The surge in global demand for energy and other commodities has confronted policymakers and consumers with difficult new economic, political and strategic realities. Although specific energy-market developments are difficult to predict with any precision, some broader developments are already baked into the cake.
With Russia’s war in Ukraine disrupting commodities markets and further complicating broader geopolitical developments that have been taking shape in recent years, no one is better positioned than Daniel Yergin to offer a sense of the new energy landscape. It is one he has scoped out in his aptly titled new book, “The New Map: Energy, Climate and the Clash of Nations”. Also, as the author of the Pulitzer Prize-winning 1991 book, “The Prize: The Epic Quest for Oil, Money and Power”, he is one of the world’s leading authorities on the politics and economics of energy. He recently spoke with Project Syndicate about energy market developments following the pandemic and Russia’s invasion of Ukraine.
Project Syndicate: There is much debate over whether Russia’s invasion of Ukraine will accelerate the “green” transition or set it back, owing to heightened uncertainty about supplies of hydrocarbons at a time when many economies were already experiencing surging energy prices. Thinking about major economies like the United States, Europe and China, do you currently give more weight to the “accelerate” scenario or to the “set back” scenario? What policy changes are most likely to tilt the scale one way or the other, and are any of them likely?
Daniel Yergin: The correct answer, I think, is both. There is clearly a new impetus for renewable electricity generation, and that will proceed, as in Europe’s post-invasion REPowerEU programme. But it will take time, and it will face some of the same supply-chain difficulties and rising costs as other parts of the economy. “Set back” is not quite the right formulation. Rather, there is also a renewed emphasis on energy security and assuring supplies. The amnesia about that critical security issue is over. Just look at Germany. It is finally committing to roll out new regasification terminals at its ports, without which it cannot import and deploy liquefied natural gas (LNG).
A basic principle of energy security is diversification, and that will loom large for Europe – much larger than it did prior to the Russian invasion.
PS: The European Union has been considering a carbon border adjustment mechanism (CBAM), which would act like a tariff on imported energy and carbon-intensive products like concrete. Given the recent surge in prices, do you still see this moving forward?
DY: We’re in a different era. The drive will still be there for a CBAM, but governments will now be much more worried about importing additional costs into their economies and adding to inflation. And there’s still the matter of how developing countries would respond.
PS: Climate activists have long been pushing for an end to fossil fuel subsidies. But repealing these policies is politically difficult, and it is best done when oil prices are low. Did governments miss their big chance back in 2020, when prices plummeted (even briefly turning negative)?
DY: We must be careful about which subsidies we are talking about. The subject gets quite muddied. While the term is bandied about, the main fossil fuel financial subsidies are those holding down prices for consumers in developing countries – often for political or social reasons. By contrast, some of the “subsidies” that oil and gas companies are said to receive, at least in the US, are the same tax treatment for expenses that are available to other industries.
PS: The US has had an extraordinary two decades, with the fracking revolution and other developments transforming it into a net exporter and top global producer of hydrocarbons. What are the biggest trends to watch in the coming years when it comes to the US energy sector, particularly fossil fuels?
DY: Just think, the shale revolution was not even imagined two decades ago, nor was the dramatic fall in the cost of solar energy. Any predictions therefore should be offered with a degree of modesty. With that said, one development that is pretty much baked in is that the bulk of the new electric generating capacity in the US will be renewable. That’s what utilities are doing.
A few years from now, significant progress may have been made on batteries; and by the end of the decade, it should be clear what role small modular nuclear reactors will play in the energy mix. The US will likely remain one of the world’s major oil and gas producers, but gasoline demand will have begun to decline, owing to the penetration of electric vehicles (EVs). US LNG will be one of the mainstays of the global energy supply. The degree to which that capacity grows will be determined not by the extent of the resource but by the ability to get pipelines and facilities permitted and online. That is certainly a trend to watch.
One way or another, progress will have been made on carbon capture technologies and techniques, because this simply must happen. And by 2030, we will know whether hydrogen – which was relatively peripheral only a few years ago – is on its way to becoming a major energy business.
Technology and innovation do not stand still. There is doubtless a new surprise brewing somewhere out of sight that will change the picture. But one takeaway from both shale and solar is that innovation can take decades to reach the breakthrough point where its full impact becomes clear.
PS: In the wake of Russia’s invasion of Ukraine, Saudi Arabia rebuffed US entreaties to produce more oil, forcing the US to explore new talks with Venezuela and Iran. How much could this moment shake up existing alliances, relationships and rivalries? Do energy crises show you who your real friends are?
DY: America’s relations in the Middle East are in flux. We will see something of a change now with US President Joe Biden’s visit to Saudi Arabia and Israel. Many factors are at work, and the tensions are evident. The feeling among traditional allies in the region is that US interests there have been shrinking, because the shale revolution has made the US essentially energy independent on a net basis (although it must be remembered that, because there is only one oil market, domestic US oil prices are not insulated). This perception was one of the factors leading to the 2020 peace treaty between the United Arab Emirates and Israel. Oil was certainly very high on the agenda of the Biden visit. No mystery there. But the visit was also a response to the widespread perception that the US was disengaging from the region, while Russia and China are increasingly present, and was meant to signal America’s reengagement.
For its part, Saudi Arabia is deeply invested as one of the leaders of OPEC+ (the other leader being Russia). But the war in Ukraine and declining Russian production – and stagnant output in some of the other members – have made the situation within that grouping increasingly uncertain. In any event, the original OPEC+ agreement in its current form is coming to an end. We can certainly expect to see more Saudi oil coming into the market, although spare capacity is not as great as some may assume. Whether more Iranian oil comes into the market will depend on there being a revived nuclear deal, which for now does not seem likely. But, of course, some has been leaking in anyway.
The talks in Caracas don’t seem to have gone anywhere. It would be productive to spend more time with Canada, especially Alberta. This is a moment when every extra barrel is welcome.
PS: As the world’s largest importer of oil and gas, China remains a massive source of energy demand. Which forms of energy will it need most in the next few years, and where will it procure those supplies? Will its purchases of Russian gas offset any measures Europe takes to reduce its own gas imports?
DY: That is a very timely question. While China has a 2060 goal for net-zero emissions, it also has an “all of the above” approach to energy, assuring that it has enough to power economic growth. While building renewables capacity, it is continuing to import increasing amounts of oil and gas to complement domestic production. And it seeks to do so from diversified sources, including the US. But it’s now importing more from Russia – oil sold at a discount.
China can absorb more of Russia’s arctic LNG exports. But to build a major new pipeline to take what otherwise would be stranded gas from Europe is probably a five-year project. Russian President Vladimir Putin has already made clear that he’s going to push such a pipeline. He will need it as his European market shrinks.
PS: There has been much talk of the 1970s, when wars and revolutions in oil-supplying countries triggered stagflation in major economies like the US. How is the current moment like the 1970s, and how is it fundamentally different?
DY: There are certainly similarities. Once again, we are in a deeply alarming, risk-filled era, an epochal moment when we are witnessing a reordering of global politics. The world afterwards will be different from before, as was true of the 1970s, too.
There’s also a supply similarity. The 1973 crisis (stemming from the Organization of Arab Petroleum Exporting Countries’ decision to impose an oil embargo on the US and others in response to the October War) erupted at a time when the global oil market was already exceedingly tight, with no spare capacity. Likewise, Putin launched his war at a time of tight markets, which may have been part of his calculation, given that he has always paid close attention to the energy business.
But there are big differences, too. The situation today involves not just oil but also natural gas and coal, which was not the case in the 1970s. Moreover, it features increasing tension and a potential conflict between two nuclear superpowers, which was on the horizon for only a fleeting moment in 1973. Putin has not hesitated to brandish Russia’s nuclear-weapons capability, which is meant to alarm and is deeply alarming.
PS: Now that energy security is top of mind, governments around the world are scrambling to secure supplies of not just energy but also critical commodities like the minerals used in EVs and solar panels. Are we entering a new era of resource-driven wars and conflicts?
DY: I wouldn’t go that far, but we are already entering a new era of resource competition. All you have to do is read government reports on critical minerals. The shift to renewables and EVs will lead to a huge increase in the demand for minerals. That means there will be a huge increase in mining, processing, and transporting, with a need for complicated new supply chains.
At S&P Global, we just completed a major new study at what the demand growth for copper will be. The answer is eye-popping. We are all too familiar with the geopolitical rivalries and tensions that oil and gas have caused. It is already evident that there will be new geopolitical tensions centred around the minerals needed to achieve net-zero emissions.
PS: As is so often the case, the Global South, particularly Africa, is bearing the brunt of today’s global upheavals, not least in the form of food scarcities. But Africa is also rich in the commodities that are now in high demand. Are major African economies prepared to capitalize on the coming minerals rush, or are they destined to suffer from the natural-resource curse?
DY: Avoiding the resource curse will be a challenge. It already is. Avoiding it in a developing country takes a lot of work – and consensus. But there is also another problem at hand: the growing North-South divide over climate policy, particularly with respect to the availability of financing for things like natural gas pipelines. Such investments are important for development, because they allow people to move away from cooking with wood and waste – sources of indoor air pollution that are associated with many health problems.
Developing countries have more than one imperative. In addition to managing climate change, they also need to reduce poverty, stimulate economic growth, and improve health. If your per capita income is one-tenth that of Europe, your priorities may be different.
PS: Last year’s United Nations Climate Change Conference (COP26) ended with countries agreeing to come back one year later with more concrete, ambitious decarbonization commitments. Now that political priorities have undergone such a sudden shift, what do you expect to come out of COP27 in Egypt later this year?
DY: COP26 took place while Europe and Asia were in the middle of a new-style energy crisis – one involving shortages of natural gas, coal, and oil – owing to the spike in demand as the global economy emerged from Covid-19. COP27 may end up taking place at a time when war is still grinding on in Ukraine. I would think that there will be a focus on natural gas, methane capture, and carbon capture in general, as well as a review of whether the pledged money is being expended to finance the energy transition. But those are just guesses from several months out. I know that a lot of work is going on right now to prepare for COP27.
By the time the event rolls around, Egypt, like other countries, may be focusing more on the immediacy of a global food crisis and the resulting social challenges, and on dealing with intractable inflation and the economic turmoil that it has unleashed.
Daniel Yergin is the vice-chairman of S&P Global and was the recipient of the first James R. Schlesinger Medal for Energy Security from the US Department of Energy.
Copyright: Project Syndicate