Is it the end of the oil age?

Is it the end of the oil age?

20 Century was fuelled by oil everything from cars to wars to the economy and even the geopolitics was driven by oil. But the situation is changing very rapidly as the world is in the middle of an energy shock which will consequently pave a way for a new order. Earlier this year, COVID 19 devasted the global economy as a result, oil demand dropped by more than a fifth and prices fell. Since then recovery is very slow and a return to the old world is near to impossible. The situation has put Fossil-fuel producers at very vulnerabilities position. ExxonMobil has been ousted from the Dow Jones Industrial Average, having been a member since 1928. Petrostates economies are driven by oil, Saudi Arabia for instance need an oil price of $70-80 a barrel to balance their budgets. Today it is selling its oil for just $40.

The oil prices have fallen before, but the situation is different this time. The clean-energy industry is gaining momentum as the public, governments and investors getting concerned for climate change. Capital markets have also shifted as clean-power stocks are up by 45% this year. Politicians are backing green energy infrastructure plans as the government provides funds with interest rates near zero. Joe Biden, America’s Democratic presidential contender,  wants to spend $2trn to help to decarbonise America’s economy. The European Union has allocated 30% of its $880bn COVID-19 recovery plan for climate measures, and the president of the European Commission, Ursula von der Leyen, confirm that she wants the EU to cut greenhouse-gas emissions by 55% over 1990 levels in the next decade.

Energy system indicators of the 21st century seem to be promising a better future than the oil age—better for human health, more politically stable and less economically volatile. There is also a big risk in energy shift. If it occurs in disorder manner, it could create political and economic instability in countries which economies depend on oil and give control of the green-supply chain to China. Even more dangerous, it could happen too slowly.

Fossil fuels account for 85% of the energy source in the world. But this system is not clean as Energy from oil accounts for two-thirds of greenhouse gas emissions; the pollution due fossil fuels is responsible for killing over 4m people a year. Oil has also created political instability. For decades petrostates which include Venezuela and Saudi Arabia have been involved in the politics of handouts and cronyism. The world’s big powers have always competed to influence these states. Fossil fuels cause economic volatility, too. Oil markets are struck by an unpredictable cartel. The concentration of the world’s oil reserves makes supply unsafe to geopolitical shocks. It is hardly surprising that the price has swung by over 30% in a sixth-month period 62 times since 1970.

A new energy system is arising. Renewable electricity such as solar and wind power could grow from 5% of supply today to 25% in 2035, and almost 50% by 2050. The use of Oil and coal will sharply drop, while cleaner natural gas will remain central. This change will eventually bring enormous advantages. Most important, clean energy will produce good results in terms of climate change, as it will help avoid devastating droughts, famine, floods and mass dislocation. Once ready, it must be politically stable too, because supply will be diversified, geographically and technologically. Petrostates will have to strive to bring reform and as their governments start to depend on taxing their citizens, some will become more representative. Consuming countries will more likely be interested in sensible regulation of their power industry which previously sought to interfere in the politics of the oil-producing countries. The 21st-century system should also be less economically volatile. Electricity prices will be determined by competition and gradual efficiency gains.

While a more reliable energy system is developing, the threat of a poorly managed shift looms. There seem to be two risks. Autocratic China could briefly gain clout over the global power system due to its dominance in making essential components and developing new technologies. Today Chinese firms are producing 72% of the world’s solar modules, 69% of its lithium-ion batteries and 45% of its wind turbines. They also control much of the refining of minerals critical to clean energy, such as cobalt and lithium. Instead of a petrostate, the People’s Republic may become an “electrostate”. In the past six months, it has announced investments in electric-car infrastructure and transmission, tested a nuclear plant in Pakistan and considered stockpiling cobalt.

The leverage of China depends on how quick other economies move. Europe is has been a place where giant developers of wind and solar farms Orsted, Enel and Iberdrola are building such projects throughout the world. European firms are leading the race to cut their emissions, too. America’s potential to lead the race of clean energy has been affected by the rise of shale oil and gas, which has made it the world’s largest oil producer, and by Republican resistance to decarbonisation measures. If America were to act on climate change with, say, a carbon tax and new infrastructure its capital markets, national energy laboratories and universities would make it a formidable green power.

The other big risk is the transition of petrostates, which account for 8% of world GDP and nearly 900m citizens. As oil demand decreases, they will face a vicious fight for market share which will be won by the countries with the cheapest and cleanest crude. Even as they struggle with the growing importance of economic and political reform, the public resources to pay for it may lessen. This year Saudi Arabia’s government revenue fell by 49% in the second quarter. An uncertain few decades lie ahead.

Faced with these dangers, the sensible step will be to ease the adjustment, by making the transition more slowly. However, that would bring about a different, even more, destabilising set of climate-related consequences. Instead, as our special report in this issue explains, the investments being contemplated fall drastically short of what is needed to keep temperatures within 2°C of pre-industrial levels, let alone the 1.5°C required to limit the environmental, economic and political turmoil of climate change. For example, annual investment in wind and solar capacity needs to be about $750bn, triple recent levels. And if the shift towards fossil-fuel-free renewable energy accelerates, as it must, it will cause even more geopolitical turbulence. The move to a new energy order is vital, but it will be messy.