Russia’s war with Ukraine has many nations examining ways to shorten supply lines by generating more domestic energy, which will speed a global transition away from fossil fuels “to a more decarbonized system,” BP Chief Economist Spencer Dale forecasts.
“Right now, oil and gas are the most heavily imported sources of energy in the world,” he said, but the war has fostered “heightened concern over energy security,” which will “accelerate the nature of the energy transitions” to favor domestic generation, much of which “will likely be in non-fossil fuels, such as wind, solar, nuclear.”
That’s good short-term news for fossil fuel industries in the United States, the world’s largest oil and natural gas exporters, which are likely to see demand increase over the next decade, before BP forecasts declines by 2035 as domestic-sourced energies become more viable.
“The passing of the momentous Inflation Reduction Act (IRA) in the U.S.” in November 2022 is also spurring worldwide investments in renewables and nuclear power that, within a decade, will begin to elbow oil and natural gas out as primary electricity generators, he said.
BP forecasts a reduction in global fossil energy consumption from the present 80 percent in total power generation to anywhere from 55 to 28 percent by 2050.
Coal consumption will tail off even more dramatically in the coming decades, Dale said, but he predicts that countries such as China and India—which now import up to 85 percent of the oil and half the natural gas they need—may use coal because they have ample and affordable domestic supplies.
President Joe Biden said in January that fossil fuels “won’t be needed in a decade.” Although BP’s analysis indicates a potential decline in demand, it maintains that oil and natural gas will remain key energy assets for the foreseeable future.
The ‘Energy Trilemma’
London-based BP is the world’s fourth-largest investor-owned oil company, behind ExxonMobil, Shell, and TotalEnergies. Its BP America Division alone reported $164.2 billion in revenue in 2022.The company’s operations range from exploration to retail in more than 80 countries. It owns nearly 19,000 service stations worldwide under its brand and as Amoco in the United States and Aral in Germany.
The projections and data included in BP’s annual Energy Outlook, published every January, include highly regarded indicators that are widely used in analyses by industry leaders, government planners, economists, financial institutions, and investors.
The Energy Outlook appraises the security, affordability, and sustainability of the global “energy system” through three scenarios in meeting 2050 carbon dioxide emissions standards in the Paris Agreement.
“All of these scenarios will be wrong. We cannot predict the future. We don’t have a preferred scenario, a base scenario,” Dale said.
While those projections span a wide range of possible scenarios for the global energy system over the next 30 years, one thing the 2002 Energy Outlook didn’t calculate was Russia invading Ukraine in February 2022.
As a result, Dale said, “the world has changed,” elevating security and affordability evenly with sustainability to form “the energy trilemma.”
“We lost sight of the other two dimensions that a well-functioning energy system needs to provide: security and affordability,” he said. “In the context of any enduring, durable energy transition, it would need to take in all three of those dimensions. The big messages of the past year have reminded us of the importance of the other two components as we seek to decarbonize the world’s energy systems.”
Pendulum Shift to ‘Net Zero’
The three dimensions are each weighed across three scenarios: “business as usual,” or current trends; “net zero,” or what would be required to meet 2050 Paris goals; and “war-accelerated,” which would exceed those 2050 standards.The war in Ukraine is “shifting the pendulum strongly from ‘business as usual’ toward ‘net-zero,’” Dale said, with “more fragmented markets” based on policies that “increase domestic resilience” as opposed to international trade.
One of the nuances of how energy policies are changing is that before 2022, planners were “heavily focused on lowering the supply of hydrocarbons,” he said, noting that now they must make similar efforts to ensure that “demand falls in line with supply.”
This will “slow the pace of globalization” and demand for imported hydrocarbons, which may become less available anyway because Russia’s petrochemical industries—the world’s second-largest fossil fuels exporter, much of that going to Europe—will presumably have “limited access to western technology and finance,” meaning that they’re unlikely to improve in performance or efficiency.
Majkut said U.S. natural gas exports have “kept the lights on in Europe” since Russia’s invasion of Ukraine and noted that there are calls to expand the pipelines and terminal infrastructure necessary for U.S. producers to ship oil and natural gas overseas.
If Europe and other nations, citing the need for secure supply lines, eventually replace imported oil and natural gas from the United States and overall use of renewable and nuclear energies increases, Majkut wondered whether long-term investments in pipelines and terminals being pondered in Congress today will be tomorrow’s “stranded assets problem.”
Dale said it’s better to be figuring out what to do with a “stranded asset” decades later than worry about being stranded now because you didn’t have that asset when it was useful.
He compared it to property insurance.
“We have a decision about whether we want to pay our house insurance,“ Dale said. ”By [paying insurance], we have to forgo some consumption. You have to think of energy security as the same thing.”
He called investment in export infrastructure “a trade-off for a robust and resilient energy system” whose mere presence as an “assurance” propels innovation in others.
“Think about energy security the same way as house insurance but on a national level,” Dale said. “Some assets—it is really critical that they are there to provide assurance.”
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