War Upstages Energy Transition
The energy transition is being weakened, slowed and misshaped by war — hot wars in Ukraine and Gaza, and economic war between the US and China.
Geopolitically, the US is the near-term winner, if you call becoming the world’s largest producer of both oil and natural gas and reporting high GDP growth “winning,” as many Americans still do.
Militarily, Russia looks set to be the winner in Ukraine and its economy has done better under sanctions than most outsiders expected. However, its enormous natural gas industry is a big long-term loser, and that will cost state coffers bigtime. Russia is also coming to look increasingly like a colonial-style, peripheral supplier of raw materials to a Chinese manufacturing and financial core.
China may be the biggest long-term winner, as it moves rapidly into low-cost renewable electricity and electrified transportation, with full control of its supply chains — coupled with discounted-price access to such fossil fuels as it needs in the interim, not just from Russia but also from Iran, Venezuela and other US disfavored places.
Beijing’s relatively neutral position on the Gaza war and cut-rate prices for its solar equipment, batteries, and electric vehicles (EVs) — made lower still as it is frozen out of US and possibly European markets — will strengthen its standing in the Global South. A near-term price is slower GDP growth, but that should be taken as a blessing by anyone who cares about the climate, especially the crash in its concrete- and steel-heavy housing sector, concrete and steel being huge carbon emitters.
War, War and Economic War
War first came to the fore of the energy transition in early 2022. Russia’s invasion of Ukraine reconfigured international oil and gas movements. Russian natural gas shipments to Europe — the backbone both of Russia’s world-leading gas export industry and of Germany’s industrial might — plunged. US destruction of the brand new Nord Stream pipelines direct from Russia to Germany’s Baltic Coast ensured those sales cannot easily resume. Seymour Hersh persuasively showed how and why the US blew up the lines. Washington’s subsequent denial has been cursory and unpersuasive.
Having ensured Russian gas wouldn’t return to Europe, the US rushed in with such spare LNG as it could muster. International natural gas prices nonetheless soared to multiples of pre-war levels, since Russia’s lost sales were bigger than the US could cover with LNG. The high prices for its remaining gas sales helped prop up Russia’s economy for a time, but it also turned both China and India off imported natural gas and back onto coal as their primary electricity general fossil fuel. That’s bad for Russia, since China and India are the only prospective large-scale customers for the gas Russia will not now sell to Europe.
Then came the Gaza war and the Houthi assault on ships headed into the Suez Canal: The cleavage between Asian and Atlantic Basin oil and gas worlds widened. That’s not good for globalized oil and gas companies. US oil and LNG tankers that load in the Gulf of Mexico (almost all of them) must now travel much further, at high monetary and environmental cost, to reach China, India, or any other Asian buyers, because they can’t go through the Suez Canal or, due to climate change-related restrictions, the Panama Canal. That means most US tankers have to go all the way around either South America or Africa to get to Asia. Not as many go to Asia as a result, limiting the US market.
However, Western oil prices stayed high, bolstered by a “political risk premium, making it profitable for the US industry to continue to pump ever more oil. So far, somebody buys it.
Finally, there’s the “direct confrontation… in the theater of economics” between the US and China on clean energy. The phrase comes directly from a Biden administration official and refers to the notion that a shooting war with China is perceived as too dangerous, given that Beijing has nuclear bombs. Instead, Washington must use economic weapons to stop Beijing from growing larger economically than the US and becoming a regional military power.
That economic confrontation is focused increasingly on solar generating equipment and EVs.
The Theater of Energy Economics
Geopolitics has been a recurring feature of the oil scene for most of a century. But this particular bout of intense political struggle between new and old energy powers is unique in that it isn’t about control or availability of a single fuel, as the Arab oil crisis of 1973 and the Iranian Revolution crisis of 1979–80 were. Its interwoven and often deadly jockeying for power and position is playing out across oil, natural gas, renewable electricity generation, and EV lines.
Also, it’s playing out against a backdrop of intensifying climate instability, high-stakes arguments over who should pay what energy transition costs, and heightened concern about security of supply for old and new energy alike.
Everything affects everything else in this complex struggle, and the outcome is impossible to predict.
What can be said with assurance is, first, that China is now massively out front in manufacturing and installing virtually all forms of new energy. However, the US is on climate-heedless counterattack against Beijing’s well-laid plans to turn the trio of “New Quality Production Forces” — solar, batteries and EVs — into its chief economic growth engine, not just with domestic sales but increasingly with massive exports, as well.
Treasury Secretary Janet Yellen made clear just how determined the Biden Administration is to derail these plans by traveling to Beijing to berate the Chinese for having “surplus capacity” to make solar equipment and batteries, as if that were the greatest sin imaginable. If she ever mentioned the climate crisis or the fact that the carbon-free energy systems China wants to sell are things the climate and the world desperately need, it didn’t make it into her official statements or press coverage of her trip.
It’s good that the US wants to start making more of its own stuff instead of importing it all, but picking out renewables and EVs as ground zero in a trade war when the US doesn’t even have a domestic renewables manufacturing sector of any size is suicidal. China may have picked New Energy as a favored field of manufacturing development for reasons the US doesn’t like, and pursued it by means the US doesn’t like, but it has done the climate a huge favor by providing a readily available path to stage-one decarbonizing.
Europe may pick up some of the slack in buying solar panels, which would be good for the environment and bad for US LNG exporters. But the US oil and gas industry has already benefited enormously not just from the ongoing price boost provided by the Ukraine War and the extra sales into Europe to replace Russian gas, but also from a slowdown in the US transition into solar and EVs resulting from its trade war with China.
Europe’s positioning in the EV battlefield isn’t so clear as it is with solar. If the EU opts to join the US in using tariffs and other trade barriers to disrupt China’s push into its so-far-fast-growing EV markets — as the EU bureaucracy in Brussels is suggesting — all Western oil companies will gain an extended lease on gasoline and diesel sales, which have been the industry’s historic honeypot. Similar factors are at play in India’s solar and EV sectors, as Washington pushes New Delhi to bar Chinese products.
Slowing the ongoing decline of gasoline consumption in the US and Europe, and keeping gasoline demand growing in India, could delay by a couple of years the peak in oil consumption dreaded by the oil industry. That would make the climate a big near-term loser in these conflicts.
The Importance of China
However, that also assumes that China’s gasoline market doesn’t crash. China’s high-growth EV sector is engaged in boisterous price competition on the domestic market as export prospects darken. Over half of new car sales in China are projected to be battery electric or plug-in hybrid by the end of this summer. At some point, that will start to shrink gasoline demand.
Since China has long been the main driver of global oil demand growth, accounting for more than half the total in some years, oil consumption worldwide could be pulled into reverse by China. The progressive breakdown in trade flows between China, the US and, to a lesser degree, Europe makes this more likely because it damps manufacturing and economic growth in China. Lower growth will constrain consumption of all forms of energy.
Also, an even faster buildout of solar, wind and battery backup inside China is already evident as a darkening export outlook pulls down prices.
Another way to look at these disparate pressures bearing down on an already complex energy transition is to say that they are pulling the US back toward its fossil fuel-dominated past, even as China flings itself into a carbon-free future. The Old versus New Energy wars take on geographical dimensions. Surely not a winning strategy for the US in the longer-term.
