Banks have been actively seeking ways to distance themselves from the oil and gas industry in recent years under growing pressure from pro-energy transition activists. Their efforts have been quite productive, too, with funding of renewable energy loans rising significantly. But the tables are turning as fossil fuel prices soar in the face of tight supply and the threat of shortages.
The Wall Street Journal, for instance, reported earlier this month that banks had underwritten more renewable energy loans than oil and gas loans during the first quarter of the year. However, certain banks underwrote more oil and gas loans than renewable ones, the report noted, reversing course on their earlier approach to lending.
Citigroup, Wells Fargo, Societe Generale, and Mizuho Financial Corp were among the banks that underwrote more oil and gas loans than renewable energy loans, according to the report,
A separate report, by a group of environmental nonprofit organizations, once again pointed the finger at the banking industry for continuing to provide the oil and gas industry with money at all. Dubbed “Banking on Climate Chaos”, the group said in its 2022 Fossil Fuel Finance Report that banks had provided a total of $742 billion in funding to the fossil fuel industry last year. Of that, four Wall Street majors, including JP Morgan, Wells Fargo, Bank of America, and Citigroup, account for a quarter.
Banks have been a huge target for environmentalists as the push for the energy transition began to really gather momentum a few years ago. The pressure exerted on the industry has led to a flurry of net-zero commitments by virtually every bank, with the majors mentioned in the above report also being members of the Net Zero Banking Alliance.
Yet the hard realities of the energy world have not escaped the attention of bankers. Demand for fossil fuels is on the rise while supply is, at best, tight. With pressure rising on Europe to impose an embargo on Russian oil and gas, there are fears, even expressed by the International Energy Agency, that the global oil market could swing into a deficit of as much as 3 million barrels daily.
What this means is that the world urgently needs more oil production and also more gas production. There is even a shortage danger in the coal market following an EU decision to ban imports of Russian coal, although Brussels scheduled the start of the ban for August so it can stock up on the commodity in the meantime.
As the Wall Street Journal report points out, this context for banks also involves higher costs for renewable energy projects: the tight supply is not only a feature of the hydrocarbons market. In such a context, any bank would remember it is a business rather than a charity, and take its money where the returns are.
It is certainly an unfortunate situation for wind and solar. After years of everyone pretty much assuming their costs will only ever go down, the pandemic and the outlook for raw material demand changed that. Supply chain disruptions were the first to start affecting wind and solar prices negatively. Then higher energy costs kicked in for an additional cost boost, with polysilicon prices hitting the highest since 2011 earlier this year.
It is a special kind of irony that energy costs, or rather, the cost of fossil fuel energy used in the production of solar panels, for instance, are affecting the costs of the technology supposed to wean us off fossil fuels. Yet facts are what they are: higher fossil fuel prices are driving up the prices of virtually everything that features energy inputs.
Banks have made it clear that despite their increasingly ambitious commitments to the net-zero path, they cannot simply drop their oil and gas clients overnight. The reason for this is that renewable energy is not on par with fossil fuels in terms of performance. It won’t be on par for a while yet, but global energy demand will remain strong, it seems, and it would need to be met.
Just how important this is was made clear by none other than pro-transition Democrats in the U.S., who, for all their focus on the shift from oil and gas to renewables, have now taken to calling on the oil and gas industry to boost production amid high priced at the pump. These have been blamed on Russia’s President recently but assigning blame will not make the burden lighter on Americans, hence the calls on Big Oil to pump more, despite transition efforts.
As for renewable energy financing, this is not going anywhere, whatever the costs. The pressure from environmentalist organizations and activist shareholders is not showing any signs of subsiding, which means lenders will continue to feel it and adjust their actions accordingly. Until there is such strong government support, including financial, for renewables, banks will continue to finance the industry.