The writer is professor of political economy at the University of Cambridge and author of ‘Disorder: Hard Times in the 21st Century’
Across the world, politicians are ever more desperately looking to contain the explosive consequences of the energy crisis. In those parts of Asia, the Middle East and Africa already mired in multiple economic and political difficulties, the crisis is proving catastrophic.
Those who import liquid natural gas must now compete with European latecomers to the LNG market seeking an alternative to pipelined Russian gas. In early summer, Pakistan was unable to complete a single LNG tender. In poor countries, a large proportion of the state’s resources go on subsidising energy consumption. At prevailing prices, some cannot: earlier this month, the Sri Lankan Electricity Board imposed a 264 per cent increase on the country’s poorest energy users.
In Europe, governments want to alleviate the dire pressures on households as well as energy-intensive and small businesses, while letting spiralling prices, pleas to consume less and fear about the coming winter drive down demand. Fiscally, this means state funding to reduce rising energy bills by subsidising distributors, as in France, or transferring money to citizens to pay those bills, as in the UK.
What is not available anywhere are quick means for increasing the physical supply of energy. This crisis is not an inadvertent consequence of the pandemic or Russia’s brutal war against Ukraine. It has much deeper roots in two structural problems.
First, unpalatable as this reality is for climate and ecological reasons, world economic growth still requires fossil fuel production. Without more investment and exploration, there is unlikely to be sufficient supply in the medium term to meet likely demand. The present gas crisis has its origins in the Chinese-driven surge in gas consumption during 2021. Demand grew so rapidly that it was only available for European and Asian purchase at very high prices. Meanwhile, respite from rising oil prices this year has only materialised when the economic data from China is unpropitious. In the International Energy Agency’s judgment, it is quite possible that global oil production will be inadequate to meet demand as soon as next year.
For much of the 2010s, the world economy got by on the shale oil boom. Without US production more than doubling between 2010 and 2019, the world would have been trapped in a permanent oil crisis since 2005, when conventional crude oil production — oil drilled without hydraulic fracturing or from tar sands — stagnated.
But American shale cannot expand at the same rate again. Although the largest US shale oil formation — the Permian Basin in western Texas and south-eastern New Mexico — is projected to reach record output next month, overall US output is still more than 1mn barrels per day below what it was in 2019. Even in the Permian, daily production per well is declining.
More offshore drilling, of the kind opened up in the Gulf of Mexico and Alaska by the Inflation Reduction Act, will require higher prices, or investors willing to pour in capital regardless of the prospects for profit. The best geological prospects for a game changer akin to what happened in the 2010s lie with the huge Bazhenov shale oil formation in Siberia. But western sanctions mean that the prospect of western oil majors helping Russia technologically is a geopolitical dead end.
Second, little can be done that would immediately accelerate the transition from fossil fuels. Britain’s planned micro nuclear reactors will not be completed until the 2030s. Running electricity grids on solar and wind base loads will require technological breakthroughs on storage. It is impossible to plan with any confidence what progress will have materialised in 10 years, let alone next year. But precisely because an energy transition is essential to reduce fossil fuel consumption, large-scale, blue-sky investment is imperative.
The only way forward is realism for the short term, recognising that there is no way back to cheap energy, allied to radical, long-term ambition. A grasp of geopolitical realities is also essential. The US remains by some distance the world’s dominant power. Its naval power guarantees open waters for international trade. World credit markets depend on dollars. But Washington does not have the power to direct China and India’s energy relations with Russia.
This coming winter will bring a reckoning. Western governments must either invite economic misery on a scale that would test the fabric of democratic politics in any country, or face the fact that energy supply constrains the means by which Ukraine can be defended.
Source: Economy - ft.com
