Global warming presents an existential planetary threat

Energy is at the nub of every politician’s deepest dilemmas. For it requires them to tread a careful path between the immediate demands of their components for affordable, secure, and accessible energy and the longer-term imperatives of economic growth and sustainable development. The Ukrainian conflict has deepened this dilemma. The conflict has triggered a radical churn in petroleum geopolitics. Prior to Feb 24, the day Putin marched into Ukraine, the oil market was globally integrated with one internationally acknowledged benchmark price and an expanded OPEC that included Russia amongst its de facto members. The gas market was headed in the same direction. Whilst still bounded by regional pipelines and inflexible long-term LNG supply contracts and prices quoted regionally in the US, Europe and Asia, the recently concluded LNG contracts all had clauses that allowed for destination flexibility. Also, LNG spot trade was gaining in market share and prices were converging. The industry presumption was that the gas market would soon mirror the oil market.

Feb 24th has upended these presumptions. The petroleum market is now fragmented, fractured and volatile. Europe and the US have sanctioned 90 per cent of the Russian crude and despite the fact that oil is fungible and can therefore be rerouted to other markets, it will not be easy to place the sanctioned quantum especially since crude oil tankers and the insurance industry have has been forewarned against carrying or covering Russian oil. This means the crude oil and products market will tighten further. Russian gas has not yet been sanctioned but here too Europe has made clear its determination to draw an iron curtain to separate its market from Russia. It has published a road map for eliminating all energy imports from Russia by 2027. OPEC is also proceeding down its own path. It has refused to remove Russia from OPEC plus and has not bowed to US pressure to increase production to cool the oil market. There is a chance they will eventually draw down on their spare capacity but when they do, it will not be because they want to subscribe Western interests. It will be because they want to keep control over the oil market and also benefit from the fact that Russia cannot meet its OPEC determined export quota.

Multiple forces are bearing on the petroleum market. No one can be sure of how the market will evolve. But what is clear is that the current “disorder” is pushing political leaders into conspicuously inconsistent positions.

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President Biden has, for instance, gone back on his pre-election pledge to disallow petroleum companies from drilling for oil and gas on federal lands. He has approved the issue of fresh leases. More interestingly, he and PM Mario Draghi of Italy discussed the possibility of creating an oil consumers cartel during the latter’s visit to Washington DC last month. This is interesting not because the idea is novel — it has been floated before and it does not stand much chance of seeing the light of day given that oil consumers have difficulty in agreeing to a schedule for the drawdown of stocks from their strategic reserves — but because America is the largest producer of petroleum liquids in the world and a major exporter of LNG. The reason Biden may have allowed this item to remain on the agenda is that he is clutching at all straws to recover political ground ahead of the November elections for Congress. One such straw is to find a way of reducing the retail price of gasoline. American consumers are currently paying historic high prices.

European leaders also find themselves between the rock of energy geopolitics and the hard place of energy economics. They want energy “independence” from Russia but to finance the investments in solar and wind generation, gas storage, LNG import infrastructure and intra-Europe gas pipelines required to reach this destination, they want to sell EU 20 billion worth of carbon emission certificates. The sale will, however, reduce the price of carbon offsets and make it cheaper for companies to burn fossil fuels. Some countries have also given the green signal to reopen coal mines. Analysts suggest these measures could release up to 250 million tons of additional GHG emissions and prolong the life of fossil fuels. EU leaders have countered by reaffirming their commitment to cut GHG emissions by 55 per cent in 2030 over the levels in 1990.

Indian leaders find themselves in a comparably tight bind. The rise in the price of oil has “forced” them to reintroduce de facto administered pricing. They have not allowed the public sector oil companies to pass on the higher prices to retail customers but instead to bear the loss. This decision will drive a deep hole in the balance sheets of these companies and adversely impact their investment plans. The government will have to ultimately pick up the tab but for the present, politics is their priority. The government is also reportedly interested in buying the assets of Shell LNG in the Siberian port of Sakhalin. The asset should be available at a discount and prima facie, the deal will enhance India’s security cover. But the molecules may be subject to sanctions and LNG carriers will find it problematic to secure insurance cover and generate arbitrage opportunities. Also, India may attract criticism for purchasing “contaminated” assets.

The above examples highlight the dilemmas created by the current energy disorder. There is no silver bullet solution to resolving these dilemmas. But in looking to find a pathway, political leaders should be mindful of the following. One, the Ukrainian conflict will end. It is an open question as to whether there will be a “victor” and if so who. But the fighting will eventually stop. Two, President Putin is mortal and there will be a post-Putin Russian nation. Russia’s energy industry and the Russian people cannot be indefinitely ghettoised. Three, the transition to clean energy will be long and expensive. Political expediency will prolong this process dangerously. And four, global warming presents an existential planetary threat.

The writer is chairman, Center for Social and Economic Progresss

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