As of March 2024, the U.S. Federal Reserve's target interest rate is 5.25% to 5.50%, which is up from near-zero during the pandemic. This is a 23-year high, and policymakers do not expect to reduce rates until they are confident that inflation is moving sustainably toward 2%. The excessive interest rate hikes are designed to cool the economy, due to the Biden administration’s runaway deficit spending.
What are these guys thinking? The gross federal debt of the U.S. has surpassed $34 trillion, including debt held by the public, federal trust funds and other government accounts. The debt load of the U.S. is growing faster in recent months, increasing about $1 trillion nearly every 100 days. The nation’s debt permanently crossed over to $34 trillion on Jan. 4. It reached $33 trillion on Sept. 15, 2023, and $32 trillion on June 15, 2023, hitting this accelerated pace. Before that, the $1 trillion move higher from $31 trillion took about eight months. U.S. debt is approximately $34.4 trillion, and strategists forecast the 100-day pattern will remain intact with the move from $34 trillion to $35 trillion. The U.S. Congressional Budget Office (CBO) projects that the federal government will spend $870 billion on interest in 2024, which is a 32% increase from 2023, when the government spent $659 billion on interest. The CBO also forecasts that 75% of the federal deficit's increase will be due to interest costs by 2034.
Now that Biden’s reckless financial scenario has context, let’s review how this brilliant strategy is impacting energy producers and consumers.
Low-carbon energy damaged by high interest rates. If high interest rates persist (which is inevitable), transitioning to a net zero global economy will be even harder and more costly. The higher cost of borrowing negatively affects renewables and promising technologies, compared to more established hydrocarbon production and metals/mining sectors, which remain somewhat insulated, according to a report by Wood Mackenzie.
“Interest rates, which have risen sharply in the past two years, may not come down as far or as quickly as markets anticipate. This increased cost of capital has profound implications for the energy and natural resource industries, particularly the cost and pace of the transition to low-carbon technologies,” said Wood Mackenzie’s Peter Martin. Higher interest rates disproportionately affect renewables and nuclear power. Their high capital intensity and low returns mean future projects will be at risk. In comparison, due to low gearing, many companies in the metals and mining and oil and gas sectors will be relatively unaffected by higher interest rates. In the U.S., Wood Mackenzie analysis shows that a 2% increase in the risk-free interest rate pushes up the levelized cost of electricity (LCOE) by as much as 20% for renewables. The comparative increase in LCOE for a combined-cycle gas turbine plant is only 11%, Fig. 1.
Higher interest rates also affect the competitiveness of renewables. In the U.S., onshore wind can generate electricity at an LCOE of $40/MWh, 50% of the cost of natural gas-fired generation. However, higher interest rates are eroding that advantage. “While power and renewables companies have higher gearing, they do compare favorably with other peer groups on a cost-of-debt basis. But this is precisely what makes them more sensitive to interest rates, Fig. 2. Mechanisms to reduce price and offtake risk, enable power and renewables companies to obtain debt more cheaply than the relatively risky oil and gas sector. However, the recent rise in interest rates has a larger proportional impact on their cost of debt.
Green tech under pressure, too. Emerging technologies, including low-carbon hydrogen, CCUS and direct air capture, will play a vital role in reducing carbon emissions. However, remarkable levels of capital investment and high capital intensity put these projects under threat amid higher interest rates. “The lack of economic incentives to capture carbon and the lack of a market for hydrogen are the most significant obstacles to investment in these sectors, but for projects that do progress, higher interest rates hurt the economics. This affects both smaller development companies that struggle to access debt and larger, credit-worthy emitters that rely on low-interest leverage to render projects attractive for shareholders,” Martin emphasized.
High interest rates boon for oil and gas. The “zero era” for interest rates has come to an end. The higher cost of borrowing affects energy and natural resources sectors unevenly. Highly capital-intensive and often reliant on subsidies, low-carbon energy and emerging green technologies are most exposed. In contrast, the oil and gas industry is relatively well-positioned. In a higher-interest-rate scenario, achieving net zero will be even harder and costlier.
Biden blocks hydrocarbon development in Alaska. If reckless governmental spending and associated high interest rates aren’t enough, the Biden administration finalized plans to prevent oil and gas leasing on 13 million acres of the National Petroleum Reserve-Alaska, Fig. 3. The changes don’t affect ConocoPhillips’s 600-MMbbl Willow project, but industry leaders say the plan is more expansive than initially anticipated and threatens to make it nearly impossible to build more important projects in the region. The plan also blocks road construction essential to opening a copper mine in the state.
The sweeping environmental action has caused great concern for companies holding leases in the reserve, which is perceived to contain many viable drilling prospects. Enthusiasm for the region increased after recent discoveries in Nanushuk field. The state of Alaska expects crude production from the reserve to climb from 15,800 bpd in fiscal 2023 to 139,600 bpd in fiscal 2033. Tapping the region’s reservoirs could yield decades of production. Company executives and Alaska lawmakers have increasingly raised alarm over the plan, saying it could thwart oil and gas development across much of the reserve, even on existing leases. The opposition has united a broad spectrum of foes, from Alaska Natives to Lower-48 oil producers.
Santos, which holds approximately one million acres of leases within the reserve and is developing the nearby Pikka Unit JV with Repsol SA, told the BLM that the proposal will infringe on its holdings, with impacts “as extensive as whole projects being denied.” ConocoPhillips, which holds 156 leases in the reserve, warned the regulation would violate its contracts and “drive investment away from the NPR-A.”
Biden the bandit. Armstrong Oil & Gas, whose leases span 1.1 million gross acres, said the measure could block it from building the infrastructure needed to access those tracts. The proposed rule would effectively nationalize the company’s leases, according to CEO Bill Armstrong. The regulation would limit future oil development on 13 million acres of designated “special areas” within reserve, including territory currently under lease. There is an outright prohibition on new leasing in 10.6 million acres.
The plan creates a formal program for expanding protected areas at least once every five years—while making it difficult to undo those designations. And it would raise the bar for future development elsewhere in the reserve. The Interior Department said the regulation does not affect existing leases. But the proposed rule text does not offer similar, explicit assurance. Instead, it proposes to give the government broad authority to limit or bar access to existing leases, “regardless of any existing authorization.” Oil leasing and infrastructure development would be presumed not to be permitted unless specific information clearly demonstrates the work can be done with “no or minimal adverse effects” on the habitat.
U.S. on wrong track on energy. The American Petroleum Institute released a new national poll demonstrating widespread concern over Washington’s approach on energy policy. Two out of three American voters say the country is on the wrong track on energy policy and following the administration’s blocking action in Alaska and pause on LNG export permits, the poll found nine in 10 Americans believe the U.S. should continue to supply natural gas to our allies overseas. With recent reports that the administration plans to impose a de-facto ban on new gas-powered vehicles, the poll found that the majority of Americans (75%) would oppose such regulations restricting consumer choice.
API President and CEO Mike Sommers urged the administration to harness all of America’s vast energy resources, including oil and natural gas, while advancing much-needed energy infrastructure and abandoning unpopular vehicle mandates that could impact costs and grid reliability. “While the U.S. continues to lead the world in energy production, it’s clear the American people see that misguided policy choices today can sow the seeds of tomorrow’s energy crisis,” Sommers said.
“Whether it’s partisan decisions to restrict American natural gas as a source of strength around the world and good-paying jobs here at home, or regulatory plans to dictate the type of cars consumers can drive—voters on both sides of the aisle know we are on the wrong path on energy policy. With much at stake for our economy and national security, it’s time for Washington to change course and forge a bipartisan path that embraces all reliable and affordable American energy.” WO
CRAIG.FLEMING@WORLDOIL.COM