The Global Search for Energy Security

The amnesia over energy security is over. The global energy crisis, fueling record high inflation, is shaking governments as consumers are stunned and angered by high prices and the prospect of shortages.

Public concerns about energy security had dissipated over the past decade, in part due to the advent of US shale oil. Fracking transformed America from the world’s largest oil importer to the largest producer, delivering energy independence after decades of promises. Political or military threats to energy supplies in the Middle East or elsewhere could be offset by US production. When Iranian missiles hit a huge oil processing plant in Saudi Arabia in September 2019 – something that would have sent prices higher in previous years – American shale production cushioned the supply shock. The prices hardly moved.

Many observers also believed that demand for oil had peaked in 2019 and would be quickly replaced by renewable energy. The reduced demand during the Covid lockdowns seemed to confirm this assessment. An energy transition was believed to be on the right track, facilitated by a wide range of government policies.

But this perception collided with reality. Demand for oil and gas rebounded as lockdowns ended and the economy recovered. Global energy supplies have lagged behind, in large part due to underinvestment in conventional energy sources.

This strong demand and weak supply set the stage for the global energy crisis that began to manifest itself last fall. Natural gas, coal and oil prices skyrocketed. Late last year, Europeans were paying five or six times the normal price for LNG, and gasoline prices at US pumps were rising.

Russia’s invasion of Ukraine turned a burgeoning energy and economic crisis into a geopolitical crisis and pushed prices higher. For half a century Russia, and before that the Soviet Union, had presented themselves as a “reliable supplier” of oil and natural gas, mainly to Europe. This idea was widely accepted in Europe on the premise that mutual dependence would benefit both sides through what the Germans called “change through trade”. Germany, for example, was so confident in this relationship that in 2011 it decided to shut down its nuclear power industry – which then produced a quarter of its electricity – and let coal and Russian natural gas fill the deficit.

When it began its war, Moscow assumed that ultimately Europe would have no choice but to submit to the conquest of Ukraine. Europe has instead opposed Vladimir Putin’s ambitions. Russia responds by starting an energy war in Europe – cutting off the flow of gas to fuel economic disruption and create as much hardship as possible.

And so, nations that have paid little attention to energy security are forced to urgently seek reliable alternative sources of supply. Europe is increasing its already ambitious commitment to wind and solar energy, but seems to recognize that these large-scale expansions will take time and only solve part of the problem. A transition to renewable energy and electric cars will not happen without energy security, which requires access to a diverse and reliable range of energy sources at least for the next few decades.

No country is making such a rapid and decisive turnaround from dependence on Russian energy as Germany, which is going through what Chancellor Olaf Scholz called the turning point, or turning point. Green Party leader and Economy Minister Robert Habeck has been working closely with the energy industry to understand how to steer the country away from Russian oil and gas – even though gas is harder than oil. Berlin is committed to building several LNG import facilities – something Germany has spurned for decades. The country has even approved the restarting of coal-fired power plants to shore up energy supplies ahead of winter.

Other European governments are making concerted efforts to ban Russian oil. As Russian Deputy Prime Minister Alexander Novak said in June, Russia will be “virtually pushed out of the European market”. This requires these countries to consider energy sources they once rejected. France is an example. At the beginning of his first term in 2017, President Emmanuel Macron floated the idea of ​​closing 14 nuclear reactors and reducing the country’s reliance on nuclear power, which then provided 75% of France’s electricity supply. Now he is calling for six new nuclear reactors and possibly another eight.

Or look at Britain, which has given the green light to develop a new North Sea gas field. European nations have also sent missions to the US and Africa to find more oil, gas and coal. The European Union is now promoting the development of the abundant gas fields in the eastern Mediterranean of Israel and Egypt as an alternative to Russian energy.

Washington has also rediscovered energy security. President Biden took office determined to accelerate the transition to renewable energy. But as Americans faced record-high prices at the pump, the government began urging US companies to produce more oil and gas and refine more gasoline and diesel fuel. The Energy Information Administration forecasts that US oil production will increase by about 800,000 barrels per day over the course of the year, and refineries are currently running at full steam. While the government remains committed to its energy transition goals, it recognizes that the world desperately needs more oil and natural gas. Mr Biden has promised Europe more US LNG and the administration has been urging other countries to pump more oil – most notably Saudi Arabia, which the president will visit next week.

The global mismatch between demand and available supply for oil and natural gas is precarious. It is likely to get worse over the next few months as Mr Putin intensifies his energy war, China’s demand rises as it comes to the Covid shutdown, the dislocations in the global supply system increase and the tight balance between supply and demand tightens even further . Oil is a complex global market, typically moving more than 100 million barrels a day around the world with remarkable fluidity. But when the market is stressed, it is very susceptible to disruption. New disruptions could come from a variety of sources – from a war spreading beyond Ukraine to a cyberattack on natural gas pipelines or a hurricane that temporarily shuts down US refineries.

At this point it seems that the only thing that would take the pressure off global markets is an economic downturn driven by high prices and central bank tightening. And that view doesn’t give a great sense of security.

Mr. Yergin is Vice Chairman of S&P Global and author of The New Map.

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