The pandemic has triggered an economic crisis such as the world has never seen. The economic downturn was followed by an unprecedented rebound. It all happened so fast. It left us with a torrent of numbers and seemingly inextricable questions.
Welcome to PCR, a special limited series by The National in which we try to make sense of the numbers and answer important questions on the Post Covid-19 Recovery.
Listen to prominent economists and business leaders as they explain the challenges and opportunities of a unique and often complex economic recovery.
Join Mustafa Alrawi, assistant editor-in-chief as he explores the many features of the Post Covid-19 Recovery.
Episode 6: the post-pandemic outlook for energy
Higher energy prices and shortages are among the main features of the economic recovery.
The world faces multi-factorial equations where any solution must comply with climate urgency and the need for energy transition, while at the same time avoid energy shortages and energy-related political tensions.
The post Covid recovery has exposed many problems and underlying weaknesses of the global energy supply. Current energy tensions may well provide valuable lessons for a smooth green energy transition.
Guests:
Dr Daniel Yergin, vice chairman of IHS Markit. A Pulitzer-prize winning author. His latest book is The New Map: Energy, Climate and the Clash of Nations.
Robin Mills, chief executive of Qamar Energy and author of The Myth of the Oil Crisis.
Petya Koeva Brooks, Deputy Director in the IMF's Strategy, Policy, and Review Department.
Silja Baller - Insights Lead, Frontier Insights, the World Economic Forum.
Laurence Boone, Chief Economist at the Organization for Economic Co-operation and Development, OECD
Narrated by: Mustafa Alrawi, The National's assistant editor-in-chief
Episode transcript:
Mustafa 00:10
When delegations from a 197 countries gathered in Glasgow in early November 2021, and as heads of state competed with ambitious pledges and firm commitments to lower carbon emissions, there was one big elephant in the room. Indeed, the timing of the Cop26 Climate Summit coincided with perhaps the worst energy crisis in decades, casting a shadow over the post Covid-recovery and the future of the energy transition.
00:40
I think the thing that's most striking to me is the fact that at the same time as the Cop26 Glasgow climate conference was taking place, both Europe and Asia were gripped by an energy crisis.
Mustafa 00:58
Higher energy prices and shortages have become one of the main features of the economic recovery. The causes behind the recent energy crisis, however, predate the pandemic and are related to a host of reasons.
01:09
So the kind of complicated set of factors that is all combining to push up gas and electricity prices particularly high so that crunches have been coming.
Mustafa 01:20
The choices facing world leaders and economists today are made more complex by the recent energy crisis. These choices involve multifactorial equations, where any solution must comply with a climate urgency and the need for energy transition, while at the same time avoid energy shortages and energy-related political tensions.
01:40
The cost of doing nothing is just much larger than any transition costs that we may have in the in the near-term.
Mustafa 01:53
Welcome to PCR. I'm Mustafa Alrawi, your host on this special podcast series from The National where we discuss the post Covid-19 recovery. In this episode, we set out to explore the challenges and opportunities of the energy transition, as governments are struggling to reconcile two economic imperatives, the climate emergency and energy security. The post Covid-recovery has exposed many problems and underlying weaknesses of global energy supply. The fast economic rebound has exacerbated price pressure, and in many cases, instigated political tensions, both national and international. More importantly, the current energy crisis sounds like a warning or a call for a more cautious, realistic approach when planning for the energy transition. It seems that the economic recovery and the ongoing energy strains might well provide policymakers with valuable lessons on how to avoid energy crunches when executing the green transition.
[The year] 2022 kicked off with worrying and often confusing news headlines, leaving many of us wondering about the future of the economic recovery and with serious questions about global energy supplies. This is all taking place as the world heads towards a greener and more climate-friendly economy.
03:21
The national average is now $3.42 a gallon, up $1.52 from a year ago, because supply is not keeping up with surging demand.
03:30
Well, I think the irony is not lost on the oil market that you have an administration that really wants to limit the amount of fossil fuel use. Now they want Opec to do something about it and solve the problem.
03:44
Because energy supply in the Europe and UK really just relies on gas and wind, this is the highest price ever and it's also unprecedented.
03:54
The power crunch in some parts of China has shut down factories and left some households without electricity. The shortages come as coal prices rise, and in some cases, because of efforts to meet official energy use targets.
04:09
The last seven years have been the world's hottest, according to new climate data from the EU's satellite system.
Mustafa 04:25
These are just some of the headlines that clearly show the urgency of the climate [crisis], while also stressing the risks of energy crunches during the energy transition. But how did we get here? What happened for oil prices to double in just one year? Is the pandemic responsible for the world's energy woes? Or are there some other factors that explain the current stress? And how is the latest Omicron wave affecting the energy outlook?
04:50
A kind of complicated and multifactorial and slow-rolling crisis?
04:55
Robin Mills, chief executive of Qamar Energy and author of The Myth of the Oil Crisis.
05:01
Ultimately, mainly it stems from the pandemic, and then the very strong economic rebound from the pandemic. What we've seen is, firstly, governments putting a lot of money into the economy, particularly in the US and pumping up consumer spending. And secondly, people spending a lot more on physical goods. So, if people are not able to go out and socialise and to travel so easily, but [if] they have a lot of money in their pockets, you know they spend on things, they spend on house redecorations, on consumer goods etc. And all of these things, of course, are quite energy intensive to produce. And, therefore, this feeds through into the supply chains generally. We've seen a lot of stories about supply chains being very stretched by very long waits for shipping, and so on, and a shortage of all the raw materials that go into these goods. We're seeing that across [sectors] so it's not just [in] energy that we're seeing this; we’re seeing this feeding through into silicon for solar panels and a shortage of semiconductors for chips for electronic goods, computers, and new cars and so on. So it's not just in energy, it's a multifaceted challenge.
06:11
The surge in the Omicron cases is certainly changing the energy outlook and the economic outlook, but obviously not as dramatically as the previous waves of the virus.
06:22
Dr Daniel Yergin, vice chairman of IHS Markit, a Pulitzer Prize-winning author. His latest book is The New Map: Energy, Climate, and the Clash of Nations.
06:33
We've lowered our growth rate for 2022 to 4.1 per cent. And we can see the disruptions, for instance, particularly in terms of air travel, and the cancellations of flights – thousands and thousands of flights have been cancelled – and that's a big hit on jet fuel demand. We don't see it having a big impact on the other components of energy demand.
Mustafa 07:08
A fast economic rebound and high consumption of goods during and following the pandemic, explained in part the energy crunch we witnessed during 2021. And that continues today in 2022. But there is more to it than a conjunction of circumstances. There are deeper and structural causes behind the current energy shortages. The roots of the problem go back years, when oil and gas prices were relatively low, and there was an under-investment in the fossil fuel sector. It seems that the under-investment in traditional energy sources was not met with enough investment in renewable energy sources.
07:51
Robin Mills, chief executive of Qamar Energy, and author of The Myth of the Oil Crisis.
07:56
We had a period of very low oil prices between late 2014 and 2019. And then, of course, we had an epic all-time crash in 2020 because of the pandemic, the lockdowns and that meant a period of under-investment in new supply. There were very few in the past couple of years, very few investment decisions on new liquefied natural gas projects. While at the same time, demand has been growing strongly, particularly in China, so that crunches have been coming. And we've had a number of technical breakdowns. So these are things that really could happen at any time, perhaps exacerbated by the pandemic, because normal maintenance didn't go on as it should have done, in 2020. But we've seen breakdowns of liquefied natural gas plants around the world, in Angola, in Norway, in Australia, and in other places. And this has all helped to tighten what was already a pretty tight market. Then, I think we've seen – in the case of Europe, in particular, you know – of Russia taking advantage of this scene that the market was tight. And taking advantage, too, to put some political pressure on the Europeans over the approval of the Nord Stream 2 gas pipeline, and also issues over Ukraine, which has historically been a major transit country for Russian gas; the Russians are trying to get away from using that transit route. So you’ve got a complicated set of factors that is all combining to push up gas and electricity prices particularly high. Now, you know, there's an angle to this as well, is this part of the energy transition to low carbon sources, a transition to renewables? Is this showing that renewables are unreliable? Not yet, the renewables have not been a significant contributor to this crisis. There has been a period of low wind generation in Europe that hasn't helped. Because if wind isn't generating so much, that puts more pressure on gas generation. Carbon prices in Europe have gone very, very high, because if gas prices are high, people want to burn coal but when they're burning coal, they need carbon credits that pushes up the price of carbon credits. That hasn't helped either. It's not the primary driver for this crisis though – this is more the story of a rapid rebound in demand combined with a few years of under-investment in new energy supplies.
Mustafa 10:25
Upstream investments and expansion plans in oil and gas have been scaled back during years of low oil prices. It takes time to increase upstream investments and restart idle energy sources and it is often trickier than simply shutting down oil wells. Adding to this is the continued risk of new variant outbreaks; the Omicron wave has caused huge disruptions in the slowly recovering travel industry. Disruptions cause uncertainties. Economic uncertainty is the very definition of energy price volatility.
11:00
Volatility is always a characteristic of energy markets.
11:04
Dr Daniel Yergin, vice chairman of IHS Markit, a Pulitzer Prize-winning author – his latest book is The New Map: Energy, Climate, and the Clash of Nations.
11:13
I have never seen the kind of volatility that we've seen over the last 18 months, from negative prices to prices as high as around $80 a barrel and expectations that they might go higher. So, this is a very dramatic shift. I think, in the midst of the first year of the pandemic, there were some very negative forecasts and expectations for energy demand. And my reaction was always: you can't generalise when you're in the middle of a lockdown [and] pandemic. We expect in 2022 that oil demand, on a global basis, will be back to where it was in 2019, particularly if the Omicron [wave] goes up sharply and then goes down sharply. There was a lot of pent-up demand and consumers who had money to spend and all that's already aided back in the economy, and that takes the form of increased energy demand.
Mustafa 12:19
Is this energy shock a one-off resulting from a unique conjunction of circumstances? Or is it the first of what will be several crises, resulting from straining too hard to bring 2050 carbon reduction goals rapidly forward, potentially prematurely choking off investment in hydrocarbons, thus triggering future shocks? This question put forward by Daniel Yergin, in an article he wrote for The Atlantic in late November 2021, is central to understanding the impact and the implications of energy choices and policies. We now understand that the post-pandemic recovery, the energy crisis, climate urgency and the future of the energy transition are indeed intertwined.
13:07
Dr Daniel Yergin, vice chairman of IHS Markit, a Pulitzer Prize-winning author.
13:12
I think the thing that's most striking to me is the fact that at the same time the Cop26 Glasgow climate conference was taking place, both Europe and Asia were gripped by an energy crisis, to have natural gas prices for LNG go up 10 times, for a period, but they normally were to have shortages of coal, to have China ration electricity. That was all an energy crisis and elements of that continued today. And it raises for me the question of whether we're looking at what I've called pervasive under-investment in the energy sector as economies rebound, and what drove those energy crises in Europe and Asia was the strength of the economic rebound, coming out of Covid-19 and the stress that has put on energy systems.
Mustafa 14:24
The increasing demand on gas and oil is not expected to divert the world's attention away from the looming climate crisis. Instead, it should inspire policymakers to accelerate the pace of the energy transition. However, the current energy crisis also highlights the many complexities and risks of the energy transition.
14:45
The issue of the green transition and more generally, achieving green, sustainable and inclusive growth is something that we worry about and we spend a lot of our time and energy thinking about.
15:03
Petya Koeva Brooks, deputy director in the IMF’s strategy, policy and review department.
15:08
In some ways, we don't have many options. The cost of doing nothing is just much larger than any transition costs that we may have in the near-term. But more generally, our view is that there is a comprehensive package, which involves green investments, increasing the price of carbon and compensating those who are affected by the transition. So, with those three elements, there is a way to move forward and to make the transition in a way that is also job-friendly. This is actually one of the areas where we are doing more research and one of the topics of our analytical chapters that we are going to have in the spring is exactly on that: green jobs.
Mustafa 16:16
The start of the pandemic in 2020 - as governments and advanced and large economies started rolling out stimulus packages, there was a lot of talk of how the economic support would accelerate the green transition. In Europe, the US and China, governments committed to spending large parts of that support money for green energy and green jobs. So how did that work? Are there any clear signs and tangible results of the so-called green packages? And how do economists assess the commitments made at Cop26?
16:50
Their recovery will have to be an accelerator of the green transition.
16:55
Silija Baller, insight lead, Frontier Insights, World Economic Forum.
17:01
I think the urgency for the transition is extremely clear. We had, again, a number of extreme weather events this year. When it comes to policy, progress is being made, but not fast enough. And I think the outcome of Cop26, which is just concluding, is largely being seen as mixed, with some but not enough progress in terms of the pledges to reduce emissions. Now, as you say, one opportunity and avenue to make progress on this would be well-designed stimulus packages. But it's not entirely clear that the best use has actually been made of this opportunity. There are some very good efforts. The EU, for example, has the highest proportion of funds currently earmarked for the green transition, about 30 per cent. However, we did a survey with our community of chief economists, and there, the transformative power of some of the packages of the major economies was judged more as moderate. One other avenue, besides the stimulus packages, would of course be a carbon tax. There's a very strong consensus by now that this is probably the optimal policy tool to tackle emissions in theory. But again, as our latest chief economists survey shows, there are some concerns about how easy this will be to implement – the costs of having such taxes are coming into view for both consumers, as well as for firms. And it's becoming clear that there will need to be some complementary policy measures in order to make this possible. There should be considerable opportunities for companies to capitalise on the green transition. In particular, it seems like the double transformers – those companies who are transforming both digitally and in the green way – are getting ahead of the curve. It seems like there's a levelling of the playing field going on. So it's not necessarily the companies that were successful in the past that are necessarily going to be successful in the future and vice versa. There's really a chance for new companies to come in and to invest in both digital and green and get ahead of the curve of their industry. Similar things are true also for workers who are able to acquire green skills right now and digital skills. There's also a levelling of the playing field there and new opportunities.
19:24
A few weeks ago, the entire planet gathered in Glasgow to discuss climate change.
19:31
Laurence Boone, chief economist at the Organisation for Economic Cooperation and Development (OECD).
19:38
And they've been, you know, committing to very high ambition levels. But when we look at the facts, when we look at the data, the commitment is high but action is actually quite low. So one of the key recommendations we're making in this report is that it's really time to actually address climate change and do that in a co-ordinating, in a globally co-ordinated way, so that all the actions that are taken are actually globally efficient.
Mustafa 20:19
The message the world has expressed at the climate summit in Glasgow in November 2021 was a full acknowledgement of the climate emergency. That was unanimous efforts such as the world is rarely seen. The call for more ambitious climate action comes at a time when the economic recovery is already suffering from energy shortages. Will the current situation hamper the green momentum? Maybe not. But at the very least, the current energy shortages are reminding policymakers of the risks of the energy transition in the absence of global and concerted efforts.
20:55
Robin Mills, chief executive of Qamar Energy and author of The Myth of the Oil Crisis.
21:01
We've seen a couple of different messages, right. And this depends politically what mindset, really, people have entered this crisis with. So, there is a pro-environmental and pro-climate mindset particularly in Europe, that says “okay, this is proving that traditional energy, oil and gas is expensive and unreliable, we’re too dependent on Opec, we’re too dependent on the Russians, we need to get away from this, we need to build renewable energy more quickly, and develop other sources from green hydrogen and so on which can supplement or ultimately replace gas and so on”. I think that will clearly happen, there clearly will be an even stronger push – in the EU in particular – to accelerate renewable deployment, wind, solar, and other renewables to try to diminish the amount of oil and gas that’s used. We've seen a definite acceleration in the take-up of electric vehicles, which of course are replacing oil. Very strong sales in the UK, for example, of electric vehicles, almost 20 per cent of new car sales now – so really rising very dramatically. So there will be that kind of a push. The other side of it is more, partly by the traditional energy industry, but also by more disinterested observers of the energy scene, who say “we're not against renewables, but this shows that the transition to renewables will not be a smooth and easy one. And it's very difficult and dangerous to ignore, or to try to rule out traditional energy sources in the interim”. So how do we manage that very difficult transition smoothly and ensure that energy supplies remain affordable and reliable through the transition? I think you've seen this pushback at a number of energy conferences recently. It's a tricky balance to strike, because we know that we need to decarbonise the energy system very quickly. Ultimately, that will mean, and that ought to mean a more robust and a cleaner and a more diversified energy system. But in the interim, we do have these periods of severe strain and stress. As I say, this current energy crisis is not really the fault of the green energy transition. But you can easily see how a too-rapid transition or a poorly planned transition could cause a crisis like this one.
23:27
Robin Mills, chief executive of Qamar Energy, and author of The Myth of the Oil Crisis.
23:32
The Opec market share, let's say, which for a few years has been around 30 per cent, slightly over 30 per cent, of the world's oil market, that in the energy transition the forecast suggests will rise to over 50 per cent. Then, if you add the other Opec plus countries, Russia particularly and some others, that group will have well over 50 per cent of the world oil markets. So even if the market is shrinking, and is smaller, that group will be much more influential and have potentially much more control over oil prices and the level of oil production. You can see potentially a similar situation with European gas and suppliers from Russia, again. Europe may be trying to get off gas and it may be replacing it very, very quickly with renewables. But gas will still remain a very important fuel for decades to come and really a critical one, particularly in winter periods. It's a bit of a paradox. And I think this debate is maybe starting to emerge again. How do you ensure that energy suppliers and oil and gas supplies remain reliable and diversified, but at the same time, you're rooting out investments in many countries and trying to wind down the oil and gas industry in some countries?
Mustafa 24:48
What Robin Mills is saying about the need to ensure the diversity and reliability of energy supply during the energy transition is echoed by many energy experts. There are concerns and doubts that the complexity of the energy transition is not fully understood by policymakers. In essence, what experts are saying is that more investment in renewable energies should come hand in hand with investment in decarbonising existing gas and oil industries, at least for a decade or so. One healthy effect from the current energy crisis is that the debate about the energy transition has broadened to include the risks of disruptions, as well as the [Global] South-North divide.
25:30
Dr Daniel Yergin, vice chairman of IHS Markit, and a Pulitzer Prize-winning author. His latest book is The New Map: Energy, Climate, and the Clash of Nations.
25:39
It's kind of forgotten in all the discussion that hydrocarbons are still 80 per cent of the world’s energy. And that it's highly likely that the demand is going to continue to grow for oil for maybe a decade or so, and for natural gas for a longer period. So any efforts, any drive on climate needs [must] also take into account the need for carbon capture and other technologies. But I think there are a couple of reactions I had, that one is just kind of being realistic. In my article in The Atlantic, I quoted a very prominent French economist, Jean Pisani-Ferry, warning that you could create an economic situation that reminds one of the turmoil of the 1970s, if you're not realistic about it. So that was one consideration. A second is that, you know, the technologies are there, the technologies will be developed, but they take time, whether you're looking at shale in the United States, or the MRN, vaccines that people have taken from Pfizer and Moderna, basically those technological developments developed over 30 years, they didn't happen overnight. Thirdly, I think that it seems pretty clear that there's a real gap between the developed and the developing world. And would I talk about the possibility of a new North-South divide on climate, because developing countries are also saying, “By the way, economic growth and reducing poverty are also very important. We need energy to do that”. India is building a $60 billion natural gas infrastructure system to reduce pollution. They want to get petroleum products to people in villages, so they don't burn, cook with wood and waste, and have indoor air pollution. So I think that perspective of the developing world, I think, is starting to become clearer. But that's going to be part of the picture as well, that the agenda will not just be set by Western Europe and North America, other countries will be part of that discussion, too. The objectives have to be adjusted and the pace has to be adjusted. I'm glad you mentioned energy security, because that's what really the crises in Europe and Asia were about and continue to be about, which is that economies need energy. And if you don't have them, you have economic problems, or you have political problems. It was striking in the United States to see the US Secretary of Energy coming out and saying the US needs more oil production. Towards the end of the year, looking at what's happening with gasoline prices – because if you have the public rebel, if you have consumers rebel, you might get a real political backlash to the whole endeavour. So I think it is a balancing act as you go forward, that this is not a simple problem, and no, slogans don't power economies.
Mustafa 29:07
Well, [as] headlines are focusing on energy shortages, their impact on inflation and the recovery as a whole, it is easy to forget that the fast economic rebound has caused many shortages, not only for energy. Shortages in semiconductors are already causing widespread disruptions in many key industries. As the world is trying to limit its dependence on fossil fuel, it finds itself already gripped with another dependence. Copper, lithium, nickel, cobalt, and rare earth elements are fundamental to green technologies. From batteries and solar panels to electric cars and wind turbines, the world is now dependent on mining for these metals. With the green transition, the economy is expected to depend even more on such elements that are, like oil and gas, vulnerable to price volatility and shortages. With the energy transition comes new risks of shortages, dependency, and even environmental impact.
30:10
We have that term, “Big Oil”, which is used pervasively, at least in many countries in headlines or in news broadcasts and so forth.
30:22
Dr Daniel Yergin, vice chairman of IHS Markit, a Pulitzer Prize-winning author. His latest book is The New Map: Energy, Climate, and the Clash of Nations.
30:32
One of the things I wrote in The New Map and I've been thinking about even more since then, is that you're going to move from this era of big oil to big shovels, because mining is going to become a much bigger question. And the kind of ESG (Environmental, Social and Governance) criteria that investors are applying to the oil and gas industry, they'll also be applying to the world of big shovels, to mining, and to these new supply chains that have to be created. We're right now, we're seeing with the supply chain disruptions we've been having around the world, and their negative impact on the economy. We can see that you have to think about the total supply chain, you can't just think about the results. Wind and solar are great, it's incredible, the cost has come down, we've had a solar revolution in terms of costs, but there's a lot of physical input that goes into those systems as well.
Mustafa 31:51
The post Covid-19 recovery, PCR, is apparently caught between energy shortages and climate urgencies. But it may well prove to be a great opportunity for having a responsible and informed debate on future energy choices. Lessons we learned from the current energy crisis may help us avert future ones. Most importantly, the way the world deals with supply tensions during the recovery may help prepare for a smooth and sustainable energy transition. If you enjoyed this episode, please do subscribe. You can find us on Spotify, Apple Podcasts, or wherever you get your audio content.