Reconciling the need for energy transition with the economic development of marginal producers of fossil energy

ABSTRACT

Energy continues to be a predominant geopolitical driver of power and dominance in a multipolar world where the main economic powers compete for supremacy. While global warming, human rights and the environment dominate the public ethical discussion, democratic governments´ main efforts focus on economic growth, international cooperation and wealth distribution, while a growing group of nationalistic and autocratic regimes focus on geographical dominance and the prolongation of their tenure. In the first instance, access to secure and affordable energy is critical to sustain the democratic economic model. In the second, energy is a strategic source of income that allows for the funding of arms, the military, and the national security apparatuses.

The author argues that the public ethical discourse, while well founded and sound, is being used undercover by some of the autocratic regimes, whose tenure is based on energy dominance, to protect their political interests and suppress eth emergence of energy supply alternatives to consuming countries, and the emergence of competitors in the energy markets.

Non-dominant democracies that rely on their energy resources to support their economic growth by supplying their internal energy needs and generating export revenue are feeling international and internal pressure to change their development model, to suppress the production of fossil fuels and to diversify their export mix and their energy supply matrix.

A sound energy policy for the energy transition in less developed and geopolitically non-dominant countries must accommodate the development of their natural endowments to support their economic progress with a rational and well supported transition of their internal energy consumption to a cleaner supply matrix.

As the world primary energy consumption matrix evolves to more renewable technologies, the window of opportunity for energy export revenue closes, thus suggesting a need to accelerate the development of the fossil fuel endowments of fossil fuel exporters.

Introduction

The invasion of Ukraine by Russian troops has laid bare the inconvenience of Europe´s dependence on Russian energy. This massive geopolitical event has compounded the difficulties of the much-sought transition of the world towards cleaner energy sources. The combination of the need to engage in a worldwide coordinated energy transition, the imbalance in energy supply and demand after two years of the COVID-19 pandemic, and the events in Ukraine, has amounted to a perfect storm of countercurrents in proposed energy policy solutions to the needs of energy in the immediate future, as well as in the geopolitical strategies that have justified the most important recent international conflicts.

The energy supply and demand puzzle is superimposed upon the more subtle battle for supremacy among the most prominent economic-military powers of the world. Since the industrial revolution of the nineteenth century, energy and the military strategies of the world powers have had an intimate connection and a strategic inter dependence.

Just as in the early and Middle Ages of the Christian era, four dominant powers coexist in the world amidst continuous friction and a varied collection of conflict areas. Today, the United States, Europe, Russia, and China compete for supremacy and the role of energy that follows their individual access plays a dominant role in their approach to military and economic strategies.

Access to natural resources today (i.e., energy) and in the future (i.e., strategic minerals) underpin the geopolitical aspirations of the four dominant economic and military powers of the world and project a shadow on the economic policies and the politics of resource-rich countries in the developing world.

Energy continues to be a source of geopolitical dominance and conflict

While access to plentiful and affordable energy is a precondition for a competitive economic development, the four dominant powers enjoy a very different endowment base, and consequently a different approach to external access of these resources.

Starting from west to east, the United States has repositioned as an energy power in the current century, after the hydraulic fracturing technique surged during a period of exceptionally high prices of oil and gas in the second decade. In fact, the overriding concern about a ‘peak oil’ situation created by resource scarcity rapidly gave way to the unlocking of vast resources in the United States and also in other parts of the world. In consequence, America´s approach towards the Middle Eastern energy producers has shifted from an alliance based on energy security to a military alliance aimed at containing the Iranian and other regional religious threats.

Europe has perhaps an opposite evolution, as the North Sea resources reached a peak of production and the region had to rely increasingly on imported oil and gas from Russia and the Middle East. Europe´s approach to energy security is mostly based on market-based collaborative arrangements and the construction of infrastructure for imports from a variety of origins. Even if at the European Commission level a reference limit of about 30% of reliance of supply of a given energy commodity from a single energy source has been sought, some countries under the influence of Russia have allowed for a greater reliance from it. The rigidity of the dominant reliance on pipeline gas from Russia makes this energy source more critical for Europe’s vulnerability to supply interruptions.

Russia, like the United States is also extraordinarily rich in energy resources and has been so for a long time. Therefore, its geopolitical approach to the geopolitics of energy has been more stable and oriented at protecting its share of the markets and to prop up prices to obtain the highest possible revenues for the State.

China, on the other hand, is rich only in coal and relies heavily on imported oil and gas in an increasing degree. Therefore, its energy strategy is based on ensuring direct access to resources and the deployment of state sponsored investments in a variety of countries in the world, with a special focus on Africa and Latin America. China´s approach to energy security is based on the building of long-term relationships with host countries and the deployment of investments in exploration and production to ensure continuous access to the resources under the ground and the operation and production of their own state-owned companies.

The strategic use of global energy-related political issues of concern to the public

The dominance of fossil energies is bound to come to an end in the next few decades. The effects of such fossil energies on the environment, human rights and global geopolitics generate increasing pressure in that direction. Those prospects stress the need of energy rich countries to maintain their market shares and to engage in price-increasing strategies to maximise their revenue

These legitimate concerns have repeatedly been used to generated public pressure on democratic governments to make policy choices that may not necessarily be in the best interest of the economic development of their countries. Policy choices are, after all more often than not, the result of compromises between the interest of pressure groups, and often times to the detriment to the greater public interest.

In the United States, President Biden´s policies on hydrocarbon exploration and development in federal lands had to be reversed after oil and gas prices increased steeply, due a deficit of supply originated in underinvestment in production during and after the pandemic.

Europe also suffered extreme increases in the cost of energy after the pandemic, even before the Russian invasion of Ukraine. Its own negative policies towards traditional sources of energy seemed to lead to a premature dismissal of traditional energy sources, including coal and oil, and to the closure of nuclear power plants.

Russia, on the other hand, has enjoyed windfall incomes from the higher prices of its coal, oil and gas exports to Europe and the world markets. The political pressures of environmental groups in Europe, to abandon traditional sources of energy, seem to have benefitted Russia. Public reports have identified Russian companies as the source of funding for these environmental groups.

In China, despite a determined policy of ensuring access to all sources of energy, internal and external, a combination of factors such as flooding of the coal producing provinces and soaring prices has created an energy crisis that is affecting the credibility of the government and the economic growth of its energy-intensive industry. As in Europe, China´s exposure to energy supply shocks underlines the importance of a sound policy for energy security.

China has a shared interest with resource rich countries willing to engage in long term and well-balanced agreements to explore and exploit their energy resources.

The pressure on small energy producers to shift their economic development model

The international consensus on the need to control climate change, and to limit the increase in the atmosphere temperature to 1.5 degrees Celsius by 2050, has led to a simple formula that distributed the efforts to mitigate carbon emissions on a uniform basis for all countries. Recognising the fundamental injustice of this approach, an assistance fund of USD100 Bn has been pledged by developed economies to help developing countries with the financing needs of their energy transition investments.

The International Energy Agency suggested in 2021 that the world needs no further investments in oil and gas exploration to satisfy the future demand for fossil fuels, as the already discovered resources are sufficient to this end.

These proposals are fundamentally wrong and need to be reviewed to address the historic responsibilities of developed economies for the current distress of the atmosphere, and the need to conceptualise a more balanced approach to the energy transition that recognises the differing needs and resource availabilities of all countries.

New oil and gas producers that are beginning to develop recent discoveries are not prepared to sacrifice the opportunities that have just arrived on their shores, especially when they have been historically at the margin of development. Guyana, Suriname, and Uganda are good examples: why would they sacrifice their future and abandon the international energy markets to protect the interests of a handful of countries with already identified resources which have historically benefitted from their exploitation?

Reconciling the genuine concerns from the use of energy with the needs of development

A rational approach to energy transition, which takes into account the historic responsibilities of developed economies and the current inequalities in the development of energy producing and exporting countries, should accommodate the needs for development opportunities in poorer countries, and distribute the burden of restraining fossil energy production in a just and balanced manner.

If the international organisations that have taken the responsibility for achieving a consensus solution to the global warming challenge insist on an oversimplified model that imposes excessive and unjust burdens on the weaker countries, the international conflicts and internal divisions that are prevalent today will most likely be exacerbated by wild political swings in the orientation of democratically elected governments, and by the pervasiveness of powerful autocracies that see energy as a source of funds for self-preservation at all costs .

Conclusion

The extent, and catastrophic consequences, of disarray in the energy markets justifies an original approach — and perhaps an “out-of-the-box” solution for the world to manage the transition and the phasing out of fossil fuel supply.

One such “out-of-the-box” alternative is the establishment of a negotiated system, between producers and consumers, of supply quotas to allocate production in a rational way among all exporting countries. This may be a departure from an orthodox and market-based equilibrium based on competitive advantages, but the alarming state of the environment and the decision to manage the transition to cleaner energies represents a wider departure from traditional economics towards government and supra government intervention.

The International Energy Forum that was chartered in Riyadh in 2011 and serves as a point of encounter for the producing countries of OPEC+ and the consuming countries of the International Energy Agency, plus other countries of transit and non-members of these organisations, could be the starting point for discussion of such an arrangement, or of other alternative mechanism to accommodate the future allocation of production between the exporting countries.

A similar system was used by the coffee producing and consuming countries with the International Coffee Agreement between 1963 and 1989 that was administered by the International Coffee Organisation. The ICA succeeded in providing stability and predictability to the markets through a system of negotiated quotas for producing countries.

Armando Zamora – President, National Hydrocarbons Agency of Colombia