WINNING THE ENERGY WAR
As we approach the fourth month of the Russian attack on the Ukraine, and expectations of a long struggle rise, it’s ever more important for governments (and society, including philanthropy) to realize that we must simultaneously pursue short term opportunities and longer term imperatives on both the diplomatic/military and the energy/climate fronts of this struggle.
On the military/diplomatic theater the west has done a good job of juggling short and longer term tactical challenges. The West has rushed military aid to Ukraine’s armies, sanctioned Russia’s banks, cut off its coal and moved to embargo oil exports, while longer range Germany has accepted a much more vigorous military role for itself, Finland and Sweden are moving to join NATO and already have new security arrangements with Great Britain.
On the energy climate front, long term energy and climate objectives have been reiterated in both Europe and the US. There has been sustained rhetoric about accelerating renewables, electrifying transportation and decarbonizing sooner than 2050
On the short term energy front, however, there is so far only an unrealistic pursuit of substitute oil and gas to replace Russian sources. Russia historically exported over 8 million barrels of oil a day. If Europe were to join the US embargo IEA estimates that Russia might lose markets for as much as 3 mbd. (The rest would — and already is — make its way to countries outside the embargo.) There is no plausible source for even 3 mbd of replacement oil. The producers with the potential capacity to produce more are all on the sidelines. Iran and Venezuela face their own sanctions problems; Saudi Arabia and the UAE are seeking to sustain the very $100+ a barrel price that would be the toxic fruit of an ongoing supply shortage; and US shale producers prefer lower levels of production with higher prices to the risk of pumping all-out and seeing profits evaporate.
So the pursuit of replacement crude by Europe will predictably fall short, leaving three pathways. Oil prices remain indefinitely intolerable; the embargo collapses or the world accelerates the substitution of clean energy for oil.
The oil industry’s solution is for government to commit to even bigger subsidies, lease greater tracts of public land for oil and gas production, and weaken safety and emission standards for the industry. Remarkably, even in a global crisis, the oil industry through the American Petroleum has proposed nothing that could actually yield more oil or cut prices.. Scott Sheffield, the CEO of Pioneer Natural Resources, an oil and gas giant, went on television to declare that there was no price– not even $200 a barrel — that would entice the industry to grow.
So is the West doomed to lose the energy front in the struggle with Russia?
Certainly not in the long run. Even without physical shortages, if oil prices remain around $100, both governments and consumers will continue to embrace the swelling fleet of electric vehicles (EVs). The West will be joined by India and China, desperately seeking to avoid the exorbitant, growth crushing costs of transport systems fueled by $100 imported oil.
But what about the short term? Is there really nothing the West can do to rebalance markets and cut prices? Fortunately, we are not helpless.
Systematically swept under the rug are a series of short term policy initiatives that could almost immediately cut demand for Russian oil and gas, lower global energy prices and accelerate the world’s shift from fossil fuels to clean energy.
As two-thirds of EU oil is used in transport, accelerating the transition to EVs is the best way to sanction Putin’s military ambitions
Within the next year Europe could Immediately reduce demand for oil and gas through efficiency and clean energy. Cutting truck speed limits, lowering thermostats on gas furnaces by 2 degrees, and accelerating the replacement of furnaces with heat pumps would cut Europe’s oil use in transportation by 11%. In only a few years, speeding up Europe’s timetable for EV’s, doubling growth targets for wind and solar, and eliminating permitting bottlenecks for renewables could save another 10% of oil plus a huge volume of gas.
There’s more. Oil and LNG are traded in global markets. Demand reductions anywhere free up supplies and lower prices everywhere. Europe has recognized this in its futile pursuit of non-Russian sources of oil and gas. But demand destruction strategies adopted by Ukraine’s global allies could make enormous difference.
Installing more roof-top solar, heat pumps and off-shore wind, could significantly cut the demand for LNG in Taiwan, Korea and Japan, freeing methane gas for the EU. The biggest vehicle fleet in the US, the Postal Service, could be fully electrified, eventually saving 500,000 metric tons of CO2. All of these oil and gas fuel replacing opportunities would accelerate if permit obstacles were systematically removed. An analysis by Energy Innovation shows that the oil-saving measures incorporated in the pending Build Back Better legislation would, by 2027, cut U.S. oil demand by an amount exceeding current Russian imports.
More broadly , Ukraine’s allies can reduce Russia’s supply chain power and revenue from commodities other than oil and gas. The US imports a lot of Russian aluminum — and faces significant future shortages of the metal as clean energy technologies grow. There are two recently shuttered aluminum smelters in the Northwest that could be reopened as the first step toward rebuilding US aluminum self-sufficiency. US (and Indian, Brazilian and Australian) electro-metals processing capacity for batteries and renewables will be expensive at first, and then as capacity scales and markets grow, highly lucrative. Wartime urgency makes it much easier to invest in initially expensive but long term profitable technologies — as the US showed when the space program birthed solar panels.
Finally, the world will soon be forced to respond to the looming food crisis, the product of two shortfalls: Ukrainian wheat bottlenecked behind the Port of Odessa, and embargoed Russian fertilizer exports — while soaring gas and oil prices make additional fertilizer prohibitive. But nitrogen fertilizer can be made using green hydrogen. And right now green fertilizer is actually cheaper than that derived from oil or gas. Why not seize this moment to commission the production of as many hydrogen electrolyzers for green ammonia plants as capacity permits — knowing that in doing so we will not only provide desperately needed food, but also drive down the future price of greening our fertilizer supply chain?
Campaigners could thus begin by embracing oil displacement strategies that reduce demand now when the economics of even expensive interventions is unequivocally favorable. The oil industry was betting its future to be turbocharged. Emerging importers like India, and new markets like plastics, were to be the growth engine of future crude markets.
To head off such growth, the next round of scaled investments in clean alternatives need to be supported. There has never been a more favorable time to get major emerging markets to solidly embrace an electric transportation future, especially for both passenger and heavy-duty vehicles..
The most effective strategies will take advantage of the cost reductions that come with greater deployment of clean energy technologies like wind, solar and batteries. Paying higher wartime prices for first generation decarbonization yields cheaper progress in the future, and actually yields cheaper energy than waiting for costs to fall before scaling.
But so far this logic does not seem grasped by policy elites on either side of the Atlantic. Perhaps President Zelenskyy should make a green energy speech asking his allies to stop wasting money and accelerating inflation by buying Russian oil and gas. He seems to have their ear.