Fossil fuels and their political influence

Fossil fuels are the result of a combination of geologic conditions acting on algal, bacterial and plant material over durations stretching into the hundreds of millions of years. They are spread unequally across the earth’s crust; a dice roll with profound consequences. These resources, namely natural gas, coal and oil; have such concentrated energy density that they have incomparable influence on international affairs.

Countries with reserves have enjoy development and international influence (a lot of which has been used to secure further access to reserves). Countries without reserves have watched themselves become smaller international actors, at the mercy of exporting countries for their energy supply. Countries with reserves, but without the mixture of technology, political stability and military strength, have all too often found the profits from their resources leaving their borders as swiftly as the hydrocarbons themselves.

Fossil fuel reserves are almost a prerequisite for world power and the struggle for them characterises a surprising amount of global politics. An example of this lies in the present energy situation in Europe, a region hungry for energy but lacking the reserves to supply itself – without Russia, that is. Russia supplies a quarter of all gas consumed in the EU and understands that the true value of this is not just monetary, but political. The imbalance in this relationship means that Russia is able to pull strings it may not otherwise be able to; the annexation of Crimea from Ukraine being an example. Putin’s Russia is unafraid to turn the taps partially or fully off to force an issue – something it did three times between 2005 and 2010. One journalist argues that “Russia’s most powerful weapons now ... are gas and oil.”

Europe’s energy future

The EU knows its reliance on Russian hydrocarbons is a weakness and has sought to work together to increase strength and to diversify its supplies. This can be seen through increased imports from the Arabic Organisation of Petroleum Exporting Companies (OPEC), the USA via Liquefied Natural Gas (LNG) and Norway. The UK does not share the plight of its European neighbours, as its North Sea reserves lends it some independence – a factor in why the UK will often lead the EU in speaking out against Russia. As well as buying hydrocarbons from less “politically hostile” countries, the EU is keen to reduce its imports altogether. It’s doing this via a technological revolution that seems set to accelerate: renewable energy.

Governmental energy policy forms a trifecta: affordability, sustainability, security. We have already seen how imported fossil fuels create a security headache for importing governments without even delving into more “gloves-off” resource wars such as the 1956 Suez Crisis, the 1973 OPEC Oil Embargo, the 1990-1 Gulf War and arguably the 2003-2011 Iraq War. But concerns over security alone haven’t led to a shift in energy supply. It’s a truism that in capitalist markets cost is king, and fossil fuels have always been the cheapest way to power transport, heat buildings and generate electricity. That is, until recently.

While the fossil fuel industry and oil exporting countries seem confident that demand for their product will not waver, the financial industry sees things from a very different perspective. Energy market analysts use an indicator called the Levelized Cost Of Electricity, or LCOE, to compare the cost of electricity from different sources. The LCOE adds up all the costs over a project’s lifetime: from installation to maintenance, running costs and decommissioning; and divides them by the total electricity generated to work out the cost per unit energy. The LCOE for solar has dropped rapidly since 2010 – by more than 80% in Spain. This is due to a combination of reduced equipment cost, increased unit efficiency and lower running costs, and means that the cost of energy from large-scale PV plants is now lower than that of conventional fossil fuel plants. As well as being cheaper over their lifetime, renewables don’t require huge upfront investment – unlike traditional coal, gas or nuclear power stations which are generational investments; something much of the EU is unable to make.

Detractors point at the intermittence of renewable energy, which is certainly where some of the “hidden” challenges lie. To tackle this, grids will need to be “digitalised”, energy storage such as batteries and pumped hydro will need to be expanded, demand-side management will be needed and many forecast that EVs will be connected to this “smart grid”. Yet even including these integration costs, the past decade of rapid reduction in capital cost for wind and solar generation as well as lithium storage means that these technologies will soon not only be cheaper to run, but cheaper even than running existing fossil power stations. The implications are huge.

The reduction in energy cost resulting from the transition to renewables will have knock-on effects. First transport and then heating will experience substitution of fossil fuels for electricity; increasing demand for electricity and thus further securing the generation and distribution investments needed to support the transition. This shift will affect new assets first; new cars, buses, trains and homes; followed eventually by existing ones which may become obsolete in the case of vehicles or require refurbishment in the case of buildings.

The fossil fuel industry does not see a cliff-edge for its products. Half of all oil is used for road transport, which requires far greater citizen and business participation than transforming energy production does - which is more influenced by economics and legislation. Indeed, EV sales have been lacklustre and the oil-hungry SUV continues its dominance around the world.

Further, a BP ex-executive observes that while global energy is becoming increasingly renewable by percentage, gross energy consumption is increasing; which may guarantee a stable demand for fossil fuels for decades to come – a “long tail” to the transition. BP though, significantly, now calls itself “Beyond Petroleum”.

The finance sector, however, believes the transition will be much faster. While rumblings of the investment risk posed by fossil fuels have been a long time coming, BlackRock, the world’s largest investment fund and which manages some $7.4tn in assets has sent the clearest message yet, calling climate change a “defining factor in companies’ long-term prospects” and saying it will divest from companies with more than 25% revenue coming from coal by the mid-2020s.

The third motivating force behind the transition to renewables comes not from politics or economics, but from the planet and its citizens: worldwide concern around global heating. In 2018 the Intergovernmental Panel on Climate Change (IPCC) drew upon the work of thousands of scientists across the world and in different areas of study to conclude that global heating will likely meet or exceed 1.5°C between 2030 and 2050, resulting in myriad grave environmental impacts. Around the same time, citizen environmental activism exploded into life across the world, with a flurry of international strikes in over 150 countries. While environmental protest is nothing new, activist groups such as Greenpeace and the infamous Extinction Rebellion possess an unprecedented energy and see themselves in an existential struggle; they demand net-zero carbon emissions by 2030. Slowly but surely the democratic demand for rapid climate action is reflected in European politics and as a further barometer of influence, BlackRock will reportedly seek to avoid investments targeted by climate activists.

The need for a just transition

Where does this leave the fossil fuel industry? With a combination of energy security, cost and sustainability all pushing renewable technology as the future for Europe, and with targets locked-in to legislation across EU states, Goldman Sachs estimate that by 2030 fossil fuel profits could face a 30% reduction. They expect fossil fuel companies will respond to this by either entering the renewable, grid, or storage sectors via acquisition or investment, or by divesting their fossil assets before their value plummets and they become “stranded assets”.

Therefore, unless fossil-fuel companies rapidly invest in renewable-related activities they could face huge losses. Necessary though it may be, the concern is that workers in or around areas that depend heavily on fossil exploitation could feel the biggest impact, through job losses and local economic downturn – the “de-multiplier” effect. Sharp job-losses in undiversified areas could cause severe socio-economic impacts; frustrations which could be borne out through unrest, rioting and migration. Lessons should be learned from the UK’s transition away from the increasingly costly coal in the 1980s; the plans to rapidly close coal pits without replacement industry lead to the 1984-5 Miner’s Strike. The workers understood their reliance on the mines for livelihood and indeed many of the former mining communities continue to experience long-term economic downturn from the sudden loss of their primary industry.

This makes clear the need for a well-planned “just transition” for those people and areas most reliant on fossil fuel production for jobs. The speed of the transition will be a key factor in how disruptive it will be; commentators discuss the potential for “failed states” where society breaks down under a severe economic, social or military shock.

Global hotspots for disruption include Saudi Arabia and Russia; both ruled by elites without adequate democratic representation. The elites in both countries have long seen fossil fuels as their greatest asset and are unwilling to surrender that power; in Russia 50% of federal revenue and 25% of GDP comes from energy and they see renewables and energy efficiency as a threat. Saudi Arabia, where 45% of GDP originates from oil, has a plan to diversify its economy as it recognises the perils of relying on fluctuating oil prices; but commentators say progress is too slow. But they aren’t alone: seven countries owe more than 30% of GDP to oil; a further six are between 20 and 30%.

n.b. There’s talk of a Martial plan (post ww2) to transition oil producing countries. Will we see a repeat of this? Need research – colonialist approach to foreign reform is very worrying, if changemakers are sowing the seeds of this language/precedent to pave the way for political support we should prepare analysis now)

Looking to the new geopolitics

The transition to renewables is therefore also a transition to a new geopolitical situation. The renewable resources, particularly solar and wind, are distributed far more equally than are fossil fuels and therefore many countries can, in theory, become energy independent and evade foreign price-fixing and political pressure. Even within countries renewable energy may create political change as they can be far more distributed and new modes of ownership, such as cooperatives, are more feasible, making monopoly less likely. But when the dust settles, where will the geopolitical tensions be?

The transition to renewables, and in general the digital era, has led to a huge increase in demand for new materials. Minerals like neodymium, manganese, cobalt, indium, platinum, gallium, lithium and copper will play centre stage and their locations could determine the new geopolitical frontline. While some claim that these bottlenecks will be less severe than fossil-fuel tensions have been, concerns remain. 30% of global copper comes from Chile, which has experienced mass-protest over inequality and cost of living in late 2019. 55% of global Cobalt supplies originate in the Democratic Republic of Congo, where child labour and forced labour are rife.

Whether countries in possession of increasingly valuable and sought-after resources benefit from their situation or find themselves victims of international exploitation and economic leakage depends on their stability, willingness to trade and perhaps military strength. A relevant example is the past decade’s developments in Bolivia, a country with significant poverty but a quarter of global Lithium reserves. While the Bolivian socialist government set out to develop their resource themselves – and ensure the social and economic benefits would stay within their borders – they were forced in 2018 to give a 49% stake to a German company for just £1.3bn.

There could be another, perhaps predictable, winner from the renewable revolution: China. China has cemented itself as the world leader in not only renewable energy equipment manufacture, but also design – it now holds some 150,000 patents in the industry; 30% of the global total and twice that of the EU.

But for now, the struggle remains that of the environmental activists. While they campaign for dramatic transformations in everything from packaging to agriculture, energy to transport – all to prevent global, irreversible environmental changes and the extinction of yet-untold species – the total implications of the transformation they want is far greater; it could define the future of geopolitics.

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