1. Introduction
The world economy is undergoing an energy transition from ‘hydrocarbon molecules to electrons’ – that is, from the use of fossil fuels to greater reliance on low-carbon electricity produced increasingly by renewables. Past experience and an abundance of analysis of earlier energy transitions suggest a number of questions, all of which need to be addressed if we are to understand what is going on in the energy economy now, and what the future implications of this transition might be. These questions are potentially very large, and many do not have obvious or clear answers. The purposes of this research paper are to summarize some of the key issues arising from these questions, to explore in particular how they link together, and to generate debate.
What are the triggers and reinforcing factors that drive this transition?
Specific triggers have caused previous energy transitions. Reinforcing factors, usually revolving around changes in technology affecting relative prices, have then supported each transition once it has been triggered. The current transition was started by environmental concerns – initially, over climate change and carbon emissions – which ultimately led to the Paris Agreement reached at the 21st Conference of the Parties (COP21) in late 2015. More recently, there has been growing concern over local air pollution.1
In this author’s view, the need to reduce air pollution is likely to be a much stronger global driver of policy than activism over climate change, because the effects of poor air quality are so immediate and apparent at a local level. The issue exemplifies the dictum that ‘all politics are local’, as one need only walk down a street in some cities (or let one’s children walk to school) for the relevance of air quality to be immediately obvious.
Meanwhile, the reinforcing factors for this energy transition are likely to include the following: the falling costs of renewable-generated electricity; the rise of electric vehicles (EVs); a variety of other technological changes affecting energy demand, such as LED lighting, artificial intelligence, big data and blockchain computing; the possibility of another oil price shock; and rises in oil product prices that are occurring independently of movements in crude oil prices – a phenomenon sometimes known as ‘OECD disease’.
What is the speed and depth of the transition?
This author’s view is that the speed and depth of the current transition are being significantly underestimated by leading industry players and analysts (referred to in this paper as the ‘energy establishment’). Their forecasts seem to persist with a ‘business as usual’ view of future demand for hydrocarbons. Yet there is much evidence that the energy establishment has consistently underestimated the rate of deployment of renewables.
Is the long-term demand for oil being overstated?
Putting all the above factors together, this research paper argues that many forecasters who are central to the energy establishment are overstating long-term demand for oil.2
Why is the energy establishment underestimating the speed and depth of the transition?
Several factors can explain the consensus among many forecasters in understating, or ignoring the nature of, the transition. These include ‘group think’ and a safety-in-numbers mentality; the institutional culture of the International Energy Agency (IEA); and the need for the international oil companies (IOCs) to maintain the confidence of their shareholders. By contrast, the financial community is far more aware of the transition, as evidenced both by the global campaign in support of divestment from fossil fuels and by other moves to persuade companies to reduce hydrocarbon use.
What policy options are available to countries that will face the negative consequences of the transition?
The energy transition presents serious challenges to countries that are heavily dependent upon exporting oil and oil products (a number of such countries are identified in this paper).3 The obvious solution lies in diversifying their economies. Yet while much lip service is paid to this imperative, for many countries it is already too late to effect the changes required. There are serious barriers to economic diversification, largely derived from political constraints that are unlikely to go away. Without meaningful restructuring of their energy sectors and economies, a number of oil-producing countries – especially in the Middle East and North Africa (MENA) region – will face serious consequences in the coming years. The resulting economic, social and political upheaval could potentially result in armed conflict and the emergence of failed states.
Without meaningful restructuring of their energy sectors and economies, a number of oil-producing countries – especially in the Middle East and North Africa region – will face serious consequences in the coming years.
What are the geopolitical implications of the current energy transition as it unfolds?
The geopolitics of energy has developed into a huge area of study, analysis and indeed contention. The contention arises because hydrocarbon energy resources are a result of geography, and are unevenly distributed between nations. Some producers enjoy a surplus, which offers the possibility of exporting hydrocarbon resources. Some consumers have a shortage of domestic hydrocarbon resources and must rely wholly or partially on imports. These structural imbalances in natural endowments (and hence in supply) are fundamental to the geopolitics of energy, which are informed by the dynamics of energy trade, developments in energy markets, and the potential of such markets to be controlled and managed.
Geopolitical calculus also involves considering energy transit routes, the risks pertaining to particular routes, and conflict over access and security issues. By contrast, renewable electricity can be deployed at a variety of scales: at large centralized facilities, such as offshore wind or gigawatt (GW)-scale solar arrays; or at a smaller scale, in a highly decentralized way and without the deployment of large-scale grids.4 Thus many of the constraints that underpin the geopolitics of energy in the context of traditional hydrocarbon trade disappear where renewables are involved. This potentially means that as this energy transition proceeds, conflicts over energy are likely to be diluted – although the change may not be immediately apparent given the likely lingering impacts from geopolitical manoeuvring over hydrocarbons.
1 Obviously this differs with the geography. For example, in the UK climate change has been paramount, while in China and India air pollution is the predominant concern.
2 The current energy transition has clear implications for all fossil fuels. However, in this paper the focus is on the impact on oil markets, if only because the geopolitical impacts associated with oil are far greater than those for other fossil fuels.
3 These challenges apply to all countries exporting hydrocarbons in any form, but the focus of this paper is on oil to keep the analysis manageable.
4 As will be developed, this might be rather more complex than this simple statement suggests.