What Happens When Energy Supplies Become Vulnerable?

November 12, 2021 10:30 AM
Europe’s over-reliance on wind and solar
Will Russia invade Ukraine?
Traders prepare for what the Biden administration might attempt to do to bring down prices
Energy Report

Energy Report

The Phil Flynn Energy Report 

The Energy Weapon 

When energy supplies become vulnerable, the entire country becomes vulnerable. It's a lesson that should have been learned after the Arab oil embargo and World War II. But, unfortunately, Europe’s failure to heed the warning by the Trump administration to not get too dependent on Russia for vital energy supplies could now see their supplies cut off.

Europe’s over-reliance on wind and solar and shutting down oil and gas production fields and non-greenhouse gas emitting nuclear power plants have put Europe in a dangerous and weakened state. They are now heavily dependent on Russia for natural gas, and satellite states like Belarus that controls pipelines look silly from a security standpoint. Moreover, the US is warning Europe that Russia is planning to invade Ukraine. 

At the same time, Putin lackey Belarusian President Alexander Lukashenko says that due to a border crisis over what it sees as a manufactured migration crisis with Poland, "We are heating Europe, they are still threatening us that they will close the border. And if we shut off natural gas there? Therefore, I would recommend that the Polish leadership, Lithuanians, and other headless people think before speaking," Lukashenko said. Oh, sure, Russian President Vladimir Putin is promising Europe more supplies. It must be difficult planning an invasion while trying to supply Europe with desperately needed gas supply.

The control of energy supply has always been essential for national security, and God forbid war. When you get leadership that suggests, as the Pentagon did recently that, "increasing temperatures; changing precipitation patterns; and more frequent, intense, and unpredictable extreme weather conditions caused by climate change are exacerbating existing risks for the U.S.” I would agree there are existing risks to Europe and the U.S., like from counties like Russia and Belarus, as they use their fossil fuel for dominance and as a potential weapon of war.

In the meantime, back on the oil ranch, oil prices are choppy and weak as traders prepare for what the Biden administration might attempt to do to bring down prices. The Biden administration is getting desperate because their energy policies have driven up the cost of oil and gas, increasing overall inflation, not to mention their policies of printing more money and stimulus checks.

According to sources, they have not acted as of yet because there is no agreement in the administration as to what they should do. An SPR release, as most experts already know, will fail. As has been written before, release from the reserve will only serve to increase demand. It will artificially lower prices in a market where the demand is insatiable and fundamentally undersupplied. China tried to release from their reserve, and they did lower prices for a short period, but now they have to refill their coffers, and they're paying a much higher price than they would have had to pay had they not tried to intervene in prices. Besides that, OPEC would more than likely respond with a production cut to match any release from the reserve.

Number 2, a ban on U.S. oil exports would also fail. The U.S. produces light oil that is better suited for foreign refineries. If they ban US oil exports, it will only serve to make US production fall. Oil fields will have to be shut because there will be nowhere to run the oil. Most US refineries can’t run light oil, and it would likely lead to layoffs.

To lower the price of oil, I would send a message to OPEC that we were going to reinvigorate our U.S. oil, gas, and shale industry. We should tell them that we're going after their market share. Oil and gas revenue seems to be the only thing that Russia and OPEC understand. We should make it a national priority to stand up to OPEC plus Russia by producing more oil and gas. The US oil and gas producers are the cleanest in the world. The only way the US can transition from these fuels without putting our economy and our national security at risk is with American workers. Until we have viable alternatives for oil and gas, we should continue to be the world's leader in oil and gas.

OPEC lowered their global oil demand estimate, meaning they will be reluctant to raise oil output. OPEC said global oil demand would grow by 5.7 million barrels a day this year, 160,000 barrels a day less than expected last month. OPEC reports that demand for oil in 2021 to total 96.4 million barrels a day.

Oil is in correction mode, and the first key support is the psychologically important $80.00 per barrel area. The second, of course, is the Bolinger ban which, after yesterday's weakness, moves down a titch. The fear is greater than the reality of what the Biden administration can do to bring down oil and gas prices. They can't even decide among themselves what to do, and whatever they do, from what we are hearing, isn't going to have a long-term effect. So use the weakness in both oil and natural gas as an opportunity to hedge. It may be your last best chance to steal a quote from the COP 26 conference, which thankfully is ending.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.