Russia and Other Petrostates Will Still Exert Muscle in the Clean Energy Shift

If you were wondering whether Europe is running out of options to deal with its continuing energy crisis, one of Britain’s largest energy suppliers just offered an answer.

In early January, Ovo Energy sent customers tips on how to keep warm without cranking up the heat, such as cuddling with pets, cleaning the house and doing the hula hoop.

Now fears are mounting that Europe may be about to face a far worse energy situation as Russia threatens military action in Ukraine. The United States is exploring ways to get more natural gas to the continent.

And for good reason. The European Union typically relies on Russia for about 40 percent of its natural gas, making it by far the continent’s largest supplier. With an estimated 127,000 Russian troops on the border with Ukraine, Europe seems torn between responding to what would be an egregious upset of its security and safeguarding its own energy requirements.

Some may see Russia’s actions as the last gasp of a fading petrostate before the energy transition robs the country of geopolitical power. But that would be wishful thinking. The transition to a clean energy economy may actually empower Vladimir Putin, Russia’s president, and other petrostate leaders before it diminishes them.

In a world that is “net zero” on its carbon emissions, major fossil fuel producers — especially Russia — will be greatly diminished in their power, assuming they do not find a way to remake their economies in the interim. But in the next 10 to 20 years, the energy transition will make opportunities for petrostates to wield significant geopolitical and economic power. There are at least three reasons this is the case.

First, this period will be marked by significant price volatility, which will give a very limited number of producers with the ability to supply more oil or gas in short order extra geopolitical influence. U.S. presidents from both parties since the 1970s have sought to cajole or compel Saudi Arabia, for example, to bring more oil to market when prices turn sharply upward; the Saudi government used these occasions to voice its priorities and make its own requests.

The clean energy transition risks bringing with it more price volatility because of mismatches between supply and demand caused by insufficient energy investments. Today’s energy market is a harbinger of what’s to come. Global investment in oil and gas is now at record lows as a result of uncertainty about the outlook for demand in a world more serious about climate and the terrible financial performance of the oil sector over the past decade.

This low level of oil and gas investment would be welcome if it were because demand was falling or investment in clean energy was rising at a rate to offset the fall in investment. But oil and gas use are both rising and projected to continue doing so for years. Investment in clean energy is rising, too, but not nearly at the rate to meet the growth in energy demand, not to mention the world’s climate goals.

Second, as oil and natural gas production shifts away from large, Western, publicly held oil and gas companies, oil companies owned by the countries in which vast resources are found will be able to flex their muscles more. Today, the so-called majors — the global producers including Shell, Chevron, Exxon, BP and Total — produce only 15 percent of the world’s oil and gas. Some of them intend to curtail oil production, and all are under mounting pressure — along with the banks that finance them — to shift investment to zero-carbon energies.

Yet unless demand falls commensurate with the reduced output, the production forfeited by these private Western companies will be taken up, at least in part, by state-controlled oil and gas companies, which are less susceptible to activist pressures or dependent on private financing. That would increase the share of global supply controlled by OPEC and its allies and with it, the cartel’s influence on global oil markets. One can see the precursors to this shift already, as Saudi Aramco, Abu Dhabi National Oil Company and Russia’s Rosneft are all investing large sums to increase future oil production.

Third, even in a net-zero global economy, substantial amounts of oil and gas will still be required in the energy mix. If the world reaches its climate goals of net-zero emissions by 2050, the International Energy Agency and others predict it will still be using roughly one-quarter as much oil and one-half as much natural gas as it does today. The producers most likely to meet this demand will be those with the lowest cost and lowest carbon footprints. Many largely state-owned suppliers, particularly in the Gulf, are best positioned to be the last producers standing. OPEC and its partners will make up a growing share of a shrinking pie, giving them outsize influence until demand falls to much lower levels. The same is likely to be true for the share of Europe’s natural gas that comes from Russia, which is the lowest-cost supplier to the continent.

The most important steps Western governments can take are to develop policies that rein in demand for oil and gas, and to increase investment in clean energy technologies. Measures to heat buildings more efficiently would be a good place to start in Europe. More tools are also needed to mitigate price volatility, such as strategic oil and gas stockpiles and requirements that private firms hold minimum levels of inventory. Policymakers should avoid retiring existing energy infrastructure before alternatives are ready to pick up the slack. Shutting down nuclear power plants, for example, not only removes zero-carbon electricity from the grid, but also makes it harder to cope with the prospect of reduced Russian gas flows into Europe.

From France’s “yellow vest” protests to Kazakhstan’s recent unrest over fuel price hikes, it is increasingly clear that if climate ambition comes into tension with energy reliability or affordability or the security of energy supplies, climate ambition will lose. As energy prices soar, preparing for crises in which state-controlled energy suppliers are able to exert outsize geopolitical and economic clout must be a priority for Western leaders.

Meghan L. O’Sullivan is a professor of international affairs at the Harvard Kennedy School and the author of “Windfall: How the New Energy Abundance Upends Global Politics and Strengthens America’s Power.” Jason Bordoff (@JasonBordoff) is a co-dean of the Columbia Climate School and the director of the university’s Center on Global Energy Policy.

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