The world is seeing power politics displacing multilateral approaches everywhere. It is pointless now to discuss who is to blame for that, writes Marc-Antoine Eyl-Mazzega in his comments on the Valdai Club report “Political Risks in Global Energy: From ‘Resource Nationalism’ to ‘Molecules of Freedom’ and Climate Weapons”.
The Valdai Club report “Political Risks in Global Energy” stresses how energy and politics are closely intertwined. It contains a multitude of examples highlighting how the West has been steadily manipulating oil and gas markets to its benefit and to the detriment of other actors and market-based economics. For a long time, the Western nations, with the exception of Norway, were mainly net importers of oil and gas. However, their behaviour has not changed despite the United States and Canada becoming oil and gas exporters (the UK was a hydrocarbon exporter in the 1980s and 1990s).
Cracks in the system appeared when the Trump administration withdrew the US from the Paris Agreement, breaking with America’s allies, but all in all, the politicisation of energy is set to continue. As a consequence, the Valdai Club report claims that markets are continuously distorted. Instability has grown and consequences have been dramatic, notably for the unresolved issue of energy poverty, but also with regards to the European Union, which is on the verge of economic suicide with its Green Deal. The EU’s “climate weapon” is motivated by its falling domestic energy resources and interest in accessing cheaper hydrocarbons, which it must increasingly import. It has been supporting renewables that cannot compete without subsidies and other indirect support measures, which lead to unfair competition. In a world of normal competition, where political interference in energy markets and trade was absent, everything would be better: there would be more growth and development, less energy poverty and a responsible use of affordable and available resources. Those who are the most to blame are the US and the EU, which seek to undermine other countries’ development to their benefit. However, as the report puts forward, the idea of opposing the climate agenda and giving an additional push to enter the golden age of gas is gaining momentum. Interestingly, authors tend to green-light the notion that not only coal, but also oil, will ultimately be side-lined if this is accomplished.
True, energy interdependency has been a key driver of geopolitics since the early 20th century. True, Western IEA consumers saw OPEC+ type oil producers as threats. True, the US oil and gas industries have radically transformed oil and gas markets (and rightly so, as shale oil and gas remains a US success story), turning them from seller’s markets to buyer’s markets to the benefit of large importers in Europe, Asia and beyond; the US has been politicising its energy exports under Trump, just like traditional “bad” suppliers have been accused of doing in the past. True, the US has been weaponising energy with its extraterritorial measures and trade pressures, notably against Russia and China. True, the Middle East attracts much geopolitical attention but crises there are only marginally reflected in oil prices, as markets are loose. True, hydrocarbons dominate the global energy mix, and this will not change rapidly. True, the LNG market is vibrant and increasingly turning gas into a global commodity. True, renewable energy sources have been subsidised, distorting competition with fossil fuels. True, there were good reasons for resource nationalism following Western imperialism.
But this report has a strong ideological subtext: that climate change is a Western plot to hurt hydrocarbon producers. It assumes Russia has just been a victim of the US and EU plots all along. It fails to explain how energy poverty could have been alleviated if political interferences had disappeared (let alone via Russia’s actions), for example, given that it has been totally absent from electrification efforts in India or Sub-Saharan Africa (nuclear being irrelevant here).
This comment thus looks into some factual responses to put these important issues into a more comprehensive perspective.
Oil and gas production and consumption are actually equally distorted: there are upstream and downstream subsidies throughout the world, in producing and consuming nations. Decisively, their environmental externalities have never been priced in, because the market economy has been largely imperfect over the past 50 years: environmental degradation has been totally ignored. The bill is coming: the world is on a >+3°C warming trajectory. This world will be dangerous, especially for Russia, which is experiencing dramatic signs of climate change, with growing financial repercussions. The EU’s climate agenda certainly has some economic and geopolitical and geoeconomic aspects, but it aims to limit global warming. This is why the EU’s policy is actually in Russia’s long-term strategic interest. Renewables are certainly not zero carbon in terms of full life circle assessment. But in any event, they’re much better than oil.
The US is now weaponising energy exports? It has obviously learned from Russia and Saudi Arabia, where this is a longstanding practice! Joke aside, what is admittedly more surprising is that it comes from a liberal democracy. But the world is seeing power politics displacing multilateral approaches everywhere. It is pointless now to discuss who is to blame for that. However, it is interesting to note that Russia is not just a victim of US interference (the UPU pipeline, Crimea/Donbass sanctions, Nord Stream 2): the US has been the best ally to Russia and Saudi Arabia! They have cut Iran and Venezuela out of the oil export markets, and avoided a supply glut, much to Russia’s benefit! And their strategic pullout from the Middle East, Syria and Libya is again playing into Russia’s hands! As an indirect consequence, Libya is wracked by chaos, exporting just one million barrels per day now. If all that had not happened, Russia would have had to cut its oil production by four million barrels per day, minimum!
Renewables cannot compete? While this had, at one point, been right, it is now actually increasingly wrong. The world has entered an era of the mass deployment of super-competitive solar technology, and what is now coming are competitive additional batteries and wind facilities to reduce intermittency and provide grid services. With a minimal carbon price, not only are they competitive, they are literally crushing fossil fuels. This is almost the case with offshore wind. Still, there is still a need for backup and baseload. Flexible nuclear, gas, hydro, batteries and demand-side tools can handle that.
Are we about to enter the golden age of gas? Certainly, the share of gas has been rapidly expanding. There is an opportunity to replace coal with gas. But should Russia seek to take measures to stabilise markets (and therefore push up prices)? The world needs cheap, reliable, and abundant gas if gas is to grow further! Talking about revitalising the GECF reflects a misunderstanding of the fragile position of gas in emerging economies. These countries have suffered currency depreciations which make imports more expensive. The recession will affect them for many years. Gas infrastructure is expensive. Coal has a huge social dimension and is considered secure. The GECF would be better off engaging in an emergency programme to cut fugitive methane emissions, and cutting upstream costs so as to be able to deliver more cheap gas, rather than dream about restoring the gas markets of the early 2010s. One thing related to the US that is often distorted is that while CO2 emissions from the power sector have been indeed decreasing over the past years, notably thanks to gas, but also renewables, total US greenhouse gas emissions have actually been rising during the same period. Why? It’s happened partly because of the transport sector, and also, notably, methane emissions from agriculture, but it’s primarily due to the hydrocarbon industry. Satellite images now testify as to how massive methane leakages are, in the US, but also in Russia. This is dramatic. Full stop.
Is the EU committing suicide with its Green Deal? Hardly. Russia constantly mocks the EU while downplaying or ignoring the rapid technological and economic changes going on. Europeans have been waiting for Putin’s “regime” to collapse for 15 years now. During the same period, Russians have been deriding the US shale industry, the EU’s solar and wind deployment, and climate change. What is the result of this wishful thinking on both sides? President Putin has just arranged to stay in power until 2036, without any problem. And the EU now thinks that its efforts to decarbonise the electricity sector are almost complete, with manageable challenges ahead, and therefore believes the time is ripe to tackle transport, industry and agriculture. Germany and Denmark may pay more for electricity than anyone else in the world, but they also enjoy the highest standards of living; additionally, industry continues to account for 20% of Germany’s GDP. In other words: the Russian public debate is stuck in denial, which will cost it many opportunities. For example, Russia wouldn’t be prepared to face the consequences of a significant depreciation of the value of its oil reserves, and hasn’t been developing any low-carbon technologies, except nuclear power (which it does great).