Third Global Energy Crisis: History Repeats Itself

Green Revolution

With natural gas and coal prices at record highs and crude oil prices not far below their 2008 peak, the world appears to be more carbon dependent than ever. For many, plans for the clean energy transition are getting further and further away.

In the midst of this third global energy crisis, the legacy of the first two – sparked by the 1973 Arab-Israeli War and the 1979 Iranian Revolution – must be remembered. Although Middle East leaders defend the thesis that the world emerged from the first oil crisis more dependent on hydrocarbons than before, data show that this narrative is controversial. Those geopolitical crises of the 1900s certainly didn’t spell the end of oil, but they dealt a blow that was never recovered.

In the US, it took two decades for oil consumption to return to the levels of 18.5 million barrels per day reached in 1978, on the eve of the second oil crisis. European Union countries never returned to their 1979 demand levels of 16.9 million barrels a day, despite an economy nearly three times the size it was then.

Oil in 1973 made up about half of the world’s primary energy consumption. Now only 31%. The change, particularly with regard to members of the Organization of the Petroleum Exporting Countries (OPEC), was abrupt: between 1973 and 1985, OPEC’s share of world energy derived from oil fell from 25% to 11%. It never rose substantially above those levels.

Afraid of having their economies hostage to a group of absolutist monarchies, the big oil consumers started an energy transition, moving away from this source of energy, which seems to have been successful.

In the UK, the economy began a coal rush as new power plants were built, coal mines restructured and reserves opened. In the North Sea, offshore oil rigs have sprung up to tap into Europe’s own oil reserves. An increase in demand for fossil fuels in the United States has caused a boom in its coal reserves, which since the 1980s have provided more than 40% of the coal consumed by the country.

France has announced plans to switch its entire generation fleet to nuclear power and has tried to sell the technology to Iran and Iraq to secure oil supplies. Worldwide, nuclear generation quintupled between 1973 and 1983 before doubling again in 1990.
In Brazil, the government introduced ethanol-based road fuel and built the Itaipu and Tucuruí dams, still some of the largest in the world.

The explanation for this shift lies in one of the oldest lessons of commodity markets — substitution.
Whenever a product becomes too expensive or unreliable, consumers switch to something that better meets their needs. The advantage of oil in 1972 was its low price and ready availability. In 1980 it was about eight times more expensive and much less reliable.

Recent events expose a dramatic unlearning of this lesson. With President Vladimir Putin’s decision to use gas as a weapon following Russia’s invasion of Ukraine, it is gas that will be the biggest loser.
Consumption will fall this year by around 20 billion cubic meters, according to recent data from the International Energy Agency (EIA), and medium-term consumption growth, forecast at 1.6% in 2019 and 1, 4% last year, will be just 0.8% by 2025, according to the EIA.

The cycle repeats itself: Today’s record natural gas prices and supply disruptions are undermining the security of natural gas as a reliable and affordable energy source.

Persian Gulf Oil and Gas

However, at this moment, it is the Persian Gulf region that is in its energetic fullness. With an estimated $3.5 trillion bonanza over the next 5 years, thanks to Putin’s courtesy, it could become an adjunct to world geopolitics, not only due to the re-engineering of global energy flows in response to Western sanctions and climate change, but also due to the rebuilding of geopolitical alliances in the Middle East region.

In response to Iran’s expansion of influence northward over the past decade, most Gulf states, Egypt, Israel and others have moved closer. This is reflected in the Abraham Accords signed by Israel and two Arab states in 2020, mediated by the United States, which seek to establish diplomatic relations in the region.

Meanwhile, Saudi Arabia and the UAE are increasing their capital investments in oil with the long-term goal of being the sector’s survivors; while Qatar expands its liquefied natural gas (LNG) production projects to an annual production equivalent to 33% of all LNG traded in the world in 2021.

A likely outcome is that the Persian Gulf will remain important in world affairs for years to come. In oil and gas, its share of Europe’s imports could rise from less than 10% today to more than 20%. But while a new Gulf may be emerging, its political volatility cannot be ignored.

The Coal

It’s tempting to see this whole hydrocarbon crisis as a simple victory for the climate and energy transition – but at a time when geopolitics is dominating the energy conversation, it’s the dirtier fossil fuel that is bucking the trend. While coal consumption is unlikely to return to 2013 peak demand levels, consumption is beating previous forecasts as the high price of natural gas causes utilities in Asia and Europe to delay plans to phase out the fuel. fossil in the short term.

Unlike oil and gas, coal reserves are found in a variety of countries with China, India and Indonesia accounting for more than two-thirds of global production. With the energy crisis on the rise, there is a risk that the necessary shutdown of coal-fired energy sources in the world will be postponed.

Renewable energy

Even so, the forces of substitution favor renewable energy, which is now cheaper in almost all regions. Three-quarters of India’s new power generation capacity installed in 2021 was renewable; until August of this year, the equivalent number was 93%. Coal-fired generation in China will drop 1% this year, the first decline since 2015, according to the EIA.

Everywhere, renewables, and to a lesser extent nuclear, account for most of the new demand. Emissions from the energy sector will fall by 5% in the Americas and 8% in Europe next year as the brief slump in coal demand eases. The REPowerEU – Plan established by the European Union in May of this year, to reduce dependence on Russian gas in the face of disturbances in the global energy market, caused by the invasion of Ukraine by Russia – will quadruple the solar capacity in the European Union. In the North Sea, whose oil rigs helped reverse the impact of the energy crises of the 1970s, European governments pledged in May to build 65 gigawatts of offshore wind power by 2030 – equivalent to around 1.5 times global offshore capacity last year.

The US Inflation Reduction Act, announced in July of this year, plans to reduce the country’s emissions by 40% below 2005 levels by the end of the decade. The solar panel industry, for example, is already building a supply chain that would be enough to put that industry on track to zero carbon emissions.

Attempts to prove the world’s dependence on fossil fuels have only accelerated our distance from them. The energy transition is gaining momentum. And Brazil is clearly well positioned in this global context, with all its investments and projects in energy generation through renewable sources for the short, medium and long term.

Beatriz Canamary

Beatriz Canamary is a consultant in Sustainable and Resilient Business, Doctor and Professor in Business, Civil Engineer, specialized in Mergers and Acquisitions from the Harvard Business School, and mom of triplets. Today she is dedicated to the effective application of the UN Sustainable Development Goals in Multinationals.

She is an ESG enthusiast and makes it possible to carry out sustainable projects, such as energy transition and net-zero carbon emissions. She has +15 years of expertise in large infrastructure projects.

Member of the World Economic Forum, Academy of International Business and Academy of Economics and Finance.