By Gideon Osaka
The geopolitical shock of the Ukraine invasion which is fueling higher energy costs continues to cause energy security concerns globally and has put the plan for energy transition at a crossroads as countries shift near-term energy policies back in favour of fossil fuels. Because of the current situation, traditional fuels that were once abandoned by European and American policymakers and investors have suddenly gained new appeal in a post-invasion period of surging energy prices.
The burning of fossil fuels, such as coal, oil and gas, is allegedly the chief driver of the climate crisis and researchers have repeatedly stressed that limiting global heating to 1.5 degrees Celsius will soon be beyond reach without immediate and deep emissions reductions across all sectors. The shift away from fossil fuels, according to them, is vital to avoid a cataclysmic climate scenario. In view of this, world leaders have agreed in the 2015 Paris climate accord to limit global heating to well below 2 degrees Celsius and pursue efforts to limit the temperature rise to 1.5 degrees Celsius. For the latter, the International Energy Agency (IEA) has warned that no new oil and gas projects are possible.
Russia’s invasion of Ukraine is now on the cusp of entering its fifth month, amplifying concern about what the conflict means for food, energy and global climate goals. The G-7 had warned that Russia’s invasion has resulted in “one of the most severe food and energy crises in recent history,” threatening those most vulnerable worldwide.
In the wake of the Ukraine invasion, several European countries immediately cut ties with Russia and its main exports-oil and gas, Russia was pumping more than 10 per cent of global crude supplies before the invasion, and these countries which have long relied on Moscow to meet their energy needs, have gone so far as justifying reopening old, polluting coal-fired power plants, even though they had reached an agreement at the United Nations Climate Change Conference last November to rapidly phase out coal. Panic-stricken governments trying to defuse political discontent over soaring fuel prices are even considering gasoline subsidies, seemingly sidelining their climate commitments.
The rush to punish Russia by deserting its energy offerings has led to a short-term surge in demand for traditionally polluting energy sources. For instance, Belgium recently agreed to extend the lives of two nuclear power reactors by 10 years, reversing its earlier ambition to phase out all nuclear generation by 2025. Germany has agreed to keep several coal plants in reserve that were previously slated for shuttering. Also, German power company Uniper announced that it was reviving a scrapped LNG import terminal project on Germany’s north coast in order to bolster domestic energy flows while Germany reduces dependence on Russian imports. That terminal project was originally abandoned in 2020 after it failed to attract enough interest in the market. In Asia, China is prioritizing energy security over climate action in five-year targets to boost fossil fuels. In its energy plan for 2021-2025, China aims to increase production of oil, gas, coal, nuclear, wind and solar energy to prevent electricity blackouts and cut dependence on foreign energy suppliers.
While tackling climate change remains a goal of the Chinese government, the volatility in energy prices triggered by Russia’s invasion of Ukraine has pushed self-reliance up the agenda. In January, President Xi Jinping poured cold water on climate hopes by saying that China needed to “overcome the notion of rapid success” and that “reducing emissions is not about reducing productivity and it is not about not emitting at all either”.
Energy security or energy transition for world’s largest oil consumer?
For the United States, the world’s largest oil consumer, national security priorities are beginning to shape, and possibly eclipse the US energy transition as well. As a candidate, US president Joe Biden made climate change a pillar of his campaign for the White House, promising to decarbonize the U.S. economy, end drilling on public lands, and lead the world in a historic shift away from fossil fuels. On the campaign trail, Biden had pledged to put the nation on the path to zero carbon emissions by 2050 and transform the power grid to be carbon-free by 2035, lofty goals that he hoped to set in motion during the first two years of his administration while his party had razor-thin majorities in Congress.
Since becoming president, Biden has taken several executive actions to address the climate crisis, including tightening federal regulations on vehicle emissions, hydrofluorocarbons and methane leaks, and announcing the administration would purchase electric vehicles for the federal fleet and make federal buildings energy efficient. It also re-entered the Paris climate agreement that pushes countries to make commitments to cut emissions that get tougher over time.
But the administration has recently instead been forced by rampant inflation and a war in Europe to prioritize energy security, leading his administration to unleash record amounts of crude oil from strategic reserves. He announced in March the largest-ever release from the Strategic Petroleum Reserve, and worked with other countries to release oil from their own stocks. The administration has also taken other price-fighting steps, including waiving some requirements for summer-blend gasoline and has approached energy companies about reopening refineries that closed during the pandemic, Bloomberg reported.
Notwithstanding this, oil prices have stayed high surging more than 70% since late last year as global demand rebounds from the depths of the COVID-19 pandemic and as trade flows are disrupted by punitive sanctions imposed on Russia.
The jump in crude prices has contributed to a record surge in U.S. gasoline prices to around $5 a gallon, part of a broad wave of rising consumer prices. The last time gasoline averaged more than $4 a gallon was in 2008. These high energy prices have contributed to U.S. price inflation, which spiked to 8.6 percent in May, up from the previous month but still near a 40-year high, according to the Bureau of Labor Statistics. Energy commodities, a subcategory including oil and natural gas, soared 50% year/year and led the upward charge. Rising gas prices have also helped drive unexpectedly persistent voter anger before November 8 midterm elections where Biden’s Democratic Party is defending its control of Congress.
In obvious frustration from this energy crisis situation, Biden in recent months has called for increased domestic oil and gas production and requested more oil from the producer group OPEC to help curb inflation. This is despite the target he has set to decarbonize the U.S. economy by 2050 to slow global warming.
“At a time of war – historically high refinery profit margins being passed directly onto American families are not acceptable,” the president wrote in mid-June letter to the American Petroleum Institute (API), which represents major oil companies, including ExxonMobil and Chevron Corp. Such companies “must take immediate actions to increase the supply of gasoline, diesel and other refined” products, Biden added. The President in the letter asked them to take “immediate actions” to ramp up supply, telling them that “historically high” profit margins are unacceptable at a time when Americans continue to see soaring prices at the gas pump.
The API who represents more than 11 million American skilled workers keeping the lights on and fuels flowing, in response to the president’s letter said that capacity has been diminished as the Biden administration has sought to move away from fossil fuels as part of its climate change agenda. “The administration’s misguided policy agenda shifting away from domestic oil and natural gas has compounded inflationary pressures and added headwinds to companies’ daily efforts to meet growing energy needs while reducing emissions” API CEO Mike Sommers said in the statement.
Sommers reinforced in the letter to President Biden and his Cabinet 10 meaningful policy actions to ultimately alleviate pain at the pump and strengthen national security, including lifting restrictions on federal oil and gas lease sales, speeding permitting for fossil fuel projects, and rolling back proposals for increased climate disclosure, among other urgent priorities.
Saudi-led OPEC to the rescue
In what could be a response to previous demands by the Biden administration for the Organization of Petroleum Exporting Countries (OPEC) to pump more oil, OPEC and its allies earlier in June agreed to accelerate oil production in July and August, as the cartel’s linchpin Saudi Arabia bowed to US pressure to cool a crude price rally that has threatened to stall the global economy.
The cartel said it would increase output by almost 650,000 barrels a day in both months, up from planned increases of about 400,000 b/d. The Opec+ deal will bring a supply increase already planned for September into July and August — effectively ending the two-year quota system that has helped oil prices rise almost 500 per cent since the nadir of the pandemic crash.
Saudi Arabia and the United Arab Emirates, OPEC’s powerhouse producers, are likely to account for most of the supply increases, with Riyadh earlier signaling it was prepared to increase output to overcome Russian shortages.
The extra supplies marked the first time the Saudi-led Opec+ cartel has deviated from a measured supply policy agreed during the depths of the coronavirus pandemic oil crash two years ago, and came after months of high-level US diplomacy to repair relations with Riyadh.
The White House has since welcomed the “important decision” and credited Saudi Arabia for “achieving this consensus amongst the group members”. It also recognized the “positive contributions of the UAE, Kuwait, and Iraq”.
The OPEC decision came just weeks ahead of a planned visit to the Middle East by US president Joe Biden, which may include a stop in Riyadh despite a rocky relationship with Saudi Arabia’s ruler, crown prince Mohammed bin Salman.
The White House is weighing the visit slated for mid-July to Saudi Arabia that would also include a meeting of other leaders in the Middle East.
The meeting between Biden and bin Salman could offer hope of some relief for U.S. gasoline consumers, as Saudi Arabia is a major oil producer. But it also risks a public humbling for the U.S. leader, who in 2019 pledged to make a “pariah” of the Saudi royal family over the 2018 killing and dismemberment of U.S.-based journalist Jamal Khashoggi, a newspaper critic of many of the brutal ways that Prince Mohammed operates.
Biden vowed to reduce U.S. reliance on Saudi Arabia, the so-called “central banker” of global oil markets, and made reviving the nuclear deal with Iran – Riyadh’s arch-enemy – a top priority.
A nuclear deal with Iran that eases U.S. sanctions could increase global oil supplies by 2 million barrels daily, helping reverse the ongoing shortage. However, reconciliation with Iran has never been popular with U.S. voters, which is why former President Donald Trump torpedoed the original Iran deal. Biden’s attempts to resurrect it have floundered, and officials in Washington and Tehran are pessimistic it will happen.
And it’s not just Saudi Arabia or OPEC that the White House is turning to for more oil. President Biden has eased sanctions on Venezuela, allowing European oil companies operating in the South American country to export more oil. The move empowers Venezuelan President Nicolas Maduro, a brutal dictator that the Trump administration hit with harsh sanctions to encourage regime change.