Why Don’t We Fight Wars Over Carrots?
What are the geopolitics of carrots? It’s an odd question to ask, but one posed by veteran oil analyst Professor Paul Stevens at the LNGgc conference held October 9-10 in London. The point of the question is that carrots do not have geopolitics because they are cheap, abundant and available nearly everywhere.

Stevens was comparing carrots to renewable energy and contrasting both with oil. Renewable energy is widely distributed and available in some form to all countries.

Oil resources, at least conventional resources, are highly concentrated in the Middle East, while the main areas of consumption, with the exception of North America, tend to lack domestic reserves commensurate with demand.

Stevens’ observation was that decarbonization will de-politicize the provision of energy in terms of geopolitical competition for access to oil reserves and supply.

However, before this promised land is reached, geopolitics is likely to have some very real impacts and there is no certainty that energy security will improve. The path of decarbonization, whether fast, slow or unfinished, is likely to prove rocky.

Rapid change

The wide gap between climate change ambitions and current policies, alongside the large drop in renewable energy costs, suggest that oil companies may be substantially underestimating the likely speed and scale of change.

Take, for example, ratings agency Fitch’s recent report Midwest US Set To Experience Strong Growth In Solar Sector, which forecasts the addition of 100 GW of solar power capacity by 2030 in the US mid-West alone. Contrast this with comments made in London in October by Shell CEO Ben van Beurden that oil and gas companies have “no choice” but to continue investing in long-life projects because the world will continue to demand fossil fuels.

However, the idea that peak oil demand occurs soon (circa 2030) and is followed by a rapid decline in oil consumption is one-dimensional. It is built around the singular threat of climate change and does not assess the destabilizing impact on the Middle East, already fraught with tension and scarred by conflict, of a rapid decline in its life-blood oil revenues. The rapid change scenario – in which climate change is averted – may well prove more destabilizing than gradual adaptation.

Moreover, even in the rapid change scenario oil remains a multi-billion dollar industry. Near 100 million b/d of oil demand today cannot be replaced overnight or even in a decade in a world in which energy demand continues to grow led by non-OECD nations.

Policy failure

There is a general tendency to think that because the consequences of climate change are potentially so extreme politicians globally will act in concert with sufficient vigor and determination to avert disaster. This is a strong argument, but one based more on the moral imperatives created by the anticipated consequences of climate change than on an assessment of the practical ability to change.

That the world is not changing fast enough to avoid global warming is currently not an outside possibility but a most-likely outcome. The US Energy Information Administration’s reference scenario in its latest International Energy Outlook sees demand for all fossil fuels continuing to grow to 2050, an outlook clearly incompatible with the targets of the Paris Agreement on Climate Change.

Disasters unfold in part because global political thinking and decision-making lacks the institutions and cooperation to make action possible. Those institutions that do exist are weak because geopolitics remains dominated by national interests. The fact may be that climate change is a global challenge beyond both nation states’ ability to transcend their own concerns and oil and gas companies’ unwillingness to change their still profitable traditional business models.

For all the progress made by the COP series of climate change conferences, the breakdown in European unity, as evidenced by Brexit, and by a rules-based world trade order, as shown by the US-China trade war, suggest the global or at least transboundary policy harmonization required to address climate change is even less likely today than just three years ago.

As a result, policy failure is as legitimate a planning scenario as rapid transition.

However, the implications for energy security are also profound. Renewable energy may have a carrot-like abundance, but its deployment will not be sufficient in time to avoid the socio-economic consequences of climate change. The world will remain dependent on international oil and gas/LNG supply chains, but in a situation in which changing temperatures create all manner of new stresses and strains relating to food production, water supplies, population movement and catastrophic weather events.

Where are we now?

It is possible to place today’s oil market, characterized by oversupply amid weak demand, in the early peak oil consumption narrative. Weak oil demand is a combination of growing alternative transport fuel use – mainly electricity and LNG – as well as slower trade growth.

For the moment though the latter is the dominant factor, but the correlation between global economic recovery and oil demand declines as energy consumption overall becomes steadily less oil intensive, prompting industry rationalization and reorientation.

However, it is equally possible and perhaps more legitimate to place the oil industry within the failed policy scenario.

Across the broad scope of long-term energy forecasts, few, if any, actually predict rapid transition. That oil and gas companies are misjudging the likely pace and timing of change is a hypothesis based on the hope that governments and companies will act successfully to avert climate change. The most probable scenario is not 100% success, but maybe 60-80% success.

The planning question then becomes what degree of destabilization is likely either as a result of impacts associated with weakened petro-economies or climate change impacts associated with rising global temperatures? Or does 60-80% policy success imply both?