There has been an unspoken assumption that the West knows what it’s doing because it has been doing it longer than the East. Almost all developed economies are in Western Europe and North America. Yet recently, the tables have turned in one vital respect: energy policy. During the last few years, the EU has doubled down on its ambition to become the world’s first net-zero region. It has built up massive amounts of renewable energy, has slated huge investments in green hydrogen, and has been adopting policy after policy to discourage the consumption of fossil fuels.
In the U.S., the big push into renewables started two years ago as President Joe Biden took office. The transition from a fossil fuel-based economy to one based on and fueled by renewable energy was a central tenet in his campaign, and he got to work from day one, banning the Keystone XL pipeline from Canada and soon after temporarily banning oil and gas drilling on federal lands.
Meanwhile, far, far, away in the East, OPEC+ was formed to include two of the world’s largest oil producers—Russia and Saudi Arabia—as well as the Central Asian oil producers from the former Soviet Union, including Kazakhstan and Azerbaijan. The expanded cartel hasn’t always seen eye to eye, and just before the pandemic really blew up, the Russians and the Saudis engaged in a brief price war. Yet since then, OPEC+ has worked like a well-oiled machine.
The EU, the UK, and the United States have raced to install more wind turbines, more solar panels, and more storage, and carmakers, almost all based in either Europe or the U.S., have equally raced to commit tens of billions of dollars to the electrification of transport. Those races are both based on the Paris Agreement and the goal of reducing the rise in global average temperatures by 1.5 or 2 degrees Celsius from pre-industrial levels.
While the West has been busy with that, OPEC+, headed by Russia and Saudi Arabia, has been pumping as much oil as it has seen fit at any given moment. In addition to that, Russia has kept its metals and uranium industry going and has continued to forge closer ties with the Far East, with a focus on China. Saudi Arabia, meanwhile, has staked a claim in the mining world and has allocated tens of billions on renewable energy and smart tech investment.
What this means, basically, is while the West has enthusiastically focused on the final section of the energy supply chain—the wind turbines, the panels, and the EVs—the East, in the face of Russia and Saudi Arabia, has focused on the start and the middle of the process, on the raw materials without which no energy transition would be possible. While doing that, they have also continued what they have done for decades: supply the world, including transition-happy economies, with fossil fuels.
Right now, the West is discovering how important the raw materials part is for the energy industry as a whole. U.S. shale drillers cannot boost production as fast as the Biden administration would like because it has been plagued by shortages. The EU is struggling under a growing electricity cost burden because renewables have under-delivered while the EU has been trying to reduce its consumption of fossil fuels. Now, this consumption is on the rise, but it’s also a lot more expensive than it was because of the tight supply. Ironically, emissions are also on the rise. The Biden administration wants to bring in more Canadian oil into the U.S., but the Keystone XL pipeline that could’ve done that has been killed by that very same administration. The administration also wants more local critical mineral production but appears to not want the mines that would be necessary to do that. What it doesn’t want, apparently, is Russian oil and fuels amid the Ukraine war, but it will only suspend these imports beginning on April 22, so it can stock up before that.
In Europe, politicians have been equally active in punishing Russia for Ukraine with, so far, five rounds of sanctions that many have joked have hurt the EU more than they have hurt Russia. There is some truth in these jokes: EU energy prices have skyrocketed and stayed in the sky, industries are warning they might have to close if the EU sanctions Russian gas or if Russia decides to turn the tap off in retaliation, and people are beginning to protest.
Even so, Brussels officials are talking about oil and gas sanctions, and they just this week voted for a ban on Russian coal imports... to take effect in August. That last part is a sliver of common sense. Russia supplies 45 percent of Europe’s thermal coal, used for electricity and heat generation. The EU is now scrambling to find a replacement, while the world’s biggest coal exporter Indonesia is hiking its prices massively and Australia, another coal giant, is warning it will not have enough for Europe.
The West is beginning its painful awakening to one very simple fact. This fact is that whoever controls the raw materials controls everything. And if those who control the raw materials play their cards right, they are likely to remain in control while the consumers of these raw materials deepen their dependence on these external suppliers.
By Irina Slav for Oilprice.com