Clear and decisive action needed on renewable energy – and fossil fuels too
Backed up by massive new investments, fossil fuel will show its immediate future is clear
Talk of oil potentially reaching $300/bl and heightened power outages in news headlines reflects how geopolitics are reshaping energy security. And energy stakeholders’ intensifying juggling act in the Middle East and beyond.
Energy markets as a cornerstone of our civilization, we cannot afford to be bad managers.
With just three months until COP27, the world's biggest annual climate gathering, the pressure to build a far more diverse and green energy basket is ramping up. It is certainly something we support, as does the UAE, targeting Net Zero by 2050 – a bold and admirable target. But that is only half of the story for energy security, especially amid today’s turbulence.
The daily twists and turns of the energy squeeze, largely driven by the Russia-Ukraine war, highlights how clean energy needs time to mature before it can stand shoulder-to-shoulder with fossil fuels. That is not necessarily a bad thing; we can still dramatically enlarge the renewable energy market, reduce CO2 emissions, and create green jobs in the meantime – all key goals for the UAE and wider Middle East.
But it does mean accepting that fossil fuels and renewables are one and the same parachute that we need to land safely – both today and for the rest of the 2020s – in these turbulent geopolitical winds.
Russia's domino effect
If Russia decides to completely stop energy flows to Europe as part of its strategy against Ukraine, there will be severe consequences for the rest of the world. For one, it would mean Europe, home to 800 million people, would not be able to put enough gas in their storage for the upcoming winter.
We are already seeing the economies of several countries elsewhere – Sri Lanka, Bangladesh and many African countries, for example – truly struggling due to these extraordinarily high energy prices. The geopolitical unrest is triggering other pressures too, including the soaring cost of wheat; noteworthy considering the UAE imports 90 per cent of its food.
Plus, Europe has made it very clear that it does not want to depend on Russian energy supplies in the future. This heralds a major change in strategy; 45 per cent of Europe’s gas came from Russia in 2021, data from International Energy Agency (IEA) show. European infrastructure and global supply have coped with a 60 per cent drop in Russian gas deliveries since June 2021, according to the International Monetary Fund (IMF), but strain is undeniably emerging.
As this transition to independence continues, I would expect the situation to become more difficult before it improves. While thousands of kilometers separate Europe and the Middle East, these major developments to our north inevitably impact our energy partnerships, prices, and security. We must be as alert and proactive as possible.
Fossil fuels’ crunch point
Most oil and gas companies are at their maximum rate of production, which is not a helpful dynamic. We will see this continue until supply starts exceeding demand, which I think could happen by the end of the second quarter of 2023 as the huge amount of investment filters through.
Global investments in these sectors have been steadily rising since 2020 and will hit $628 billion this year, led by upstream gas and liquified natural gas (LNG), forecasts Rystad Energy. This year’s investment growth is very much pre-programmed by the $150 billion worth of greenfield projects sanctioned in 2021, nearly double that of 2020. Overall, investments in the Middle East could rise by 22 per cent this year.
Plus, I expect the US rig count will recover to the levels seen before COVID-19 imminently and US shale production volumes have climbed by 1 million barrels a day over the last year, to 12 million barrels a day. When supply does start exceeding demand, OPEC+ must be ready with an internal management model.
The organization is a very important stabilizing entity in the fossil fuel market and, indeed, the global economy. It needs to remain intact, encompassing Russia. High or low fossil fuel prices are not as bad as an unstable market, because the latter makes it hard for companies and countries to set budgets and growth targets.
For now, there are only two countries in the world with remaining spare capacity for fossil fuel production – the UAE and Saudi Arabia. But that does not mean we can keep pushing them to use 100 per cent of their supply, squeezing every last drop. We need a cushion of supply to help safeguard energy stability, especially as the next nine months are going to be tough no matter what.
The more we work together across all energy markets to bolster security, the sooner we improve our environmental journey and achieve commercial growth. Keeping our sights on the long game is the best gameplan.