Today
Mon 29 November 2021

Nafeez Ahmed sees the current energy crisis as a symptom of a deeper malaise – reliance on Russia and fossil fuels – which could lead to spiralling inflation and a perfect global economic storm

Britain and Europe are in the midst of a gas crisis that signals an approaching turning point in the global energy system which markets in their current form will be unable to resolve. The Government’s prevailing approach was exemplified in the Prime Minister’s simplistic refrain that: 

“… the problems we are seeing are temporary. We’re experiencing bottlenecks in all kinds of things – huge stresses – as the world wakes up from COVID. It’s like everybody going to put the kettle on at the end of a TV programme.”

But Boris Johnson is wrong.

The current price hikes are a warning sign of a deeper shift: a turning point of global proportions that requires a very different approach from business-as-usual. Though no longer rich in fossil fuel resources, consistently poor policy choices mean that the UK and Europe as a whole remain dependent on them. The failure to recognise the implications has set us up for increased geopolitical dependence on Russia, and a future of intensifying, intertwined cyclical climate and energy crises that will amplify the chance of triggering a series of shocks that could devastate the global economy.

To understand what’s happening, we need to go beyond banal headlines and simplistic reductions of the crisis to one or the other factor, and instead attempt to understand the crisis through a whole systems lens. 


 

The Elephant in the Room

In 2015, I had joined Anglia Ruskin University’s Global Sustainability Institute as a visiting research fellow. The preceding year, the Institute’s Global Resource Observatory had published a series of maps revealing the state of resources available in different countries around the world. The analysis demonstrated that relative to rates of domestic consumption, the UK had only 10 years of coal remaining, and five years of coal and natural gas. Most of Europe was found to be in a similar state, with only five years or less remaining of gas, and only a few countries with up to 10 years’ worth left. The maps also highlighted astonishing levels of central government debt, concentrated in the US, UK and parts of Europe.

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Europe’s gas crisis, then, has not come out of the blue, but was years in the making. It is not simply a side-effect of market dynamics as most media commentators have wrongly claimed, but a result of the fundamental structure of the existing global energy system – including Britain and Europe’s continued dependence on fossil fuels, which has triggered this current cycle of converging climate, energy and food crises. 

In my research at Anglia Ruskin University for my book, Failing States, Collapsing Systems, I discovered an alarming pattern from the study of state-failures and civil conflicts in every region of the world: countries become vulnerable to state-failure within around 15 years of losing stable and consistent supplies of energy. Although it’s not easy to apply this to complex cases involving multiple countries with various import and export relationships around energy, if we view Europe as a whole, the mounting evidence that the continent is no longer a significant fossil fuel producer dovetails with the evidence that significant fossil fuel producers are displaying declines in production.

In May 2021, the French Defence Ministry commissioned Paris-based think-tank, The Shift Project, to examine the continent’s energy woes. The report, authored by renowned International Energy Agency oil expert Oliver Rech, concluded that total oil supplies to the EU are likely to drop by 10-20% over the next decade. Unless this shortfall is rectified through a fundamentally new energy strategy, Europe will face escalating political disruption out to 2036 which, at that point, may lead to continent-wide processes of state-failure.


 

Climate and Energy: A Perfect Storm

The gas crisis is thus part of a wider systemic failure. We are now experiencing a series of amplifying feedback loops between different crises within human and earth systems, with crises in the climate and energy systems mutually accelerating one another.

On the one hand, the increasing frequency and intensity of extreme weather events due to climate change meant that Europe had suffered from an especially bitter winter. The pandemic had also pushed up remote working. Both drove up demand for gas for heating. As economies began to rebound, volatile summer heatwaves led to higher electricity use due to air conditioning, keeping demand high through 2021. US gas exports were also down thanks to hurricanes disrupting refineries, and UK wind power was low due to the record heat. 

These problems would not have emerged if the UK, US and Europe had seen the writing on the wall much earlier and more aggressively ramped up deployment of solar, wind and batteries. Instead, as a result of the tepid roll-out, the result was increased intermittency of supply.

 

 

How to Save the World in 15 Years Part Two: Net Zero is Not Enough

As demand went up, supply constraints also emerged within the world’s biggest supplier of natural gas: Russia. In recent months, Russian gas exports to Europe experienced a marked decline. Some analysts speculate that this is a result of Russia’s efforts to pressure the European Union (EU) to ratify its Nord Stream 2 export gas pipeline. That may well be a factor, but there is a more fundamental issue: rising domestic gas consumption within Russia. 

As the business news organisation, Bloomberg, reported in early September, Russia’s own storage for domestic consumption has been depleted. In preparation to keep citizens warm in the winter, Russia’s majority state-owned energy company, Gazprom, needs to keep as much natural gas at home as it currently exports to Western Europe. Supplies equal to about 80% of daily exports to Europe are being pumped into underground storage sites, with a view to secure a record 72.6 billion cubic metres in domestic inventory by November, according to Gazprom data.

The spur behind Russia’s sudden domestic gas hunger was also linked to climate change. The unusually cold temperatures in the 2020 winter and heatwaves during the summer of 2021 drove the surge in Russian gas consumption. 


 

Russia: a Slowly Dying Energy Goliath

The short-sighted UK and Europe choice to continue to be dependent on Russian fossil fuels is coming home to roost. 

Over the coming years, Russian domestic gas consumption is expected to increase due to rising demand, regardless of climate events. In June, Gazprom forecast that domestic gas consumption would rise by 7.5% within the next five years. This means that the Russian export constraints Europe is experiencing today is a taste of things to come, happening more regularly over the next decade, rather than just a one-off blip. 

The interplay between fossil fuel exports and domestic consumption is a complex one, captured in Texas geologist Jeffrey J. Brown’s Export Land Model (ELM). The ELM explored how a country’s fossil fuel exporting capacity is not just determined by how much it produces, but also by how much it consumes. The more a country ends up consuming its own energy resources due to population growth and lifestyle, the less capacity there is for exports. So when a country begins to approach the limits of its own resource production capabilities relative to its internal consumption, its ability to export at the same rate also declines. 

As Britain and Europe’s domestic fossil fuel production capacity has declined, this has increased their dependence on imports from countries like Russia. The constraints Russia is experiencing on its natural gas exporting capability look to be only the beginning of the country’s energy problems. 

While the country still has large gas reserves, as domestic gas consumption rises beyond current levels this is likely to increasingly constrain its exporting capacity. But Russia also faces looming oil production constraints. 

Earlier in 2021, a Russian Energy Ministry strategy document predicted that its oil production had most likely already peaked in 2019, and would probably never hit that level again. The impact of the pandemic, the shift to electrification and renewable energy disruption are all key drivers, but there are also combined geological and economic factors. As production has shifted from conventional to unconventional forms of oil and gas using more expensive and dirtier methods, larger and larger amounts of energy are needed for every unit of energy extracted. This decline in ‘energy return on investment’ (EROI) has made the economics of the industry less efficient, less attractive, and less profitable, disincentivising more investment in expanding production.

Russia’s internal admission provides sobering confirmation of the broad accuracy of a global oil production model created five years earlier by CERN physicist Michael Dittmar. Dittmar had warned that Russian oil production could decline by half over the next two decades. Europe’s chronic addiction to Russian fossil fuels is, in other words, like a sinking ship.

“The bottom line is that as Europe’s domestic oil supplies slowly dwindle, there is no meaningful strategy to wean ourselves off abject dependence on Russia; the post-carbon transition is consistently too little, too late; and the impact on Europe’s economies — if business-as-usual continues — will continue to unravel the politics of the union,” I wrote for The Ecologist in 2018. “While very few are talking about Europe’s slow-burn energy crisis, the reality is that as Europe’s own fossil fuel resources are inexorably declining, and as producers continue to face oil price volatility amidst persistently higher costs of production, Europe’s economy will suffer.” And here we are.


 

The End of the Age of Fossil Fuels

The 2021 global energy crisis is a continuation of an ongoing deeper energy transformation. Conventional analysts have a tendency to view events as discrete episodes that happen in a silo. In reality, the gas crisis is merely the latest episode in the continued unravelling of the incumbent energy system, that has been hugely exacerbated by the ongoing failure to recognise the urgency of shifting to the most promising clean energy disruptions. 

As economists Simon Tagliapietra and George Zachmann, point out, it is high time that policymakers woke up to the more fundamental reason for the high volatility and excessive price spikes: “The industry knows the energy system is undergoing a profound and fast transformation. Investments in fossil assets aren’t sustainable long-term. But governments have not yet committed clearly enough to a low-carbon future. So, the energy supply-demand balance in the EU will be volatile depending on how quickly fossil fuels are phased out and green energy is phased in.”

It is therefore crucial to resist calls to boost incumbent but doomed conventional energy industries, as opposed to accelerating the deployment of the fastest growing clean energy technologies. 

That’s because all the evidence suggests that Europe is experiencing the slow demise of the fossil fuel era, and needs to call a spade a spade. Fossil fuels are being disrupted by multiple forces. The internal economics of the oil, gas and coal industries are crumbling under their own weight, plagued by declining EROI, plummeting profits and rising debt. 

Although the world still has vast supplies of oil and gas, it is becoming increasingly uneconomical to extract. New discoveries of oil in 2019 were less than a quarter of those made in 2010, and have continued to decline. According to HSBC, the world’s sixth largest bank, 81% of the world’s total fossil fuel liquids production is now in decline. Five years ago, the bank had warned of a potential supply shock that would drive up prices again. The pandemic forestalled this outcome by crashing demand, but as it decimated reserves and disincentivised new investment in already declining production, this has set us up for another supply gap

 

 

How to Save the World in 15 Years Part Three: The Looming Death Spiral of Carbon-intensive Industries

But as Tony Seba, the co-founder of the independent think tank, RethinkX, has noted, there is more to this story. “The web did not disrupt the newspaper industry because we ran out of paper,” he wrote in Clean Disruption of Energy and Transportation. Neither did it disrupt vinyl and CDs because they ran out. Rather it was “a faster, cleaner, cheaper, more compelling way to produce, store, transmit and consume content.” 

Incumbent fossil fuel industries are crumbling under their own weight, but their demise is also being accelerated by the emergence and distribution of disruptive technologies across the information, energy, food, transport and materials sectors which are offering faster, cleaner, cheaper and more compelling ways to meet our fundamental civilisational needs. These technologies have rapidly become cost-competitive with incumbent industries, and are set to become orders of magnitude cheaper over the next decade. We are therefore likely to continue experiencing cyclical market crises in the fossil fuel-dominated energy sector as its decline accelerates. 

If we fail to recognise this transformational inflection point for what it is, and adapt accordingly by accelerating the post-carbon industries, those crises will keep hitting us again and again. 


 

A Deepening Economic Crisis

As these crisis processes unfold, the geopolitical stability of incumbent political systems will become increasingly strained, but so too will the viability of a myriad of industries from energy suppliers to food producers, from steelmakers to manufacturers. However, the risk doesn’t operate in a linear fashion from one sector to the next.

The sudden hiking of energy costs represents a whole systems threat to an already vulnerable world economy that is now oversaturated in the vast levels of debt on which its structurally dependent to continue growing. As the Guardian’s economics editor, Larry Elliott, wrote in August with a compelling insight all too rare among financial commentators, it’s not that we simply face the prospect of another financial crisis. In reality, the 2008 financial crisis never ended. The 2020 pandemic-induced slump just appears as yet another episode in “one long crisis stretching back two decades,” he observed.

With the energy price hikes potentially lasting into 2022 and reaching record levels, the gas crisis will push up inflation not just in Europe, but all over the world, spiking costs of living, plunging poorer households into debt, and undercutting the debt-dependent consumer spending that has helped spur the economic ‘recovery’ so far. 

The huge levels of systemic debt that the world’s largest economies have relied on to fuel this mirage of a ‘recovery’ could be on the verge of unwinding. In the US, President Biden’s administration is frantically trying to increase the total amount of money the government is authorised to borrow, without which the government might be “unable to pay its bills”, resulting in “widespread economic catastrophe” according to Treasury Secretary Janet Yellen. On the other side of the world, China is bracing for impact as Evergrande, the country’s largest property developer, faces a liquidity crisis that is rattling global stocks.

A collapse or breakdown in any of these sectors could be impossible to contain, and may be enough to overwhelm the capacity of the global system to respond to other emerging crises as shocks in one sector are simultaneously transmitted to others. 

Each of these crises alone could be enough to act as a trigger for a new global downturn, yet another episode in the unfolding of this long crisis. But we cannot respond intelligently if we refuse to understand the dynamics of what we are subjecting ourselves to: the protracted unravelling of the global fossil fuel-based energy system is now increasing the pressure on those triggers to a degree reminiscent of the perfect storm that preceded the 2008 global financial crisis. 

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