BREAKINGVIEWS-Fossil-fuel bigwigs are stuck in an Iran null zone

By Robert Cyran

NEW YORK, March 27 (Reuters Breakingviews) - The 10,000 attendees descending on the oil and gas industry’s marquee annual get-together in Houston all had one thing on their minds. Yet even as conflict in the Gulf dominated talk at CERAWeek, the scope of disruption that has already happened seemed to go little acknowledged on financial markets. Executives unable to address already-rising shortages are receiving few reliable signals to invest in ramping up new supplies. They may well be whistling past the biggest disruption of fossil fuels in their lifetimes.

Energy demand is largely fixed in the short run. Modern cities and industry cannot simply switch off. Ever since the United States and Israel launched joint strikes on Iran, leading to escalating hostilities that have damaged significant oil and gas infrastructure, that’s meant that prices – in some markets – have spiked. A producer could sell gas for over $20 for 1 million BTU in Asia. Yet spot prices at a key hub in the Permian Basin in Texas sit at negative $2.60. The problem is that supply is also fixed. Pipelines, liquefaction facilities and transportation ships cannot be built overnight on a whim.

This leads to widespread oddities. Chevron boss Mike Wirth put it bluntly: if markets reflected the broad state of physical supplies, prices would be much higher. A barrel of West Texas Intermediate, the U.S. oil benchmark, is near $100 for delivery in May, but below $80 later in the year. That’s high enough to tell frackers to drill now, but not enough to provide certainty for long term. After all, if the conflict ends and Gulf production ramps back up, major new domestic investments could lose money.

Yet many attendees were sanguine about the possibility of existential mismatches between the industry and the unfolding crisis. As one executive in the liquefied natural gas industry quipped: “If you are worried about supply in five years – why?” He said that the need to keep the lights on will ensure everything works out. U.S. Department of Energy Secretary Chris Wright even took the opportunity to spin the global scramble as a positive. “No oil, no modern world” was his mantra. Meaning: everyone at the conference is going to do fine.

The discord came from the smaller part of the conference dedicated to innovations like batteries and solar. The cultural disconnect is plain: the greener technologists used paper teabags, rather than the plastic ones available elsewhere. Yet they’re looking at ever-rising data center demand and pricing signals to invest in renewables. If they’re right, then at some point they are going to displace fossil capacity. As Gulf disruption spreads, this trend will only hasten.

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CONTEXT NEWS

The annual energy conference CERAWeek, hosted by S&P Global, ends on March 27. The event in Houston has around 10,000 attendees.