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Abu Dhabi, UAEFriday 5 March 2021

Why a new energy mix will provide the bedrock for a more stable future

Coal is high-carbon, polluting and dangerous in other ways, and can easily be replaced by renewable energy, nuclear or gas power

A coal-fired power plant in Niederaussem, Germany. Coal is the most exposed fossil fuel. Reuters
A coal-fired power plant in Niederaussem, Germany. Coal is the most exposed fossil fuel. Reuters

The once reliable Democratic-voting state of West Virginia is now solidly Republican. Areas of north-east France strongly back the far-right National Rally. Parts of the English Midlands and north supported Brexit and turned from Labour to the Conservatives in the 2019 election. The common theme linking these areas is important for future national and global energy politics.

These regions were, and in the case of West Virginia still are, major coal-mining centres. Left behind by the long, slow decline of coal and its associated heavy industry, they have turned to right-wing and populist politicians promising easy but false solutions.

Now imagine the replication of this issue on a global scale. Countries representing more than 75 per cent of world carbon dioxide emissions have committed to net-zero targets by 2050 or 2060, including the EU, the UK, China, Japan, South Korea and, most likely, the US under Joe Biden, who will be sworn in as US president on Wednesday. A new graduate today can expect to be working in a near-zero carbon world well before retirement.

Coal is the most exposed fuel: high carbon, polluting and dangerous in other ways, and easily replaced by renewable energy, nuclear or gas power. Coal mining employs about 50,000 Americans, 50,000 Australians, 80,000 Poles, about half a million Indians and about five million Chinese. These are not particularly large numbers in proportion to total employment, but they are concentrated in certain areas and support local economies.

The international picture for oil and gas is more challenging. Although employment is lower in these capital-intensive industries, they sustain the government budgets and economies of entire countries.

Oil and gas will be valuable sources of energy and feedstock beyond 2050. They will focus on non-emitting uses such as petrochemicals, hydrogen generation and power generation with carbon capture and storage.

But the total quantities extracted, particularly of oil, will probably be much less while prices will be lower. The major low-cost producers such as the GCC should increase their share of the market, and so can countries such as Iraq, Iran and Russia if they invest sufficiently and lower the carbon footprint of their upstream industries.

Nevertheless, margins and total revenue will be significantly reduced, especially relative to growing populations. Hydrocarbons will no longer suffice as the economic motor.

The oil price crash in late 2014 and the coronavirus-induced slump last year have been dry runs for a transition away from petroleum. Opec’s oil export revenue dropped from $1.2 trillion in 2012 to $322 billion in 2020.

Demand has probably yet to hit a record high. Cycles of underinvestment could episodically fuel prices. However, this will only trigger further replacement by non-fossil fuel technology.

The Opec+ agreement on production cuts has succeeded in stabilising the market for now. But indefinite continuation will result in the rapid loss of market share – to competing producers such as the US in the short-term and electric vehicles and other alternatives in the long term.

This relatively brief episode of low prices has still put an economic strain on all oil exporters, sometimes compounded by political problems.

Still, some countries, notably the UAE and Saudi Arabia, have made quite significant steps in improving the business environment and investing in new industries. Angola and Oman have embarked on necessary but painful and challenging reforms.

Others, such as Algeria, Kuwait and Russia, have settled for uncomfortable stagnation.

A fourth group – notably Libya, Venezuela, Iran and Iraq – is struggling through crisis. And a final set that is emerging as oil and gas producers – countries such as Guyana, Surinam, Mozambique, Tanzania and Uganda – faces a sudden recalibration of expectations and horizons.

Even those that do realise the magnitude of the challenge have to move urgently. 2050 may seem far away but it is practically tomorrow in terms of creating large industries, educating a new generation and transforming the economic structure.

The diminishing economic role of fossil fuels could leave behind spots of depression on the world map, with far-reaching and unpredictable social and political consequences.

Some petroleum exporters such as Norway and Malaysia already have diversified economies.

The relatively small populations and large sovereign wealth savings of others allow a more gradual shift. Those countries that do not successfully adapt face a range of outcomes. On the one hand, they might slip gradually into poverty or, at best, mediocrity. On the other, they could undergo radical and, perhaps, violent change or even collapse.

Venezuela has already previewed this outcome. What was once the wealthiest and most democratic state in Latin America has over the past two decades suffered the worst economic ruin any country has experienced in peacetime.

When part of a country loses its economic lifeblood, there are at least partial remedies. The more capable, ambitious and young move elsewhere. The government provides aid and local development funds. Eventually, as in some former industrial areas of Europe, new businesses and livelihoods spring up.

The Netherlands turned its coal mining company, DSM, into a maker of chemicals, then pharmaceuticals and advanced materials, employing the former miners.

Nations have few such parachutes. Wealthy Venezuelans can hide in gated communities or move to Miami, but the global climate is not friendly to refugees, even less to perceived economic migrants.

Some parts of the international community, while prolific consumers of fossil fuels themselves, may not have much sympathy or compensation for states they consider as climate villains.

I have suggested before that one role for a reimagined Opec could be to guide its members to low-carbon prosperity. Other oil-producing states, notably Norway, are willing to share their expertise. A just transition is not just morally preferable but offers a more stable and successful future world.

Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis

Updated: January 18, 2021 03:03 PM

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