As the world continues to fight to move away from fossil fuels, climate risks like wildfires, storms, and natural disasters are becoming more and more important in setting oil prices.
When Hurricane “Beryl,” one of the newest extreme weather events, got close to Texas in early July, it worried the market and caused crude oil prices to go up.
The U.S. Energy Information Administration says that Texas produced 42% of all crude oil in the country in 2022. It also has the most oil plants of any state in the country. When asked by Agence France-Presse, Han Tan, an expert at Exinity, said, “About half of the total refining capacity in the United States is along the Gulf of Mexico.” This is enough to make prices go up because investors are worried that there could be problems with the supply.
Tan told us that “markets fear Hurricane Beryl is just a prelude to what could be a storm-heavy season this year.”
The World Meteorological Organization said that Hurricane Beryl’s early arrival and quick strengthening could be a sign of how storms will be in the years to come.
In May, wildfires in Canada affected the Fort McMurray area, which is a key hub for oil production in Canada. This made the price of crude oil go up.
At Rystad Energy, Jorge Leon said that climate change is now “a major source of risk for oil markets” and that he thinks this will “escalate in the coming years, becoming more apparent and more extreme.”
Analysts say that climate risks are like global risks in that they are hard to predict and can change prices based on supply and demand risks. On the other hand, Leon thinks that “climate risks are less manageable in the short to medium term.”
This could also be true in the long run by cutting down on carbon pollution. Since fossil fuels are the main cause of global warming, changes in the climate will have a bigger effect on how oil and gas companies do business.
An expert at PVM Energy named Tamás Varga said, “Climate change has and will continue to affect oil production.” He said this by saying that hotter weather makes it harder for refineries to work.
In the same way, Han Tan said, “many European refineries were built in the 1960s and 1970s with cold temperatures rather than hot ones in mind.”
The United Nations says that fossil fuels like coal, oil, and gas are to blame for more than 75% of the world’s greenhouse gas pollution.
At the United Nations Climate Change Conference (COP28) in Dubai, countries came to a historic agreement for the first time. This means that fossil fuels will be phased out over time, even though oil and gas-rich countries have many benefits. But the text that was accepted does not say that fossil fuel production should stop.
Ipek Ozkardeskaya from Swissquote said, “It is not reasonable to expect investors to change this trend while they are trying to make the most money.”
In truth, this is clear from the fact that Shell and BP, two big British oil companies, have given up on some of their climate goals in the past few months.
As long as “the financial costs of climate damage do not exceed the benefits,” Ozkardeskaya says the economy can’t be the answer.
She said “concrete, radical, and global regulatory changes with significant financial consequences… are the only ones capable of directing capital towards clean and sustainable energies.”