By Daniel Yergin
The Wall Street Journal, Jul. 6, 2022
As inflation soars, the West is finally getting serious about a goal it abandoned years ago.
The amnesia about energy security is over. The global energy crisis fueling record high inflation is shaking governments as consumers are stunned and angry at high prices and the prospect of shortages.
The general concern with energy security had dissipated over the past decade, in part because of the emergence of U.S. shale oil. Fracking transformed America from the world’s largest importer of oil to the largest producer and, after decades of promise, delivered energy independence. Political or military threats to energy supplies in the Middle East or elsewhere could be absorbed by U.S. production. When Iranian missiles hit a huge oil-processing facility in Saudi Arabia in September 2019—something that in previous years would have sent prices skyrocketing—American shale production cushioned the supply shock. Prices hardly budged.
Many observers also believed that demand for oil had peaked in 2019 and would quickly be replaced by renewables. Depressed demand during Covid lockdowns seemed to validate that assessment. An energy transition was thought to be well on its way, facilitated by a wide range of government policies.
Yet that perception ran up against reality. Demand for oil and gas bounced back as lockdowns ended and economies rebounded. The global energy supply couldn’t keep up, owing in large part to underinvestment in conventional energy sources.
This strong demand and weak supply set the stage for the global energy crisis that began to manifest last autumn. Prices for natural gas, coal and oil all spiked. Late last year, Europeans were paying five or six times the normal price for liquefied natural gas, and gasoline prices were taking off at U.S. pumps.
Russia’s invasion of Ukraine turned a burgeoning energy and economic crisis into a geopolitical one, further driving up prices. For half a century Russia, and before that the Soviet Union, had trumpeted itself as a “reliable supplier” of oil and natural gas, especially to Europe. That idea was widely accepted in Europe on the premise that interdependence would benefit both sides through what the Germans called “change through trade.” So confident in this relationship was Germany, for example, that it decided in 2011 to shut down its nuclear power industry—which produced a quarter of its electricity at the time—and let coal and Russian natural gas account for the shortfall.
In launching its war, Moscow assumed that Europe would eventually have no choice but to acquiesce to its conquest of Ukraine. Europe has instead opposed Vladimir Putin’s ambitions. Russia is responding by launching an energy war in Europe—disrupting flows of gas to fuel economic disruption and generate as much hardship as possible.
And so nations that previously paid little attention to energy security have been forced to search urgently for reliable alternative supplies. Europe is reupping its already ambitious commitment to wind and solar, but it seems to recognize that those additions at scale take some time and solve only part of the problem. A transition to renewable energy and electric cars won’t happen without energy security, which, at least for the next several decades, necessitates access to a diverse and reliable array of energy sources.
No country is making as rapid and determined a turnaround from dependence on Russian energy as Germany, which is undergoing what Chancellor Olaf Scholz calls the Zeitenwende, or turning point. Green Party leader and Economic Minister Robert Habeck has worked closely with the energy industry to understand how to move the country off Russian oil and gas—although gas is more difficult than oil. Berlin is committing to building several LNG-importing facilities—something Germany has spurned for decades. The country has even authorized restarting coal-fired plants to shore up energy supplies ahead of winter.
Other European governments are making a concerted effort to ban Russian oil. As Russian Deputy Prime Minister Alexander Novak said in June, Russia is “practically being pushed out of the European market.” This requires these countries to consider energy sources they once rejected. France is an example. At the beginning of his first term in 2017, President Emmanuel Macron floated the idea of shuttering 14 nuclear reactors and reducing the country’s dependence on nuclear power, which then accounted for 75% of France’s electricity. Now he is calling for six new nuclear reactors, and potentially another eight.
Or look to the U.K., which has given the go-ahead for the development of a new North Sea gas field. European nations have also been sending missions to the U.S. and Africa in search of more oil, gas and coal. The European Union is now promoting the development of Israel’s and Egypt’s abundant eastern Mediterranean gas field as an alternative to Russian energy.
Washington has also rediscovered energy security. President Biden entered office determined to accelerate the transition to renewables. Yet as Americans faced record-high prices at the pump, the administration began to urge U.S. companies to produce more oil and gas and refine more gasoline and diesel fuel. The Energy Information Administration forecasts that U.S. oil production will increase by about 800,000 barrels a day over the year, and refineries are currently going flat out. Though the administration continues to maintain its goals on energy transition, it recognizes that the world urgently needs more oil and natural gas. Mr. Biden has promised Europe more U.S. LNG, and the administration has been pushing other countries to pump more oil—most notably Saudi Arabia, which the president is scheduled to visit next week.
The global mismatch between demand and available supply for oil and natural gas is precarious. It will likely get worse over the next few months as Mr. Putin steps up his energy war, China’s demand increases as it comes out of Covid shut-ins, the dislocations in the global-supply system increase, and the tight balance between supply and demand tightens even further. Oil is a complex global market in which more than 100 million barrels typically move around the world every day with remarkable fluidity. But when the market is tight, it is highly vulnerable to disruption. New interruptions could come from a variety of sources—from a widening of the war beyond Ukraine to a cyberattack on natural-gas pipelines or a hurricane knocking U.S. refineries temporarily out of operation.
At this point, it would seem that the only thing that would take the pressure off global markets is an economic downturn resulting from high prices and central banks’ tightening. And that prospect does not provide a great sense of security.
Mr. Yergin is vice chairman of S&P Global and author of “The New Map.”
