. And you can’t retain public support for big policy shifts of this kind if gasoline prices are doubling or trebling, if there isn’t security of energy supply and so on. So you guarantee the energy security now in order to tackle the climate security later.

Peter Spiegel
So I guess the biggest evidence they haven’t pivoted away entirely from the green agenda is one could argue the most significant legislation that was passed in 2022, which was the Inflation Reduction Act, which actually was very much a Green Subsidies Act, something of the order of $300bn in green subsidies, mostly through through tax incentives. You’ve covered a lot of this since it passed. Talk a bit about that piece of legislation and what impact you think it will have on the US economy going forward.

Derek Brower
Yeah, this is I mean, this is absolutely the proof of the Biden administration’s ambition on climate and clean energy still. The Inflation Reduction Act is by far the biggest piece of climate related or clean energy related legislation ever passed in American history. And that means in western history as well. What it purports to do, what it tries to do is stimulate investment in the supply side, a clean energy supply, supply of electric vehicles and so on. And it does that through incredible tax credits, you know, tax credits that could wipe up to 65 per cent of the cost of a project off for a developer. And in some they’re worth about $370bn. So it’s a huge, huge stimulus program for clean energy and it will transform the American economy. It’s already starting to transform the American economy. The American economy is by far the most attractive place for clean energy developers now in the western world. It’s outcompeting Europe, which had taken this lead in clean energy and climate over the past couple of decades. It’s opened up investment into green hydrogen. It’s opened up the idea of capturing carbon, made that viable as a way of sequestering this pollution. It’s stimulating investment in batteries. It’s everything. It’s the full gamut. And it’s it’s this sweeping legislation that really means if the investments happen as planned, the US will transform its energy system. Quite how long it will take is, is up for debate. Its ambition is to do it in the course of about 15 years. It probably won’t happen that quickly. This is the kind of change that might have been seen in the 40s in the US with the New Deal, but this is on that scale. It’s one of those pieces of legislation whose whose sheer scale is has been underestimated. And the more developers look at the tax credits available, the more you know, the more capital it floods in. The more you think, wow, this is actually quite significant.

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Peter Spiegel
All right. Let’s wrap up a conversation on this . . . for listeners to sort of step back and have three takeaways on what they should think about in terms of the US economy and energy. What would you say they are?

Derek Brower
I think, first, that the US has been rather insulated from a global energy crisis because it has so much of its own domestic oil and gas production. And the shortages in Europe were about in particular natural gas supply, which the US has in abundance. Second thing is that oil and gas still actually matters to this economy in the US. The Biden administration realised that very quickly, which is why it pivoted to asking for more oil and gas from suppliers and releasing its own stored crude oil stocks. That’s the second thing. And then I think the third thing is that in spite of that, I guess, a dose of reality, that oil and gas is still important. The Biden administration is still super focused on what comes next. And what comes next is a clean energy transition that helps decarbonise the US economy and above all mix, I think from the Biden administration’s point of view, makes them a leader in their supply chains or gives them control over the supply chains for clean energy and makes the US economy resilient in the 21st century, with the second half of the 21st century. The final point, I guess, is that the US is the world’s pre-eminent energy superpower. It’s the biggest producer of oil. It’s the biggest producer of natural gas. And it’s taken the lead in clean energy too.

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Peter Spiegel
Thanks again for listening. I’m Peter Spiegel. You can find more of Derek’s reporting on FT.com. This episode was done in collaboration with Blinkist. If you want to find more about conversations and topics like this, check out the Blinkist app.

This episode was produced by Zach St Louis. Topher Forhecz is our executive producer. Sound design by Breen Turner and Sam Giovinco. Cheryl Brumley is our global head of audio. Thanks for listening. Class dismissed.

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