Even before the full scale of the global pandemic was becoming apparent, disagreement between Russia and Saudi Arabia caused an oil price crash.
Then the pandemic saw oil demand fall by 30 per cent in April 2020 and prices in the US collapsed to below zero for the first time on record. By the end of August 2020, they had recovered to around $45 a barrel.
Oil giants such as BP and Shell slashed thousands of jobs, cut dividends, and downgraded the value of some of their reserves, while reaffirming their commitment to a low carbon economy. And some oil producing nations were prompted to accelerate plans to reduce their dependence on oil rents.
The shift to a ‘new energy order’ was already underway, but the pandemic has quickened the pace, with new global alliances being formed as China and the US compete to take advantage of the move to renewable technologies that challenge the influence of OPEC (Organization of Petroleum Exporting Countries) and Russia.
Fossil fuel importers may finally gain the upper hand over their suppliers, which will have huge implications for geopolitics, but just how is difficult to predict.
As COP26 unfolds in Glasgow, I revisit four scenarios first published in Nature to consider how the pandemic might shape the energy transition over the next decade as campaigners and the United Nations (UN) try to compel the world to take urgent action against climate change.
1 The big green deal
This is an energy transition driven by a global consensus on the urgent need for action that is set in motion by a co-operative dynamic. It also implies a rapid and deep decarbonisation with a steady 'ratcheting up' of ambition within the UN 2016 Paris Agreement, starting with the COP26 Conference in Glasgow.
Thanks to clear, determined and concerted policy signals, in large part driven by a determination to ‘build back better’ through a ‘green recovery’, financial markets heed the call and divestment from fossil assets quickly gains momentum. As a corollary, companies specialising in low-carbon technologies are strongly capitalised, and within a relatively short period green technology corporations supplant big oil on stockmarkets, though some international oil companies succeed in reinventing themselves.
A comprehensive global green finance package gives petro-states in the Middle East a soft landing, enabling them to manage the loss of fossil-fuel rents and leave the carbon-intensive economic model of old.
This ‘big green deal’ scenario represents the ideal case, with progress accelerated by the actions taken to recover from the pandemic putting the world economy on the path from a high to a low carbon paradigm. It also brings about significant growth and welfare effects in line with the UN’s Sustainable Development Goals (SDGs), the importance of which was highlighted by the stark inequalities exposed by the pandemic, both within and between countries.
This is the only scenario that achieves the SDGs. While it is underpinned by a multi-lateral approach, the potential for conflict remains, but in the aftermath of the pandemic and renewed global commitment to address climate change, energy security concerns are no longer paramount, reducing the potential for international and regional conflict.
2 Dirty nationalism
The opposite dynamic emerges in this case, where the primary driver is nationalism that is reinforced by the failure to adopt a multi-lateral approach to deal with COVID-19. Inward-looking policies favour self-interest and states prioritising self-sufficiency over interdependence and co-operation.
As was demonstrated in the early months of the pandemic, this in part helps the development of renewables as they are seen as domestic energy sources replacing imported ones, thus reducing vulnerability (defined as import dependence). But it primarily helps fossil fuels, notably coal, as well as unconventional fossil fuels such as tight oil and gas.
Indeed, evidence from the Energy Policy Tracker in September 2020 revealed that 53 per cent of G20 public money for energy has been going to the fossil fuel sector - so much for a green recovery.
Importantly, as national governments seek their own solutions to the pandemic and climate change, global markets fragment, thus prohibiting the economies of scale needed to drive down costs and help deploy novel healthcare solutions and low-carbon technologies at scale.
The fossil fuel divestment campaign loses momentum in the face of renewed state subsidy of domestic fossil fuels, which also undermines the prospect for investments in green technologies. National energy security trumps concerns about climate change.
Moreover, as states favour conflict over co-operation, multi-lateral institutions such as the World Trade Organization, the World Health Organization and the United Nations Framework Convention on Climate Change become sidelined or abandoned. This results in a failure of the Paris Agreement and the Nationally Determined Contributions mechanism which committed countries to reduce CO2 emissions. It also undermines support for the SDGs.
In this scenario change is slow, if not stalling; a focus on national self-interest is the dominant model, with an emphasis on power politics centred on the nation state, making the political architecture fragmented, while climate change remains unabated and an increasing ‘threat escalator’ that brings about climate-induced conflict. Fossil fuel producers, albeit under pressure, continue with their existing business model.
3 Technology breakthrough
Let us assume, by way of contrast, a technological breakthrough in, say, electricity storage, plus continued cost reductions for solar and wind generation technologies.
Their sizeable markets, coupled with a technology-friendly regulatory environment puts China and the US in the lead in scaling up the production, deployment and trade of critical technologies. The resulting competition is not only about technology leadership, with tech giants such as State Grid of China and Google vying for market share - much like certain states supported their pharmaceutical industries in the race to find a vaccine for COVID-19 - it also extends to geopolitical rivalry. This is reinforced and cements regional blocs (now defined in large part by their respective integrated energy systems - ie transnational electricity grids). These blocs end up in conflict over critical materials and the associated processing and fabricating industries needed for low-carbon tech.
While such a scenario helps to mitigate climate change, some regions lose out. As market scale and might matter most in technology leadership, the EU, as a result of a failure to agree a co-ordinated approach, ends up being marginalised.
Russia, having failed on repeated occasions to diversify its economy, faces falling Government revenues from oil and gas, the decline of its national champions Gazprom and Rosneft, and growing social unrest in the second half of the decade as the economy never really recovers from earlier oil price crashes and the impact of the pandemic.
There is, of course, a potential alternative path where technological advances in Carbon Capture and Storage (CCS) and negative emissions enable a significant amount of fossil fuel production to remain in the mix.
However, the falling cost of low carbon technologies and their relative abundance and absence of other environmental externalities, means that fossil fuels still lose out. Equally, biomass energy and CCS are preferred to using that technology to retain fossil fuels, though the scale of deployment is limited by concerns over biodiversity and food security.
In this scenario, change is fast (though not as fast the big green deal) but uneven, with the political architecture dominated by one or two national powers.
This scenario demonstrates a pathway that is politically and socially problematic, but one that does resolve the climate change challenge. However, the SDGs do not progress as competing blocs favour regional solutions to development assistance, focused on preferential trade agreements over a global approach.
4 Muddling on
This reflects a ‘business as usual’ scenario, where prolonged cost reduction for renewables is the major driver of climate change mitigation, but the absence of strong policy support for decarbonisation keeps fossil fuels in the mix for longer. Also there is a much stronger determination to address climate change in the EU than elsewhere in the world.
Consequently, although renewables claim an increasing share of the energy mix, the speed of the energy transition is too slow to mitigate global climate change. However, thanks to a boost in some parts of the world as a commitment to a green recovery, it is still too fast for most of the incumbent fossil fuel industry to adapt successfully, resulting in the ‘worst of both worlds.’
This results not only in a series of bankruptcies of national oil companies, but also in many of their private international counterparts facing significant financial stress. In addition, fossil-fuel exports to the EU soon become a risky business model, putting severe financial pressure on oil-producer economies in the Middle East, Russia and Africa, some of which may experience domestic political turmoil as a result.
In this world, following the blow dealt by the COVID-19 pandemic, the ‘energy dominance’ of the US proves short-lived and while it remains self-sufficient, exports of oil and gas fail to live up to earlier expectations as the shale boom falters.
China's motivation for transforming its energy system lies in improving air and water quality and in building sizeable state champions fit for the global market. Europe, by contrast, is more concerned with climate change, pushing bilateral low-carbon energy partnerships. The US remains on standby, focused on domestic matters.
This implies diverse growth models for energy technologies, an increasingly heterogeneous world of ‘clubs’ led by the EU and China and limited global co-operation. As some regions remain characterised by inadequate regulation or fail to benefit from select partnerships, this scenario also reinforces existing economic and geopolitical imbalances, and increasing energy inequality. The inequalities exposed by the pandemic are never reversed and this serves to undermine progress on the SDGs, resulting in a ‘lost decade’.
In this scenario, change is slow, the political architecture is clubs and climate mitigation is too slow to meet climate targets. This highlights that even muddling on is not really business as usual as the growing environmental consequences of a warming planet - as evidenced by increased episodes of extreme and melting ice caps - physically challenge the status quo.
Even before the COVID-19 pandemic, the gap between policy ambition for emissions reduction and the pathway needed to be on to achieve this ambition was widening.
It is a relatively easy task to model a world in which the global energy system is transformed and the worst impacts of climate change are avoided. The real challenge lies in the process of the transition. In short, geopolitics matter.
These scenarios highlight that the road to net-zero is fraught with geopolitical dangers that threaten to de-rail progress and create new sources of conflict and inequity.
Despite the best intentions of many, there is a very real chance that the cumulative economic, social and political impact of COVID-19 will be to retard our already inadequate efforts to address the much greater threat of climate change.
However, important lessons can be learnt in the current crisis and, in such a context, it is only by identifying the threats to a successful energy transition and presenting a set of possible solutions that we can put the world on the road to a just transition.
A failure to consider and prepare for the geopolitical challenges and tensions that arise from the process of energy system transformation may make it more difficult to maintain a path towards deep decarbonisation.
Bazilian, M., Bradshaw, M. J., Goldthau, A. and Westphal, K. (2020) "Model and manage the changing geopolitics of energy", Nature.
Kuzemko, C., Bradshaw, M. J., Bridge, G., Goldthau, A., Jewell, J., Overland, I., Scholten, D., Van de Graaf, T. and Westphal, K. (2020) "Covid-19 and the politics of sustainable energy transitions", Energy Research & Social Science, 68, 101685.
Bradshaw, M. (2020). "Pandemic, price wars, petrostates and the new energy order", Geography Directions.
Michael Bradshaw is Professor of Global Energy, Co-Director of the UK Energy Research Centre and is attending COP26 as one of the University of Warwick's delegation. He teaches Managing in a New World and Managing Sustainable Energy Transitions on the Full-time MBA and Forecasting for Decision Makers on the suite of MSc Business courses.
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