OPEC+ and US intensify fight for oil

Yesterday was an explosive day for the oil markets. The group of oil-producing countries OPEC+ said it would cut output by 2 million barrels a day, the biggest reduction since 2020, in an attempt to boost already high prices for the product.

The decision drew criticism from the Biden administration, which had been pressuring the Saudis not to cut production at a time of global economic peril — and election season. The White House called the decision “shortsighted” and said OPEC+ was “aligning itself with Russia”.

This marks a sharp escalation in the oil struggle between the United States and the Saudis. In response, the Biden administration raised the prospect of releasing more oil from its strategic stockpiles to try to contain prices. It has also been discussing possible limits on fuel exports, in an attempt to build up domestic inventories of gasoline and diesel. It could also try to revive the so-called Nopec legislation, which would target OPEC for conspiring to raise prices. But when it comes to moving oil markets, Washington seems unarmed.

The Biden administration also said the decision shows the US needs to break its dependence on OPEC oil. The White House is making tentative efforts to get foreign investors to invest in American clean energy and electric vehicle projects.

Biden’s Inflation Reduction Bill faces backlash from foreign automakers

The surprising passage of climate legislation in Washington sent waves of euphoria in the clean energy sector in the United States. But one group felt left out: foreign investors who wanted to cash in on the green gold rush.

Democratic politicians in Washington are racing to mitigate the fallout from foreign investors after climate legislation won this summer.

Yesterday, Reuters reported that President Joe Biden expressed willingness to continue negotiations with South Korea on the Reduction of Inflation Act (LRI), a spending bill to drive the rise in clean energy, in part by strengthening the chain. of domestic supplies. The legislation has been criticized by foreign manufacturers over a provision that requires all electric vehicles to be assembled in North America by 2024 to qualify for tax subsidies, making most foreign models ineligible.

Biden’s solace comes a week after efforts by top lawmakers to negotiate this tax credit provision. Last Thursday (29), Democratic Senator Raphael Warnock of Georgia introduced a bill to extend the deadline for assembly in the country to 2026, after urging the White House to use “maximum flexibility” in administering that clause. . The move came days after Vice President Kamala Harris vowed to continue consulting with South Korea as the law is implemented.

The LRI tax subsidy was a slap in the face to foreign manufacturers, who made big commitments last year to produce in the US and help maintain the country’s position as a top destination for foreign investment. At least eight mega-deals — projects worth at least $1 billion — have been announced by foreign companies to make electric vehicles and batteries this year in the U.S., according to fDi Markets, a company of data owned by the FT which monitors US equity investments.

“The disheartening reality of this policy (…) is that it will actually slow down the adoption of EVs [veículos elétricos] by dramatically reducing consumer choice, while penalizing companies around the world that have long invested in high-quality American factory jobs,” said Pat Wilson, Georgia’s commissioner of economic development, who helped broker a $5.5 billion for an EV plant this year with Hyundai, the largest economic project ever recorded in the state. Production at the plant is not expected to start until 2025, disqualifying the company for tax credits for a year.

The LRI tax credit drama underscores Biden’s difficult balancing act to boost domestic industry and spur the energy transition without jeopardizing strategic alliances, particularly with South Korea, a major investor in clean energy manufacturing in the US that has accused the tax credit of being discriminatory and violating the free trade agreement.

“There has always been a tension in Biden’s policy between the strong drive to strengthen domestic production and jobs (…) and the equally strong impulse to work with allies and partners (…) to address global challenges such as the climate change,” said Matt Goodman, senior vice president of the Center for Strategic and International Studies. “These are equally strong but somewhat conflicting impulses, and they really come to the fore in this LRI tension.”

Aside from the difficult relations between the US and its major trading partners, how this will affect foreign automakers’ profit margins and long-term interest in the US is likely to be minimal, given the size of the country’s consumer base. As the FT’s Seoul bureau chief Christian Davies highlighted last week, South Korean companies, some of the LRI’s biggest critics, could benefit tremendously from the legislation, receiving up to $8 billion. ) in taxpayer subsidies annually until 2026.

In the short term, experts warn that the tax credit drama could make it harder for smaller manufacturers to enter and slow down the uptake of electric vehicles by limiting the options available on the market.

“Much of the clean energy transition has focused on open markets and access to open technology,” said David Victor, a professor of innovation and public policy at the University of California San Diego and a senior fellow at the Brookings Institute. “However, much of the mechanisms for implementing the Inflation Reduction Act are actually doing the opposite of what made the global energy transition possible.”

Can US oil and gas capital navigate the energy transition?

Houston has been synonymous with the US oil and gas industry for as long as the city has existed, and likes to call itself the “energy capital of the world”. But even with the current soaring prices of fossil fuels, there is growing recognition in the city that their fortunes will be tied to their ability to navigate the transition to a lower-emissions global economy.

A new report from the Greater Houston Partnership, a local business group, argues that the city can maintain its role as the global energy capital even as it moves away from oil and gas, but it needs to start quickly expanding its own green economy.

“The world’s energy transition hubs will not be defined in the next decade or two, they will be created in the next five years, so moving quickly is critical,” said Sarah Morgan, partner at law firm Vinson and Elkins, who contributed for the report.

That will mean mobilizing massive amounts of capital for new, greener ventures in a city that has been awash in petrodollars for decades.

The report concludes that the amount of capital invested by banks, venture capital, private equity, industry and others in the city in low-carbon technologies will need to expand to around US$150 billion by 2040, roughly ten times more than today, to maintain a central role in the transition.

The fourth-largest city in the United States, Houston will need to tap into its well-established oil and gas financial community and attract new energy financiers that could gravitate more naturally to San Francisco or Boston, the report argues.

Where would all the money go? The group says the city should focus on technologies like carbon capture and storage, hydrogen and renewable fuels, where its roots in the oil and gas business give it an edge.

This reflects the strategies adopted by many of the city’s oil and gas companies, such as ExxonMobil, Chevron and others, who promise to invest significant resources in these technologies.

The newly passed Inflation Reduction Act, which aims to funnel hundreds of billions of dollars into low-carbon technologies to combat climate change, is a “significant impetus to realizing Houston’s ambition,” according to the report.

Morgan said discussions about carbon capture, hydrogen and other technologies have been going on for several years but have “accelerated” in recent weeks as projects suddenly appear more economically viable with LRI’s new financial incentives.

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Gasoline prices in the United States rose again, reaching an average of US$ 3.83 per gallon (R$ 5.19 a liter) yesterday. It was up 16 cents from two weeks ago, when prices at pumps rose for the first time after nearly 100 consecutive days of declines.

Yesterday’s historic OPEC+ output cuts could push prices even higher, causing problems for Democrats facing a difficult midterm election five weeks from now. The White House said it will continue to release oil from strategic stockpiles and explore additional measures to increase domestic supply.

Last March, Biden released a record 180 million barrels of crude from the Strategic Reserve and urged oil companies and OPEC+ to pump more oil. While gasoline prices have cooled from a record $5.02 a gallon in June (BRL 6.80 a liter at today’s exchange rate), they remain 16% higher year-over-year.

Translated by Luiz Roberto M. Gonçalves