[Global Issue+] Soaring International Oil Prices Despite Eco-Friendly and Electric Vehicle Policies

Surged from $12 to the $60s Last April
Rising on Construction Market Optimism Driven by the Green New Deal

[Image source=AP Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] Last April, international oil prices plummeted to $12, falling below production costs, but in less than a year, they have surged more than fivefold to around $60. This reflects global expectations of a slowdown in COVID-19 spread due to widespread vaccine distribution. However, considering the green policies in the U.S. and Europe, along with successive developments in electric vehicles and new battery factory constructions, the rise has been steep.

With forecasts emerging that international oil prices could recover to $100, criticism is growing both inside and outside the U.S. that the Biden administration's green policies are paradoxically driving oil prices up. The 'Green New Deal,' a key pledge of President Biden's inauguration, is said to be fueling the rise in oil prices.

The Green New Deal Sparks a Construction Boom... Leading to Rising Oil Prices

[Image source=Reuters Yonhap News]

According to foreign media such as CNBC, on the 12th (local time), West Texas Intermediate (WTI) crude oil prices closed at $65.61 per barrel on the New York Mercantile Exchange (NYMEX), down $0.41 (0.6%) from the previous day. After three consecutive days of sharp increases, WTI prices ended their rally due to profit-taking sales, but compared to late April last year, prices have surged more than fivefold. On April 28, 2020, WTI recorded $12.34 per barrel, raising concerns about production costs. Considering that the production cost of shale oil in the U.S. is $30?40, and Russia's is over $20, most oil producers except Saudi Arabia, which claims around $2, faced bankruptcy threats.

Oil prices, which had recovered to around $30, began to turn sharply upward from September last year as the U.S. entered the election season. After the Biden administration took office, prices entered the $60 range. While the COVID-19 recovery contributed, the most significant factor driving the surge was President Biden's Green New Deal policy. The policy to build massive green energy infrastructure effectively pushed oil prices higher.

CNBC analyzed that the Green New Deal raised expectations for the construction industry. Building green energy infrastructure requires constructing many solar and wind power plants, along with large-scale construction of distribution facilities such as substations and transmission towers, as well as basic infrastructure like roads and telecommunications. The large-scale deployment of construction heavy equipment inevitably increases oil demand, thus driving up oil prices.

The Paradox of Green Energy: Electric Vehicles and Carbon Emissions

[Image source=AP Yonhap News]

An even greater irony is that the expansion of electric vehicle use is also a positive factor for international oil prices. Electric vehicles are intended to reduce fossil fuel use and carbon emissions, so why does their increase benefit oil prices?

According to foreign media such as CNN, the Organization of the Petroleum Exporting Countries (OPEC) forecasted on the 11th (local time) that global oil demand this year will average 96.27 million barrels per day, a 6.5% increase from last year. They also predicted that oil demand will continue to rise until 2040. This is because, despite the ongoing transition to electric vehicles and green energy, oil will remain an essential energy source through the 2040s.

Electric vehicles are cars equipped with secondary batteries that use electricity to power motors instead of gasoline. Therefore, they do not emit exhaust gases. However, electric vehicles cannot generate electricity themselves and must receive power from external sources. To solve air pollution through electric vehicles, it is not enough to convert all vehicles to electric; the electricity must be generated from green energy.

The problem lies in the efficiency of green energy sources such as solar and wind power plants. These green energy plants have energy efficiencies in the low teens percentage-wise. Considering that internal combustion engines using fossil fuels have energy efficiencies around 50%, this is very low. To supply the power of one thermal power plant, at least five times as many green energy plants must be built. However, the locations suitable for these plants are limited. Wind farms must be built in high-wind mountainous areas, and solar power plants achieve high efficiency only in desert regions with little rainfall.

Since these plants must be located far from urban centers, massive transmission facilities must be constructed to supply power to cities, causing widespread environmental damage such as deforestation and soil pollution. Therefore, to immediately increase electric vehicle demand by expanding power facilities, more thermal power plants must be built than currently exist. This is why it paradoxically acts as a positive factor for international oil prices.