Climate Risks Drive Up Oil Prices

Climate risks such as wildfires, hurricanes, and natural disasters are playing an increasingly significant role in determining oil prices, as the world continues to struggle with moving away from fossil fuels.

Hurricane "Beryl," one of the latest extreme weather events, caused market concerns that led to a rise in crude oil prices as it approached Texas in early July.

According to the U.S. Energy Information Administration, Texas accounted for 42% of the total U.S. crude oil production in 2022 and has the highest number of oil refineries in the country. Han Tan, an analyst at Exinity, stated in response to questions from Agence France-Presse, "About half of the total refining capacity in the United States is along the Gulf of Mexico," which is enough to drive prices up as investors worry about potential supply disruptions.

Tan explained that "markets fear Hurricane Beryl is just a prelude to what could be a storm-heavy season this year."

The World Meteorological Organization warned that the early arrival and rapid intensification of Hurricane Beryl might signal the nature of storms in the coming years.

Wildfires in Canada in May had previously driven up crude oil prices when they threatened the Fort McMurray region, a key hub for Canadian oil production.

Jorge Leon, an analyst at Rystad Energy, commented that climate change is now "a major source of risk for oil markets," and he expects this to "escalate in the coming years, becoming more apparent and more extreme."

Analysts compare climate risks to geopolitical risks in terms of their unpredictability and their impact on prices based on supply and demand risks. However, Leon also believes that "climate risks are less manageable in the short to medium term."

This could apply to the long term as well, through the reduction of carbon emissions. Since fossil fuels are the largest contributors to global warming, climate disruption will increasingly affect the operations of oil and gas companies.

Tamás Varga, an analyst at PVM Energy, noted that "climate change has and will continue to affect oil production," pointing out that hotter weather disrupts refinery operations.

Similarly, Han Tan explained that "many European refineries were designed in the 1960s and 1970s primarily to withstand cold temperatures rather than hot ones."

Fossil fuels—coal, oil, and gas—are responsible for over 75% of global greenhouse gas emissions, according to the United Nations.

For the first time, countries agreed on a historic resolution during the United Nations Climate Change Conference (COP28) held in Dubai, paving the way for the gradual phasing out of fossil fuels despite the many privileges of oil and gas-rich countries. However, the adopted text does not directly call for an end to fossil fuel extraction.

Ipek Ozkardeskaya from Swissquote said, "We cannot rationally expect investors to reverse this trend while trying to maximize their profits."

In reality, this can be seen in the actions of major British oil companies Shell and BP, which have abandoned some of their climate goals in recent months.

According to Ozkardeskaya, as long as "the financial costs of climate damage do not exceed the benefits," the solution cannot come from the economy.

She emphasized that "concrete, radical, and global regulatory changes with significant financial consequences... are the only ones capable of directing capital towards clean and sustainable energies."