Energy (In)security

This Week's Trend In Brief:

• After Iran launched its drone attack on Israel last weekend, professionals across the energy industry understood the risk of the conflict escalating into further military action would add further disruptions for the industry amidst several other major conflicts.
   

• Iran’s attack and the collective pause in anticipation of a response are the latest examples of increasing energy insecurity around the world, from Yemen to the South China Sea to Venezuela, as oil prices rise and energy companies face complex geopolitics disrupting their supply chains and operations.
   

• These disruptions intertwine with other macroeconomic factors such as high inflation and higher interest rates making it more difficult for companies hoping to advance the energy transition.
   

• While complex geopolitics are nothing new for energy firms, increasingly polarized domestic politics are now adding more fuel to the pressures facing the industry. 
   

• Energy companies and those who represent them cannot afford to wait and see how these conflicts abroad or at home play out. Instead, companies must stay informed, understand all the dynamics at play, and take a proactive approach to mitigate risk before disruptions or shifting market conditions can undo even the best-laid plans. 

Digging Deeper:

 
After Iran launched its drone and missile attack on Israel this past weekend, professionals across the energy industry understood the risk posed by the escalating conflict on the heels of several other major conflicts. While the attack primarily affected oil prices, and the changes were less damaging than anticipated, the event highlights an increasingly global and challenging landscape facing companies operating in the energy industry. Companies operating in the U.S. already face significant hurdles to getting projects built, and these disruptions are a reminder of the potential for sudden disruptions to impact industry’s ability to operate and how global energy markets intersect with domestic policy and pressures.
 
Iran’s attack and the collective breath-holding for a response highlight the increasing energy insecurity around the world disrupting supply chains and business operations. Earlier this year, attacks by Houthi rebels over Israel’s war with Hamas threatened the future of energy supplies to the E.U., “which relies on imported natural gas to power factories, generate electricity and heat homes.” In the South China Sea, territorial disputes regarding an estimated 190 trillion cubic feet of natural gas and 11 billion barrels of oil have sparked standoffs between multiple countries in the region, raising more concerns about global energy security. Similarly, Venezuela’s competing territorial claims with Guyana over oil deposits discovered on the land has alarmed officials across the world, with the U.N. Security Council recently urging the countries “to avoid escalating tensions over an oil-rich region that they both claim.” Just yesterday, the Biden Administration announced it would reimpose sanctions on Venezuela’s oil and gas sector after the country failed to “comply with the spirit or the letter of the agreement” previously reached with the Administration over democratic reforms. These geopolitical conflicts can create concerns about energy security both domestically and abroad.
 
Exacerbating the pressure on energy companies are macroeconomic factors such as high inflation and higher interest rates that make it more expensive and less economically viable to advance the energy transition. Last November, two large offshore wind projects in New Jersey were canceled over these “macroeconomic factors, including high inflation, rising interest rates and supply chain constraints.” The rate of inflation was only 1.8% when the project was announced but was nearly double that at the time of the cancellation. Interest rates followed a similar trend, and ongoing supply chain issues made securing materials difficult and far more expensive. Similarly, BP and Equinor canceled a major offshore wind project in New York earlier this year citing “inflation, interest rates and supply chain disruptions.” Offshore wind projects are not alone in facing these issues. Oil and gas industry officials are worried “about the impact of inflation on upcoming oil and gas projects” and fear there is “a high possibility of oil and gas projects getting stalled or cancelled” because of inflation and supply chain issues.
 
While complex geopolitics are nothing new for energy firms, increasingly polarized domestic politics are now adding more fuel to the pressures facing the industry. On the left, Biden faces pressure from voters concerned about his administration’s handling of foreign policy, especially in the Middle East. Cities like Dearborn, MI, which Biden won in 2020, are now overwhelmingly denouncing him in a show of foreign policy-driven domestic pressure that is becoming more prevalent in U.S. politics. On the right, multiple foreign aid measures related to Ukraine have faced pushback from Republicans. The two parties have also clashed in recent months over Biden’s pause on new LNG export licenses, with proponents claiming the pause is essential to prevent climate change and opponents arguing the pause threatens the energy security of the U.S. and its allies. Even more arcane debates such as global development funding are now becoming entangled in domestic political debates. Taken together, the intrusion of these foreign policy pressures into the domestic decision-making process has become larger, more influential, and more disruptive than in the past.
 
Energy companies and those who represent them cannot afford to wait and see how these situations play out but must monitor all these factors and understand the interplay between them to overcome challenges for industry. As conflicts around the world, high interest rates, increasing inflation, and other factors that impact industry loom, companies must prepare early in order to anticipate and stay ahead of any challenges before they have a chance to derail their objectives. Public affairs professionals and the companies they represent need a proven playbook to stay informed, understand all the dynamics at play, and take a proactive approach to mitigate risk before disruptions or shifting market conditions can undo even the best-laid plans.

Trends in Energy is your weekly look at key trends affecting the energy industry, brought to you by the competitive intelligence experts at Delve. As the political and regulatory landscape continues to shift, reach out to learn how our insights can help you navigate these challenges.