The great clash: Save the climate or stop inflation?

US President Joe Biden and other Western leaders are in a terrible political bind, trying to pursue three conflicting agendas at once. They aim to curtail climate change by slashing the use of fossil fuels while also halting Russia's invasion of Ukraine, which has led to energy shortages that have fueled runaway inflation. That, in turn, has undermined political support at home and will make everything else harder to achieve.

No solution to this conundrum is in sight. What may be coming instead, experts warn, is a worldwide recession that would prove to be a political nightmare for Biden and his allies. And that could supply Russian President Vladimir Putin with the vindication he's been hoping for. In March, only a few weeks into his invasion, Putin predicted that sanctions would boomerang on the West because of Russia's huge exports of energy and agricultural goods, causing inflation and a "worsening situation" in the United States and Europe. He may have been right.

"This whole thing is going to end in disaster," said Amrita Sen, chief oil analyst at Energy Aspects in London, a consultancy. "The problem is we are sleepwalking into probably one of the biggest recessions of all time." Demand for oil and gas is simply too high versus supply, Sen said, and governments aren't taking enough measures to lower demand or increase production, in large part because they are still constrained by their pro-climate agendas. "There needs to be some realism in governments across the board. Demand is too high. It needs to come down hard," she said.

Biden in particular is in a pickle. Although the United States is the world's biggest oil producer, the White House says there are few ways to lower the price of energy, especially gasoline. "There's a lot going on right now, but the idea we're going to be able to, you know, click a switch, bring down the cost of gasoline, is not likely in the near term," Biden told reporters at the White House on Wednesday. Biden's attempt in March to blame it all on "Putin's price hike" and COVID-19 did little to halt the erosion of his already-low poll numbers in the face of rising consumer prices, and in recent weeks, the president has been "obsessed" with the gasoline issue, US Energy Secretary Jennifer Granholm said.

But Biden insists he won't compromise on his climate agenda. "You can walk and chew gum. You can do both," Granholm told CNN on May 28. "The fact that we are paying these outrageous prices is almost an exclamation point on the fact that we need to move to clean energy so we are not in this position in the future."

But so far, it appears the world can't do both without a great deal of pain. "Here's the situation," Biden said at a Tokyo news conference on May 23. "When it comes to the gas prices, we're going through an incredible transition that is taking place that, God willing, when it's over, we'll be stronger and the world will be stronger and less reliant on fossil fuels."

This week, Biden even turned to the pages of his longtime critic, the Wall Street Journal, to propose tax credits to develop more homegrown clean energy. But with the world still 80 percent dependent on fossil fuels, that's a glacially slow agenda while recessionary trends are moving at a much faster pace. Global GDP is set to "basically flatline" this year, the Institute of International Finance said last week in a new report. "Risk is building that the global economy is headed for recession."

The larger problem is that ​​Biden and his Western allies may be in a state of denial over how much of their ambitious climate agenda has run headlong into the economics of the petroleum industry, which has been holding off on investments in refining, drilling, and other production fixes in the face of anti-fossil fuel sentiment. Last year at this time, in the runup to November's U.N. climate summit in Glasgow, Scotland, a report by the Paris-based International Energy Agency bluntly stated that no new investments in fossil fuel should take place if the world wants to tackle global warming effectively. U.N. Secretary-General António Guterres also called for a halt to new fossil fuel projects at the time, warning that climate change posed "an existential threat to us all—to the whole world."

But it's precisely that lack of investment in recent years that has led to the supply shortages felt today in sky-high energy prices. Western leaders want many of those investments back—to get out of the immediate fix—but energy companies make multibillion-dollar investments over a multidecade time frame.

"What they're asking for is supply for a long runway—making multibillion-dollar investments in long lead-time projects—but they only want it for a short interval," said Kevin Book of ClearView Energy Partners, a research firm. "They want one last fossil bender before they go green and sober. That works for messaging, but it doesn't work from an investment perspective."

With demand for oil surging, Biden has been increasingly mocked by critics for applying Band-Aids to a gaping wound. His release of 1 million barrels a day from the Strategic Petroleum Reserve (SPR) in late March for the next six months—the largest in the reserve's nearly 50-year history—provided only brief relief. Now pump prices are on average nearly 50 cents more than they were before Biden's move. "It was a short-term move," said Stewart Glickman, a global energy expert at CFRA, a market research firm. "After all, the United States uses 20 million barrels of oil a day, and the world uses 100 million barrels a day, so it is kind of a drop in the bucket."

Biden appears to be so desperate for some relief that the president—who once called Saudi Arabia a "pariah" because of Saudi Crown Prince Mohammed bin Salman's role in the 2018 murder of journalist Jamal Khashoggi—is considering a fence-mending trip to Riyadh, Saudi Arabia's capital, and other Middle Eastern producers this month, news outlets have reported. That follows repeated attempts by the Biden administration to get Saudi Arabia, the world's second-largest producer and biggest oil exporter, to increase supply.

Riyadh had until now resisted these entreaties, sticking to a production cap pact it made with Russia. On Thursday, the so-called OPEC+ group—OPEC's 13 members plus 10 other producers, including Russia—announced it would increase supply by a further 200,000-odd barrels per day in July and August on top of earlier plans to boost production by just over 400,000 barrels a day later this year. The move was an indication that OPEC too is worried that high oil prices could bring about a worldwide recession, but it is expected to provide only token relief; OPEC's paper targets and its real production figures are often two different things.

"It won't make a big difference. Very few countries can raise production right now, and their quotas will not rise enough—alone or combined—to make up for other disruptions," said Matthew Reed, vice president of Foreign Reports, a Washington-based analytical firm specializing in oil markets, after the OPEC+ announcement. Congressional Democrats have floated a plan to ban US petroleum exports, but that could backfire as well, further driving up global energy prices, or flood the domestic market, prompting oil producers to dial back supply, some experts said.

Although food and housing prices have risen too, nothing has put a bigger crimp in the United States' highway economy than the debilitating cost of gasoline. The curtailment of summer holidays is only the latest source of anger. Roughly 60 percent of Americans previously said they would take more trips this year compared with last year, but now higher gas prices are causing travelers to scale back their plans and go shorter distances, and one-third say they're likely to cancel plans, according to a May survey by Morning Consult, a business intelligence company, and commissioned by the American Hotel & Lodging Association. At the end of May, the average gallon of gasoline in the United States jumped to $4.59—more than 50 percent higher than a year ago, according to the American Automobile Association.

And pricier oil and natural gas has indirect effects. It raises the cost of fertilizers, chemicals, and other key inputs, causing big issues for farmers, companies, and consumers. A Gallup poll published May 31 found that 77 percent of US respondents said the country's economic outlook is getting worse. "[L]ikely the lowest confidence has been since the tail end of the Great Recession in early 2009," the polling firm said. Asked to name the No. 1 problem facing the country, respondents placed the government at the top of the list—and inflation second. US inflation moderated slightly in April but is still near 40-year highs at 8.3 percent.

The crisis is just as acute in Europe. A decision by the European Union on Monday to ban seaborne Russian oil exports by about 90 percent over the next six months could also rebound, just as Putin warned, because global oil prices are so much higher than a year ago and Russia will continue to find new buyers in China, India, and other nations. Inflation in the 19 countries that use the euro currency was 8.1 percent in May, up from 7.4 percent in April, according to Eurostat, the European Union's statistical office. As in the United States, soaring energy costs were by far the biggest culprit.

Despite the short-term risks, the longer-term climate agenda has dominated Washington rhetoric: Biden's recent budget request put Ukraine at the top of the agenda but said little about fossil fuel issues, keeping the green agenda intact in the language. As a result, Big Oil fears "stranded assets" as the mood shifted away again from fossil fuels. Threats of litigation, price caps, windfall taxes, and calls to halt new oil and gas projects have threatened to further reduce investment in fossil infrastructure. And Biden's climate envoy, John Kerry, is still criticizing "very significant windfall profits coming to the oil and gas industry," telling a German newspaper last week that "frankly, they should be investing some of it in renewable energy and in alternative energy."

And that's not the worst of it. Crude oil needs to be refined to be usable as gasoline, diesel, jet fuel, and the like, but refinery capacity shrank during the years of COVID-19 lockdowns, creating a choke point that has pushed up prices for businesses and consumers. US refiners are running flat-out, but lingering COVID-19 fears and aversion to fossil fuel investments limit any expansion of refining capacity.

"Even though crude prices are, historically speaking, not that high, the squeeze on refined products is driving end-user prices to records," said Robin Mills, chief executive of Qamar Energy, a research firm in Dubai, in a report last month. "This contributes to inflation, fuel shortages and global economic worries." Crude is trading at about an average of $120 a barrel, but because of reduced refining capacity, refiners' profit margins—or "crack spreads," as they're known in the industry—are at record highs, raising the overall price.

The leap in diesel prices has been especially ruinous for the transport industry—trucks, trains, boats, and barges—equivalent to $176 a barrel for diesel in some places, Mills said.

Perhaps the only practical solution is to reduce overall demand, but governments are "very cautious about introducing demand-oriented policies, such as encouraging work from home and using public transport," Mills said in an interview. "I don't really see any government jumping into that at the moment. Maybe it will come in winter, when prices go really high. Right now, the policy is out of joint."

Glickman added that "I hate to say it, but I think the easiest way to resolve this situation is a sharp recession that crimps demand."

Anticipating big gains in the US midterm elections this November, Republicans are pouncing—especially since Treasury Secretary Janet Yellen, in a rare admission from a senior official, conceded this week that the administration had misjudged the inflation threat as temporary. In a May 26 letter to Granholm, Republicans on the House Committee on Oversight and Reform accused the US Energy Department of misusing and draining the Strategic Petroleum Reserve to risky levels, saying, "The Biden administration has made diminishing domestic energy production a policy priority—causing the price of gasoline to skyrocket."

Yet the problem faced by the United States can't be laid entirely at Biden's feet, Glickman said. The curtailment of industry investment stretches back much further. True, Biden did take a hostile line to fossil fuels while campaigning and after taking office. But when Biden first outlined his energy policy in July 2020, oil prices were still low, with West Texas Intermediate Crude, the US benchmark, at just over $40 a barrel. "It's easy to be principled and pro-renewable when the cost of being hostile to oil and gas looks pretty light," Glickman said. "Those principles are being tested today, and that's why you're seeing the president approach Saudi Arabia and tapping the SPR. But that's not changing the proximate cause, which is a systemic lack of investment by the industry."

The problem actually dates back more than a decade, when major institutional investors in the oil and gas industry saw slow growth and persistent low prices coming after years of sub-par returns on massive investments. They began demanding buybacks of stock and dividends rather than future investment in new refineries and oil rigs. That was compounded by projections that in the coming decades, most big energy companies would be shifting to renewables, as well as resistance by environmentalists. "The decision has been made to close down operations at certain refineries rather than make major investments in repairs and retooling—in an industry whose future and lifespan is particularly uncertain," said Matt Smith, oil analyst at Kpler, a firm that tracks oil transports.

Most recently, supply chain issues have cropped up in oil and gas as much as in other industries, curtailing the supply of drill pipes and bits, fracking experts, and machines. "Companies are finding it hard to find workers—be it fracking crews or truck drivers—while materials from steel piping to sand are in short supply," Smith said.

"Everyone is saying, 'Why is it taking 12 to 16 weeks to get my refrigerator from Asia?' Well, the same is true of the oil industry," Glickman said. "And experienced labor and a lot of folks in industry said to heck with this. I'll do something different. There's a lack of investment upstream and downstream as well because nobody wants to build new refineries. Everybody is sort of anticipating that in 10 years, we'll be much further down the road in energy transition."

The upshot is that while Russia, which makes up about 10 percent of the world supply of crude oil, may be mainly responsible for the latest jump in fuel costs, prices were already rising before the Ukraine war because of those prior structural issues.

"The fact is, the world is not investing enough in energy, period," Reed said. "Not enough to replace what we lose every year and meet rising demand. We would have found this out sooner if not for COVID. The bigger problem today is what we've lost over the last two years, which is refining capacity. There is no easy fix for that."

"The energy we need now—traditional or renewable—should have been invested in years ago. It was not, at least not at the scale we needed," Reed added. "With no relief in sight, something has to give. It might just be the global economy."

Michael Hirsh is a senior correspondent at Foreign Policy. Twitter: @michaelphirsh

Disclaimer: This article first appeared on Foreign Policy, and is published by special syndication arrangement.