Bumps in the Energy Transition
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Bibliographic details
- Authors: DANIEL YERGIN
- Published: December 1, 2022
Overview
- The global energy crisis that intensified in late summer of 2021 and was exacerbated by the February 2022 invasion of Ukraine has accelerated efforts toward renewable energy and net-zero ambitions, while also clarifying significant obstacles to achieving net-zero carbon emissions.
- The article identifies four central, interacting challenges to the energy transition: energy security, timing/speed and macroeconomic impacts, a new North-South divide, and constraints on minerals and supply chains required for net-zero technologies.
Energy security and recent market dynamics
- The need for energy security—adequate and reasonably priced supplies—has re-emerged as a prime policy requirement to ensure public support and avoid severe economic dislocations.
- The current crisis began in late summer of 2021 as global energy consumption rebounded post–COVID-19 lockdowns, tightening oil, natural gas, and coal markets and revealing “insufficient supply.”
- The US government announced the first release from its strategic petroleum reserve in November 2021, three months before the February 2022 invasion of Ukraine.
- A key root cause: “preemptive underinvestment” in new oil and gas resources driven by:
- government policies and regulations;
- environmental, social, and governance (ESG) considerations by investors;
- poor returns caused by two price collapses in seven years;
- uncertainty about future demand.
- The shortfall was “preemptive” because of assumptions that alternatives to oil and gas would already be in place at scale.
Historical context of energy transitions
- Past transitions unfolded slowly:
- Coal emerged as a distinctive industrial fuel in January 1709.
- It was not until 1900 that coal supplied half the world’s energy demand.
- Oil was discovered in the United States in 1859; it took until the 1960s—about a century later—for oil to overtake coal as the world’s number one energy source.
- Historically, transitions were “additions” rather than wholesale replacements; in the six decades since oil overtook coal, global consumption of coal has almost tripled.
- The present climate-driven transition is intended to be rapid and transformative:
- Objective: change the energy foundations of what is today a $100 trillion global economy in little more than a quarter century.
- The European Union anticipates hydrogen will provide 20 to 25 percent of its total energy by 2050; hydrogen provides less than 2 percent today.
Speed of the transition and macroeconomic risk
- Timing is a core challenge: pressure exists to accelerate parts of the 2050 carbon emission targets toward 2030, but the scale may be underestimated.
- Differences from past transitions:
- Previous transitions were driven mainly by economic and technological advantages; this transition is driven primarily by policy.
- The ambition is unprecedented in scale and speed.
- Macroeconomic concerns:
- Jean Pisani-Ferry warned accelerating targets too aggressively could create “an adverse supply shock—very much like the shocks of the 1970s.”
- His assessment: “Climate action has become a major macroeconomic issue... the macroeconomics of climate action are far from the level of rigor and precision that is now necessary... advocacy has too often taken precedence over analysis.”
- Policy implication: the need for methodical, peer-examined assessments of costs and benefits of alternative plans for action.
North–South divide and development trade-offs
- A renewed North–South divide centers on disagreements over climate and transition policies, development priorities, and responsibility for emissions and costs.
- Developing-country priorities that complicate rapid decarbonization:
- Urgent needs for health, poverty reduction, and economic growth.
- Billions still cook with wood and waste, causing indoor pollution and poor health.
- Many see increased use of hydrocarbons as integral to raising living standards.
- Example: India is building a $60 billion natural gas distribution system while committing to renewables.
- Political tensions:
- The European Parliament’s September 2022 resolution condemning an oil pipeline from Uganda through Tanzania illustrated stark differences of perspective and elicited accusations of “neocolonialism and imperialism” from Ugandan officials.
- Finance constraints:
- Western banks and multilateral institutions have shut off finance for pipelines and other hydrocarbon infrastructure, described by one African energy minister as “removing the ladder and asking us to jump or fly.”
- Demographic note: developing countries comprise where 80 percent of the globe’s population live.
Minerals and supply chains: the copper example and physical constraints
- Policies such as the US Inflation Reduction Act and REPowerEU will accelerate demand for minerals needed for renewable technologies (wind turbines, electric vehicles, solar panels).
- The IEA projects a shift from “a fuel intensive to a mineral intensive energy system” that will “supercharge demand for critical minerals.”
- S&P Global analysis highlights copper as “the metal of electrification”:
- An electric car will require at least two-and-a-half times more copper than a vehicle with a conventional internal combustion engine.
- Conclusion: copper demand would have to double by the mid-2030s to achieve the 2050 goals.
- Supply-side constraints:
- At current rates of supply growth (new mines, expansions, efficiency, recycling, substitution), available copper will be significantly smaller than required.
- The IEA estimates it takes 16 years from discovery to first production for a new mine; some mining companies say more than 20 years.
- Production concentration:
- Three countries produced 40 percent of world oil in 2021—the United States, Saudi Arabia, and Russia.
- Just two countries produced 38 percent of copper—Chile and Peru.
- Market dynamics and geopolitics:
- Copper prices have fallen about 20 percent from their high point this year, reflecting recession risks, but post-recession demand from the transition will likely push prices higher again.
- Price surges and demand could intensify tensions between resource-holding countries and mining companies, affecting investment rates.
- Competition for minerals may intersect with “great power competition” between China and the United States.
- Physical inputs for renewables are not costless; the drive to shift significant parts of 2050 goals toward 2030 must contend with tangible supply constraints.
Synthesis and implications
- The four challenges—energy security, macroeconomic impacts of timing, the North–South divide, and minerals/supply chains—will each significantly shape how the energy transition unfolds and will interact to compound impacts.
- Recognizing these challenges should prompt deeper analysis, balanced policymaking, and international engagement on finance, technology, and supply-chain investment to reduce risks of economic dislocation and geopolitical friction.
Source: Daniel Yergin, "Bumps in the Energy Transition," F&D Magazine, December 2022.
Content in this bundle
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