TheMarketForIdeas

The various World Economic Forum reports speak of poly-crises and perma-crises, which act as powerful stressors on our societies. Their effect has been visible in the area of energy, which is fundamental for the effective functioning of our economic, social and political lives. The effects of the American invasions in the Middle East and the civil wars that broke out after the so-called Arab Spring (including the emergence of Daesh, the so-called Islamic State) have proven that an increasingly integrated global energy system is also prone to cascading effects as a result of crises in demand, supply or risk perception. In recent years, we have seen the effects of the pandemic, resulting in a shrinking and then increase in energy demand, and the war in Ukraine (and sanctions against Russia) had significant effects on perceptions of security of supply and markets. We may soon see an impact from Houthi rebel attacks on energy shipping traffic through the Gulf of Aden, much of it aimed at Europe. Disturbances in the global energy markets increase the prices of almost all products, implicitly also increase inflation, lower living standards, bury companies, especially in energy-intensive fields or with fossil fuels as inputs and often strategic (metallurgy, petrochemicals, arms industry). However, not all of these effects can be attributed to exogenous shocks. They are also the result of a mix of ideology, special interest groups, civil society organizations, which have pushed many Western countries towards counterproductive energy policies, including for the desired reduction of carbon emissions (decarbonization), which have ended up exacerbating energy insecurity in the West. Especially in the case of Europe, the recurring crises in the field of supply, sustainability, and accessibility of energy for large consumers will sharpen trends of Western deindustrialization. There will be four ripple effects – a reduced competitiveness of Europe on the global stage, the economic stagnation of Western Europe after 2008 (with small exceptions such as the Netherlands or the Nordics) becoming chronic, the vulnerability of the Energy Union (resulting in more frequent blackouts) and an inability of Europe to rise to challenges such as the production of munitions and other war materials. From Romania’s perspective, even if we will not face supply crises, we will suffer secondary effects of the economic weakness of our main economic partners. Also, as we have not yet seen a country that becomes developed in conditions of high energy access costs, we can ask the question whether Romania and other Eastern countries will be able to enter the club of the developed after the limits catch-up growth will be reached, and countries will face middle income traps, which can produce long-term economic stagnation.

Some of Europe’s mistakes

European Green parties have become increasingly influential among young people, and other poles of power in society have neglected both the strong anti-nuclear trend they cultivated (with alleged Soviet and later Russian aid and encouragement) and increasingly radical approaches on how to transition to renewable energy (which generates its own dependencies on China, among others). Notable in this regard is Germany’s unilateral renunciation of nuclear power after 2011, a decision taken out of Merkel’s need for support from the Greens, as well as the impact of the Fukushima disaster on the collective psyche. In practice, it meant not only that Germany had to restart coal-fired plants (including for grid stabilization to connect new wind farms in the Baltic Sea), but also higher imports of electricity from France, from nuclear sources, and from the Czech Republic and Poland, based on coal or gas. This was the time when Der Spiegel ran articles asking whether electricity had become a luxury good. Under German influence, the Europeans’ “wandering in the desert” on nuclear issues lasted more than ten years in which new projects were discouraged (also taking advantage of the massive delays and cost overruns from the French projects at Flamanville and Olkiluoto). Only recently has nuclear power become politically acceptable again at European level, with clear signals of a change in direction due to the need for security of supply. In parallel, problems were seen with the maintenance of existing assets (the French fleet of reactors, which entered emergency overhauls in the midst of the war in Ukraine), with the delays and cost overruns for the completion of the aforementioned new assets, but also a general decrease in the capacity of the European industry in the nuclear field, left in its dust by the South Koreans and, above all, the Chinese. A case in point is the British Hinkley Point C plant, which EDF did not have the financial capacity to build on its own and teamed up with China General Nuclear Power Corporation, while estimated costs ballooned from 13 billion of dollars in 2016 targeting 2023, to 31 billion dollars in 2023 targeting 2028.

Some Green groups have joined the trend of strangling/constricting supply in order to force the decarbonization of the economy and at the cost of causing "demand destruction", more precisely an economic contraction. According to the French expert Thierry Bros, the transition from coal directly to renewables is impossible, as gas is needed as a transitional fossil fuel, now also in the European thinking. Germany reacted positively by increasing gas consumption, reducing emissions, but at the cost of increasing dependence on Russia. The way the German elite laughed at Donald Trump when he issued warnings about the consequences of this addiction in 2020 indicated a lack of vision in the wider security field. Germany had reached the point where even its grand hydrogen plans would depend on Russia, which already had a strategy to become, by 2030, the main exporter of hydrogen to the EU, including through the Nord Stream gas pipelines. The war in Ukraine also highlighted a number of other problems related to the way in which important European assets were sold off such as gas storage facilities (those of Wintershalle, sold to Gazprom), the absence of concrete European provisions related to the obligation to accumulate stocks of natural gas ahead of winter (an early warning sign of the February 2022 war being that the Russians had not filled their storage facilities as they used to), but also a lack of supplier diversity. Unlike oil, which is easier to redirect, natural gas supply from diversified sources requires the vision to build the infrastructure ahead of time to facilitate it. However, the sanctions on Russia not only launched a rush to install liquefied natural gas processing facilities in European ports (often based on a converted LNG vessel), but also efforts to... double LNG imports from Russia, which was exempt from sanctions, not being transported through the pipeline network. Replacing Russia with the US in the grand scheme of European dependency aligns the energy and security partnership, but it will also entail a new transatlantic power relationship that will force concessions from Europe, which will find it harder to promote strategic autonomy or data sovereignty.

The 360-degree turn of the USA

The Americans did not disappoint either. An equally strong Green segment, present at all levels of government (local, state, federal) and especially aligned with the Democrats, has led to some important American own goals. The revolution in unconventional energy sources, especially shale gas, has turned the US into the world’s largest energy producer and one of the largest exporters during Trump’s tenure. In the classic American-style, the sector was full of relatively small, over-indebted and fragile firms, and the fracking industry went through two major corporate crises linked to downward shocks to global prices, possibly also orchestrated by OPEC+ to drive a rival with a much higher operating cost out of the picture (estimated breakeven at $50 a barrel in the US compared to $6 in Saudi Arabia, at ARAMCO). Although Trump was aligned with the mainstream Republican party in being pro-energy, he faced obstructionism at every turn on the topic of building infrastructure to facilitate energy transportation and access to global markets. He was not even allowed to fill the federal reserve with energy at very low prices during the main phase of the pandemic, which would have helped Biden limit the rise in energy prices during the election period by releasing stocks from the reserve. The US has enormous deposits in Alaska and other areas where natural gas is currently either flared (now illegal, but still practiced at a level of 3-7% of the total) or reinjected, lacking transport infrastructure to an LNG terminal.

The Trump Administration has also facilitated a nuclear mini-renaissance on the side of small modular reactors (customers include Romania and Poland) and involved the OECD in promoting the new nuclear momentum. After decades of rapidly building the world’s largest number of reactors, anti-nuclear forces have burdened the process governing the construction of new reactors, increasing cost and time. In states such as California, laws have been enacted that prohibit the construction of new reactors, and some states (and California) have ended up shutting down their nuclear plants before the end of their useful life, for environmental reasons. The last nuclear reactor inaugurated by the US, Vogtle 3 in Georgia, was on July 31, 2023, seven years after the penultimate one and almost 50 years after the start of the administrative process. Signs of a change in attitude can also be seen in the way California has postponed, until 2025, the anticipated closure of the Diablo Canyon nuclear power plant, the last one left on Californian territory.

The Biden Administration then returned to the Democrats’ pro-green, anti-energy policies. After this predictable move, the US has undergone a U-turn on energy policies in the Biden era as a result of ideological pressures on the Administration. After coming to power, Biden gave a major speech on the topic of giving up fossil fuels within ten years, reflected including in political statements of the International Energy Agency which, according to expert Thierry Bros, would have sent a signal to the market to underinvest in energy even before the invasion of Ukraine. For electoral reasons, he strongly attacked Saudi Arabia (calling it a pariah state), reducing the chances of the US to coordinate production increases with the main OPEC group to reduce inflationary pressure in Western societies. It also cancelled 99 percent of new prospecting licenses on federal land granted by the Trump Administration (much of the land west of Texas belongs to the federal government) and blocked a number of energy infrastructure projects. The invasion of Ukraine and sanctions on Russia produced the first 180-degree turn by the White House, which positioned the US as Europe’s long-term LNG supplier, a role that Trump had also offered but which did not make economic sense at the time. President Biden also signed an executive order overturning environmental provisions for a pipeline project that ran through protected and tribal lands. After prices stabilized, global supply lines were redrawn (the Europeans buying what the Russians’ new customers would have bought) and the Europeans twice successfully went through the exercise of stockpiling LNG stocks for the winter, the Biden Administration once again succumbed to electoral logic, in the context of the 2024 presidential elections. He made another 180-degree change, limiting future LNG export licenses to Europe, hoping that this would signal his ecological and green credentials, but also that the American market will react to the promise of access to inventory without European competition by lowering the price. For Europe, the blow was not an immediate one – the period 2024-2028 is covered by the imports already foreseen, including the American ones. After 2028, Biden is betting that Europe will have lower or equal energy consumption (possibly through impoverishment and deindustrialization). But he’s also betting that nothing will happen to Europe’s supply or even global supply by then to warrant the issuance of export licenses and related infrastructure development. This expectation is unrealistic after the events of the last two decades (most recently, Houthi attacks on ships trying to pass from Asia to Europe and vice versa through the Suez Canal), as part of the poly- and perma-crisis, which suggests that the global system is in major need of extra standby (uneconomic) extraction capacity to compensate for problems in other nodes of the global energy grid.

Conclusion

Both the Europeans and the Americans have made major mistakes in their energy policies, trying to satisfy ideologies, special interests and pragmatic political realities. The result, in the context of a complex, dynamic and challenging security environment, was a system vulnerable to all kinds of crises, including financial ones or arising from histrionic market movements. A study on this subject, which will appear soon under the European Defense Agency and for which I was a member of the supervisory committee, points out that the price movements in the market, likely to cause real damage (bankruptcies and inflationary shocks), are due mainly to the lack of additional market capacity. Almost everything currently in the market is also consumed, and few entities have the ability to extract more energy on a dime to offset the exit of another supplier from the market. For oil, the only surplus is in the hands of OPEC+, particularly Saudi Arabia, and is equivalent to 1% of total supply. For natural gas, the surplus is in Russian hands, mostly because we are dependent on pre-existing infrastructure to switch suppliers.

As a conclusion, Western states should focus on measures to reduce the demand for fossil fuels, not to constrain the supply, which only provides higher profits to foreign suppliers. The cost of European energy subsidies in 2022 was €266 billion (1.7% of GDP), so we already know how expensive the political option of not ensuring security of supply is. Coal is 21% of European emissions, but only 12% of the energy mix. Replacing it with natural gas would lead to an 11% drop in carbon emissions. In the context of the European priority to reduce emissions by 90% compared to 1990 by 2040, it is clear that natural gas will be important as a transition medium from coal to renewables, which suggests the need to invest in security of supply. Europeans need to change their buying behaviour in energy futures markets as well. The world’s third-largest LNG importer, the EU, has a share of long-term LNG contracts that is half that of other countries, preferring to buy at spot prices to take advantage of various dips, but opening itself to opportunistic marginal price increases. Another difference is that a lot of electricity in the EU was bought at spot prices, with authorities around the world scrambling to encourage "power purchasing agreements" directly between large consumers (including the armed forces) and power producers. Last but not least, decarbonisation cannot be achieved without nuclear energy, especially in a European context, because the alternative would be for Europe to become a major importer of electricity from other regions, in addition to oil and gas, which would further undermine security of supply for energy.

Photo source: PxHere.