Michael Bradshaw, Professor of Global Energy at Warwick Business School and Fellow of the Royal Geographical Society, analyses how the conflict in Ukraine is shaping European and US stopgaps and their effect on climate action.
Energy supplies and the planet: How will Russia’s war in Ukraine affect them? by Michael Bradshaw. With kind acknowledgements to Warwick CORE Insights.
The Russian invasion of Ukraine has changed the world forever. It is not unique in this respect. There have been two similar ‘inflection points’ in the last 15 years alone. The first was the global financial crisis of 2008, the second being the start of the Covid-19 pandemic in 2020.
Though the pandemic is far from over, the global economy was on the road to recovery during 2021. This was welcome news in many respects, but also created new challenges. Demand for oil and gas surged as the world emerged from lockdown, triggering an energy price crisis as supply struggled to keep up. That has been exacerbated by the war in Ukraine. While the outcome of the conflict remains uncertain, it is already clear that the West’s response will have a lasting impact on our ability to take timely action on climate change.
Is Europe on the verge of a 1970s energy crisis?
The need to accelerate that action is greater than ever. As the IPPC’s recent reports make clear, the window of opportunity to limit global warming to 1.5 degrees is closing fast.
To meet the goals of the Paris Agreement the world needs to reduce greenhouse gas (GHG) emissions by 45 per cent by 2030. COP-26 offered hope of a concerted push. For the first time, a COP closing statement included the need to ‘phase down’ fossil fuels.
There have already been missed opportunities to do exactly that. The 2008 crisis put a short-lived crimp in the growth of carbon emissions. But as the global economy recovered, so did emissions growth. All the indicators suggest the pandemic resulted in a similar dip in emissions. Again, that rebounded as economies recovered and emissions hit a record level (IEA) in 2021. Both events were associated with extreme oil price volatility. Oil prices peaked at $147 per barrel in 2008, only to fall to $35 by the end of the year.
In stark contrast, the American benchmark oil price for West Texas Intermediate (WTI) grade oil was -$40 per barrel, which recovered to $74 by the end of last year. When US President Joe Biden announced a ban on Russian oil and gas imports on 8th March, the price hit $124 and at the time of writing, it was just below $100 a barrel. The world of COP-26 is gone.
Europe is now determined to move away from any reliance on Russian fossil fuels. It is a challenge that should not be underestimated. Russia is the world’s second largest exporter of oil, after Saudi Arabia. It is also the largest exporter of natural gas and the third largest exporter of coal. The EU imports 40 per cent of its natural gas and 27 per cent of its oil from Russia.
According to data from the US Energy Information Administration, OECD Europe accounted for 49 per cent of Russia’s crude oil and condensate exports in 2021. It was also the destination for 74 per cent of Russia’s natural gas exports. At present, the EU is not blocking Russian energy imports. However, there is a lot of ‘self-sanctioning’ going as traders shy away from Russia oil, leading to significant discounts. Even so, the price remains high and the devaluation of the rouble is filling the Kremlin’s coffers.
What happens next depends on whether Russian oil and gas continue to flow to Europe. If those exports were to stop, it could tip the world into a 1970s style energy crisis. The IEA has warned of the ‘the biggest supply crisis in decades.’ The very high cost of energy would impact consumers and governments everywhere.
Clearly, some would profit. Others might be relatively isolated by government policy. The vast majority would bear the brunt in terms of inflation, physical shortages, and economic recession.
How do we avoid long-term regrets on climate change?
The current plethora of plans to reduce Europe’s reliance on Russia and oil and gas imports is likely to promote a short-term surge in emissions as production from existing non-Russian oil and gas fields accelerates.
Those that can still burn more coal will. It may be costly, but far less so than gas (Russia also provides 32% of OECD Europe’s coal imports). At the same time, the search for more Liquefied Natural Gas (LNG) imports increases the carbon intensity of Europe’s gas supply as they are far more energy intensive than Russia pipeline gas.
As the gas price crisis last autumn demonstrated, markets were tight before the war in Ukraine and there is little spare LNG. Consequently, Europe will have to outbid other consumers, effectively offshoring its energy insecurity. It is important to recall the conclusions of the IEA’s Net-Zero study, that investing in new oil and gas exploration and production is not compatible with the Paris Agreement. At a recent energy conference in Houston, U.S. Energy Secretary Jennifer Granholm said: “We have to responsibly increase short-term supply where we can now to stabilize the market.”
It is one thing to make the most of existing fields and even invest in short-cycle production, like US tight oil, but it is quite another to invest in new large-scale, long-term projects and infrastructure development.
Not only are they not a solution to the current crisis, they could also result in ‘carbon lock-in’ or end up as ‘stranded assets.’ The ‘no regrets’ solution is not more fossil fuel production. It is a reduction in fossil fuel consumption through efficiency, demand reduction, and an increase in clean energy sources. It is unclear how fast this can be achieved, but security concerns may accelerate the pace of change.
In the short-term, emissions may be higher than they would if Russia had not invaded Ukraine. Longer-term there is a chance that they may lower if Europe is determined to reduce its reliance on fossil fuels in absolute terms, not just Russian oil and gas. However, we should avoid slogans such as ‘energy independence’.
The transformation to a clean energy future comes with its own security challenges, witness the growing concerns about critical materials and clean technology supply chains. Equally, electricity grid interconnection, like pipelines, is dependent on large scale, immovable infrastructures.
Achieving Net-Zero in a Zero-Sum World
Discussions at COP-26 made clear the diverse views on both the urgency of the climate crisis and the pathways to a low carbon future. This has always been the case, but the war in Ukraine may serve to fracture the world further.
Europe may be embarking on a quest for greater energy security, but climate change action is a global challenge. All the scenarios, and there are many, that deliver significant climate progress require on a high level of international cooperation. The current energy crisis may stiffen the resolve of many emerging economies to stick with coal, believing it to be more secure.
Equally, the current very high cost and precarity of LNG, which has become a zero-sum market, may lead to a rethink on the role of natural gas. Many may now avoid it, aiming to leapfrog from coal to clean at some future date.
Finally, even before Russia’s invasion, the pandemic had already set back the progress of achieving energy access in the global south. COP-26 shone a light on the failure of the developed economies to deliver the promised level of climate finance. They should not allow an increased commitment to defence spending to further undermine their obligations.
The purpose of COP-27 in Egypt this autumn is to ratchet up international climate ambitions. In the current context, the greater challenge may be engendering a spirit of cooperation in an even more fragmented world.
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