Ukraine and the Great Energy Reset If there were ever a time for energy realism, it is now. Mark P. Mills
https://www.city-journal.org/ukraine-war-and-the-new-shale-revolution
Elon Musk is back in the news. In a tweet heard ’round the world, he stated a simple truth related to the Ukraine war: “Hate to say it, but we need to increase oil & gas output immediately.” The analogous truth—hate to say it—is that the Biden administration is right: banning and sanctioning Russian oil and gas exports is the wrong answer, even if it becomes politically necessary at some point.
Acknowledging these truths won’t change the tragic course of events unfolding in Ukraine. But naivete about energy realities is what robbed the U.S. and its allies of important “soft power” options and helped finance Russia’s aggression. In the near term, our choices are limited, but continuing down the same energy path is a formula for yet more problems in the future.
The fact is, exhortations aside, the world cannot easily, overnight, walk away from Russian energy. Europe gets 25 percent and 40 percent, respectively, of all its oil and gas from Russia. For Germany, the shares are 35 percent and 70 percent, as well as 50 percent of its coal needs.
In a prescient analysis released a month before the invasion, the Baker Institute for Public Policy considered Europe’s options if Russia’s supply of natural gas were taken away. It makes no practical difference—though the political differences are obvious—whether that happened because of an export cut-off (the initial motivation for that study) or an import ban.
The Baker Institute toted up a heroic combination of all possible measures Europe might take: surging imports of gas from Norway and Algeria, electricity imports from the U.K. and Scandinavia, putting the pedal-to-the-metal on operating coal and nuclear plants, and maxing out existing LNG terminals. All combined would barely make up for one-third of the energy lost from a Russian ban.
It should go without saying that the measures considered didn’t include any “surge” in supply from the trillions of dollars of windmills and solar farms across that continent—because sun and wind power can’t, ever, “surge.” Instead, the study concluded that an “unabated large-scale curtailment of Russian gas supplies to Europe would be regionally devastating and globally impactful.”
And then there’s oil. Energy historian and analyst Daniel Yergin was right to predict recently that the world is about to experience another “energy crisis.”
Sanctioning Russian oil and gas would require huge “carve-outs.” Even then, it would dramatically drive up global prices. Because oil, in particular, is as fungible a commodity as gold, a lot of Russia’s exports would continue anyway, both overtly to China and by subterfuge to others, as we know from the history of Iranian oil sanctions. The same would be true for much of Russia’s natural gas. While those exports would sell at a discount (as they already are), it would be from a far higher world price and thus would have nominal financial consequences for Putin—but huge, inflationary effects on citizens everywhere.
Asking American producers to increase “output immediately” would also be a mere symbolic gesture. It takes time to expand production significantly. Scott Sheffield, CEO of Pioneer, America’s biggest independent shale-energy company, warned a few days ago that turning on a dime can’t happen following the years of hammering shale companies have taken from investors and politicians. Of course, if the government were to anchor that request in a substantive and dramatic shift in policies and legislation, not merely rhetorical political theater, then it would have an immediate impact in dampening price escalations. Today’s energy prices reflect traders’ beliefs about the future.
The narrative frames for the debate are already clear. On one hand, we have the climate-change cabal calling for “doubling down” on alternative energy plans. On the other, we have the calls to “drill, baby, drill”—albeit with the latter being, for the first time in a long time, an increasingly bipartisan call.
But in the immediate days following Russia’s invasion of Ukraine, the European Commission president announced: “We are doubling down on renewables. This will increase Europe’s strategic independence on energy.” The Biden administration quickly echoed the strategy, one that advocates of a so-called energy transition have prominently supported.
In fact, the day after Russia launched its invasion of Ukraine, the White House proceeded with a “Roundtable on Countering ‘Delayism’ and Communicating the Urgency of Climate Action.” Almost two years ago, during the 2020 primaries, then-candidate Biden said, “we are going to get rid of fossil fuels.” In keeping with those promises, the administration has taken numerous actions to restrict, cancel, or delay hydrocarbon-based energy production, from drilling to pipelines to export terminals.
The green case is obvious, even if simplistic: eliminating hydrocarbons to achieve climate goals would also eliminate geopolitical dependencies on hydrocarbons. The key question is whether technology makes that possible in a meaningful timeframe.
That there is little that can be done easily, or quickly, to change the energy status quo should be clear. Consider a separate but illustrative response to the Ukraine crisis as an example of how actions taken over many years make seemingly overnight successes possible. Worried about the potential loss of Internet access for citizens, Ukraine’s vice prime minister Mykhailo Fedorov goaded Elon Musk on Twitter: “while you try to colonize Mars—Russia try to occupy Ukraine!” Within days, Musk activated SpaceX’s recently launched multi-satellite-based Starlink service and shipped receiving terminals into Ukraine, essentially eliminating a key Russian weapon for isolating citizens. That overnight response, however, was decades in the making: SpaceX was founded 20 years ago this month.
If there were ever a time for energy realism, it is now. The data are clear regarding the challenge, in cost and time, to abandon hydrocarbons. The European Union and the United States have, over the past two decades, spent more than $5 trillion and made countless mandates and exhortations in the service of replacing oil, natural gas, and coal. They didn’t do these things to minimize the now starkly evident risks of dependence on Russia (or OPEC, for that matter) but to “decarbonize” the global energy system.
Overall global energy demand is up 50 percent since 2000 because of economic and population growth. To put it in terms that illustrate the scales involved: that growth equals twice the total annual energy use of the United States. That growth was fueled by a 30 percent increase in global oil production and a 60 percent increase in both coal and natural gas production.
Yes, the $5 trillion spent on alternatives did help reduce the hydrocarbon share of all energy use. It’s down to 84 percent today—a mere two percentage-point decline relative to two decades ago. Meantime, burning wood still supplies far more energy than all the world’s solar panels, and oil still fuels nearly 97 percent of all the world’s transportation.
The energy policies of the past two decades have utterly failed to chart a path toward a future free of hydrocarbons—and more critically, free of dependencies on regimes unfriendly to the West. The International Energy Agency (IEA)—which, it bears noting, is a promoter of the “energy transition”—forecasts that two decades from now, even if the world were to commit even more fully to alternatives, oil and natural gas will still meet more than half of all global needs.
Those who want to accelerate a putative “energy transition,” by fiat or with the carbon tax often proffered as a “neutral” solution, are engaging in magical thinking about the nature of energy technologies. We’ve been treated to two decades of analogizing “energy tech” with computing and communications tech. To distill the lack of seriousness of that analogy, consider the fact that, if photovoltaic technology could scale like silicon logic, we would soon see a postage-stamp-size solar array powering a skyscraper. If chemistry scaled like computers, we’d see batteries the size of a single book powering jumbo jets.
To put the magical thinking in more concrete terms: it would require two billion Tesla car batteries to replicate the energy in the minimum quantities of natural gas that Europe stores for normal reliability (never mind what it would need in a crisis). No manufacturing technologies exist that could make that many batteries. That’s just for Europe, and it doesn’t even include oil.
Then there are the mining and mineral realities involved in charting an alternative energy path. Delivering the same amount of energy as hydrocarbon-based machines by building solar or wind systems would require at least a tenfold increase in the use of specialty minerals and metals. As I’ve written previously, the IEA did the world a favor in documenting the fact that just starting an “energy transition” would require the global supply of minerals—rare earths, nickel, copper, cobalt, lithium, and so on—to increase by from 700 percent to 4,000 percent. The world doesn’t have enough mines now operating or planned to meet such demands. And, relevant to our current times, both Russia and China are significant suppliers of many of those critical minerals.
Trying to supply such unprecedented quantities of minerals would stress global supply chains. In the world of commodities, that translates into higher prices for all those minerals. That will make everything else built from those minerals more expensive. It will also inflate the cost of the energy transition machines because raw materials account for 60 percent to 70 percent of the costs to manufacture both solar panels and batteries.
The United States depends on imports for all of its supply of 17 minerals and for more than half of its supply for 28 others. The technologies of the “energy transition” will require an acceleration of heavy industries in metals, chemistry, and mining the likes of which the world has never witnessed.
Meantime, hydrocarbon technologies have had an enormous effect on the energy status quo. The most important transformation in energy markets in recent decades, indeed of the past century, was the rise of America’s mighty shale machine. Over the past two decades, American shale technology has added 300 percent more energy to markets than has all the energy from all the planet’s wind and solar farms combined. America’s unprecedented increase in oil and gas production ended the long-standing duopoly of OPEC and Russia as the world’s dominant suppliers of hydrocarbons.
Despite that transformation, pre-Covid and pre-Ukraine, European and American leaders were vigorously pursuing policies to impede the expansion of hydrocarbon production, both directly through regulations and indirectly through financial and political pressures. The world was already well on the way to $100 oil and rising dependencies on Russia (and OPEC) before today’s war premium accelerated that trend.
No one wants to predict $200-a-barrel oil. But it is worth remembering how markets responded in the past when levels of oil supply comparable to Russia’s were taken off the market (or at least off the legitimate market). The 1979 Iranian Revolution and the 1973 Arab oil embargo—also political events—drove up world oil prices 200 percent and 400 percent, respectively.
What, then, should we do now? The first step is an easy one for politicians, even if it’s also politically unpopular with certain factions: call for an immediate summit meeting of hydrocarbon producers and ask them what can be done—both to make a difference in the short term and to send a signal to the world that a repeat of the previous shale revolution is possible. The goal isn’t to eliminate alternatives to hydrocarbons but to have policies in addition to those favoring wind, solar, and batteries.
The administration could take some of the necessary actions through executive orders and directives. Few (likely none) of the proposals would entail subsidies or other government handouts. Many would merely remove regulatory and other barriers. Congress would also have to pass legislation to signal permanence of action and intent. The latter is crucial because, given recent history, few companies and their investors will commit the amount of capital required in the current political environment.
If the United States signals to the world that a Shale 2.0 revolution is coming, there’s little doubt it would reset expectations and even moderate the now-inevitable price increases. Indeed, it was only a half-dozen years ago that global LNG prices collapsed and dragged down European pipeline prices merely in anticipation of the massive increase in U.S. exports.
There is a collateral question: do the capabilities exist for Shale 2.0? Fundamentally, this is a question of technology. The first shale revolution began using technology of that day, just after 2000, when “peak oil” supply theory was in vogue. Today, however, technologies related to automation, the cloud, artificial intelligence, and new materials sciences have advanced dramatically and migrated into revolutionary industrial-class capabilities. But to take the risk of deploying these new technologies in shale fields, and offshore, the industry will require a political partnership.
Historians invariably denote iconic events as pivots in history. Turning points are often seen in the convenience of the rearview mirror as events that suddenly appear. They are always years, usually decades, in the making. But once a triggering event happens, rapid changes can follow in attitudes and policies. However the grotesque conflagration in Ukraine turns out in military and political terms, it is already obvious that it is a historical pivot point.
The Ukrainian crisis has laid bare two decades of feckless energy policies. It is past time for a Great Energy Reset.
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