Popular ESG funds have done little to curb oil demand

Text/Dan Eberhart

Image source: Visual China

In 2021, interest in companies with environmental, social and governance (ESG) qualifications reached an all-time high.

ESG-focused exchange-traded funds attracted about $120 billion globally last year, a trend that oil and gas producers can no longer ignore. So far, U.S. producers have responded by cutting spending on new drilling projects and investing more in decarbonisation and low-carbon (i.e., "clean energy") projects.

If we have any chance of meeting national climate targets, we need to step up our efforts to reduce carbon emissions, but the popularity of ESG-based funds has done a shameful little to reduce demand for fossil fuels. This has created a situation where feel-good-looking investment funds desperately need investment in new production – which has left the oil market quickly mired in tight supply and soaring prices.

The Biden administration has made significant commitments to combat climate change, but has barely implemented specific policies to reduce demand for petroleum products.

Biden aims to make the United States a net-zero carbon country by 2050 and has committed to achieving 100% carbon-free electricity by 2035. He also set a target of 50 percent of electric vehicle sales by 2030 and recently pledged to cut methane emissions by 30 percent by the end of 2030.

Biden has also targeted oil and gas producers directly. He terminated the Keystone XL pipeline, which would have transported Canadian oil through the United States to ports in Louisiana, where he was working to block oil and gas leasing on federal lands and waters and urged OPEC cartels to increase supply to lower rising oil prices instead of turning to domestic producers for help.

The net effect is twofold. It has placed climate policy above energy security on the White House agenda, thereby increasing investor interest in companies with high ESG scores and making U.S. oil companies cautious about investing in new drilling. The investment rate is expected to remain near an all-time low in 2022.

At a time of rising global pandemics and inflation, the U.S. government does not want to send such a message to key business sectors. Meanwhile, crude oil prices are steadily moving toward $80 a barrel, with gasoline consumer prices reaching their highest level in seven years, approaching $3.50 a gallon, and inflation above 7 percent.

When it comes to climate goals, Biden has shown little real action on how to achieve them.

The most radical climate proposal in Biden's "Rebuild a Better Future" bill, including clean electricity standards and a carbon tax, was stripped away by members of his Democratic Party who feared how he would win over American voters.

His lease ban was dismissed by a federal court as ultra vires — though the administration is expected to redouble its efforts in the new year to restrict fossil fuel companies' access to the federal district. Biden's request for OPEC to increase production has largely been ignored. In fact, it was only the arrival of the Opichron variant, and subsequent concerns about its potential impact on the global economy, that weakened demand, which in turn led to higher oil prices.

The U.S. current oil production is about 11.7 million barrels per day. The U.S. Energy Information Administration (EIA), a nonpartisan agency, expects the average U.S. production to reach 12.1 million barrels per day by the fourth quarter of next year. Although this is considerable growth, production will still be lower than the peak of about 1 million barrels per day before the end of 2019.

Adequate resources are not an issue. The United States is rich in natural resources. With the support of federal policymakers and Wall Street, the oil and gas industry can do more to ensure that America's energy supply is affordable, safe, and reliable.

As we move into 2022, it is clear that the impact of the ESG movement on investor psychology is far greater than the impact on consumer demand for petroleum products.

The price of oil is determined by the global market. The EIA expects global oil demand to increase by 3.5 million bpd to an average of 100.5 million bpd by 2022 – essentially returning to pre-pandemic levels.

It's time for policymakers to face the fact that the desired transition to universal electrification will not achieve this goal. While ESG-driven investments are increasingly limiting financing for new drilling, consumer demand for gasoline, plastics and other petroleum products is increasing.

If the Biden administration wants to avoid an energy crisis based on the pandemic and the worst increase in inflation in generations, it should acknowledge that the energy transition will take decades to complete and that fossil fuels will be a necessary driver of economic development in the coming decades.

While policymakers and markets address the thorny issue of changing energy consumption patterns, what better way to achieve this shift than by relying on America's abundant oil and gas resources – an industry that supports more than 11 million jobs – to keep energy prices more affordable?

Achieving this goal will be a daunting task for a fossil fuel-based energy system, which requires about 20 million barrels of liquid fuel per day.

In addition, U.S. oil producers are already busy decarbonizing due to pressure from investors ESG. By 2030, ExxonMobil will achieve net-zero emissions in the Palmian Basin in West Texas. There is not a single OPEC producer who cannot make a similar statement.

Dan Eberhart is a forbes contributor and expresses opinions on behalf of individuals only. Translated by Stephen