Renewable Energy and the Politics of Fossil Fuels

GCC

Energy Policy

Commentary

Dr. Gawdat Bahgat

The United Nations Framework Convention on Climate Change (UNFCCC) is scheduled to be held in the city of Glasgow, Scotland, from October 31 until November 12. The underlying reason behind the convention is that human activity is unequivocally responsible for global warming. At the Glasgow convention – also known as COP26, as it is the twenty-sixth conference the UN has held on the subject – world leaders will review data, set emissions targets, and make key decisions on the coordination of a global reaction to climate change. Reducing the world’s consumption of fossil fuels and switching to cleaner sources of energy, such as solar, wind, and nuclear, are considered a major step to protect the environment, ensure clean air and water in the coming decades, and avoid socio-economic and political instability.

However, the volatility of energy prices in the last several months has raised serious concerns over the path and speed of the transition from fossil fuels to renewables and nuclear power. The simplest explanation for the current spike in prices is that the demand for energy is currently exceeding supply. On the demand side, the economic recovery from the pandemic has led to increasing consumption of oil as travel resumes, and unusually cold weather in Europe has incentivized the greater use of fossil fuels as a heating source. Moreover, supply has been constrained by various factors, both natural and man-made; hurricanes have forced shutdowns of oil refineries in the Gulf of Mexico, tense political relations between China and Australia have led Beijing to stop importing coal from Canberra, and a protracted calm spell over the North Sea has sharply curtailed the output of electricity-generating wind turbines.

Fossil Fuels’ Staying Power

The world is not investing enough in fossil fuels to meet its future energy needs, and uncertainties over policies and demand trajectories will create a strong risk of future volatility in energy markets. Major oil producers have significantly cut their investments in fossil fuels, which has led to diminishing supply. Meanwhile, the world does not yet have sufficient green energy to replace fossil fuels. The recently published OPEC World Oil Outlook 2045 warns that underinvestment remains one of the greatest challenges for the oil industry. This underinvestment has been exacerbated by the Covid pandemic and pressure by environmental groups to avoid future fossil fuel development, with the result that total oil and gas investment in 2021 will be down about 26 percent from pre-pandemic levels.

At the same time, in order to meet global energy demand as well as climate aspirations, investments in clean energy would need to grow from around $1.1 trillion this year to $3.4 trillion a year until 2030. This increase in investment has been reflected in the global energy mix, as wind and solar capacity more than doubled between 2015 and 2020. Even so, the share of fossil fuels in the global energy mix has remained consistent; fossil fuels continue to supply approximately four-fifths of the world’s energy needs.

A good illustration of this ambition to switch to electrification and renewable energy and the reality of fossil-fuel domination can be seen in the rising popularity of electric vehicles (EV). Although petroleum currently fuels the great majority of cars around the world, many Western governments have recently advanced policies to incentivize a rapid shift to EV. Additionally, nearly all major American and European automakers, including General Motors, Volkswagen AC, and Volvo are betting big on EV production and have scheduled future dates by which they will no longer construct gasoline-powered cars. Even so, adoption and building the necessary infrastructure and charging stations will take a long time, and given the current dominance of gasoline-run cars, they are not likely to disappear any time soon.

As expected, the global energy markets have responded to the contradictory signals from policymakers and the resilience of fossil fuels. Spot prices of natural gas have more than quadrupled to record levels in Europe and Asia, and according to the International Monetary Fund, the persistence and global dimension of these price spikes are unprecedented. In October 2021, U.S. natural gas futures hit a nearly 13-year high. Similarly, the price of Brent crude oil, the global benchmark, briefly exceeded $85 per barrel – the highest recorded price since the 2014 global oil crash. Finally, coal prices reached their highest level since 2001.

Strategic Implications

Unlike many other economic commodities, changes in the energy markets have significant and immediate geopolitical implications. Major consumers and producers have responded to the changing dynamics in the energy landscape. Although the United States is a leading player in the global oil trade, U.S. production fell sharply after the March 2020 arrival of the COVID-19 virus and has since barely inched back up. The Biden Administration has even considered selling off part of the U.S. strategic petroleum reserve or banning exports of crude oil. Understanding that higher energy prices could aggravate inflation and dampen economic recovery, President Biden has urged OPEC to increase oil production more quickly to ease supply constraints.

Similarly, most of Europe seems to have moved too quickly away from fossil fuels without due consideration into what renewable sources would replace them. As a result, Europe is now scrambling to find gas to burn in its remaining traditional plants. Although Europe has expanded its capacity to import liquified natural gas (LNG), Asian gas demand for LNG has skyrocketed, leading to intense competition between European and Asian consumers over limited gas supplies. Some European governments have justifiably argued that volatile gas prices reinforce the need to accelerate towards renewable energy. However, there are concerns that high prices could trigger a backlash against renewables if consumers start to believe the price of the energy transition is too high.

The limited supply of gas and its high prices have provided an unexpected opportunity for Russia to expand and solidify its political influence in Europe. Russian President Vladimir Putin has publicly offered to help calm the natural gas crisis by increasing its exports to the continent. An important factor is the completion of the new Nord Stream 2 pipeline, which connects Russia and Germany through the Baltic Sea but has yet to go into operation. Russian officials have urged the German government to speed up its regulatory approval. As Germany delays, in part due to concerns of the leverage Moscow would gain from such an arrangement, Russia has found customers elsewhere; China has emerged in the past half-decade as a major importer of Russian gas. This European-Chinese competition adds more pressure on Russian gas supplies, and predictably drives prices further up.

Finally, the oil-producing nations of the Gulf have sought to strike a balance between environmental concerns and the need to provide adequate oil and gas supplies to support the global economic recovery. Saudi Aramco plans to increase its oil production capacity from 12 million to 13 million barrels per day by 2027. The Abu Dhabi National Oil Company (ADNOC) plans to spend $122 billion to boost oil production capacity to five million barrels a day by the end of the decade, up from about four million a day today. Iraq has made several major deals with foreign oil companies to help the state national oil company develop new fields and improve production from old ones. Qatar is spending almost $30 billion to increase its LNG production capacity from the enormous North Field. Doha has urged international oil companies and Western governments to accept that natural gas, which is another source of pollution but is relatively cleaner than coal and oil, needs to be part of the transition to meet carbon net zero goals. In October 2021, the Emir of Qatar created an environment and climate change ministry, while the Saudi Crown Prince committed the nation to net zero emissions by 2060.

One trend that will probably elicit notice at COP26 has been the decrease of oil’s share of the global energy mix from around 50 percent in the 1970s to 29 percent today, a trend attributable to the increasing use of natural gas and renewable sources. However, the recent surge in energy prices underscores the risks of phasing out fossil fuel production too quickly without adequate supplies of green energy. Uncertainty remains high, and a balance between environmental concerns and a stable energy market is needed. While the need to address climate change cannot be overstated, the political and economic consequences of a mismanaged transition from fossil fuels could be dire. As the nations of the world gather in Glasgow to set their targets, they should carefully consider this problem.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of the Gulf International Forum.