The Coming Power Struggle is about Energy

Europe_illustration [Converted]Not since the modern oil industry emerged in the second half of the 19th Century has there been such dramatic change in the world energy market as we see today. It is less than a decade since the conventional wisdom about the future was a blend of “Peak Oil,” the phasing out of carbon-based fuels, the rapid growth of “renewables,” and a long-term rise in energy prices that would slow down world economic growth.

These predictions were based not only on what seemed to be an inevitable decline in oil, gas, and coal reserves but also in the political reality that governments had decided to compel industry and consumers to switch from carbon-based fuels to renewables and in general to pay more for less energy.

That legal obligation remains in force in many places – particularly Europe where all member-states in the European Union are “committed” to aggressive emission-reduction targets, claiming they are leading the world towards a better (i.e., carbon-free) energy future. But the world is actually leading the EU, and what constitutes better is differently defined. Significant carbon reduction may be achieved by technological advances that themselves lie in the future. But the phasing out of fossil fuels and a large-scale shift to renewables is not happening, and will not happen, as advertised. In addition, in many markets – European and otherwise – neither industry nor consumers are willingly prepared to pay the soaring energy prices that adherence to Kyoto or any other carbon-reduction process would require.

That’s the negative side of the picture; the positive side is that new sources of conventional energy (and, in some cases, new technologies for exploiting known energy resources far more cheaply) have suddenly emerged on-stream. Almost every day brings a new headline story about this gusher of energy developments. A few examples:

  • Crude oil stockpiles in the U.S. are at their highest levels since 1931, thanks in large part to the shale oil boom, according to the Energy Information Agency.
  • Shale gas resources could meet over one third of UK energy needs in the next decade, according to the government-backed study commissioned by the UK Onshore Operators Group and undertaken by EY.
  • According to the Economist, coal is cheap and simple to extract, ship and burn. It is abundant, with proven reserves mostly in politically stable places, and there is a wide choice of dependable sellers. It powered the industrial revolution, and it now offers the best chance for poor countries wanting to get rich.

The developments noted demonstrate a game-changer. The simple fact that more energy is more available at cheaper prices will alter millions of economic decisions, private and public, around the world. Of course, some of these optimistic projections will turn out to be exaggerated, and some businesses will suffer from this energy bonanza. But the net effect still represents a massive stimulus to world economic growth.

New sources of energy, contributing to more affordable energy services, are not the only trend transforming the world energy market, however. Three others are pushing governments and businesses in the same direction.

“The positive side is that new sources of conventional energy have suddenly emerged on-stream. ”

The second trend is the West’s response (or, rather, responses) to the Ukraine crisis. Both the European Union and the U.S. (and, most vocally, Canada) now publicly agree that reliance on Russia for significant energy supplies is politically and strategically unwise. Russia is no longer seen as a kind of apprentice Western country but as anti-Western, hostile, and kleptocratic. Not a great deal can be done immediately about this given the timelines to build energy infrastructure, but the political will exists for a massive shift of energy supply from closed authoritarian regimes like Russia to open democratic countries.

Transportation_Frame14The worldwide upsurge in new energy supplies has thus arrived at exactly the moment when Europe—still the single largest market in the world—is looking urgently for new energy suppliers. And those open democratic suppliers – non-European players like Canada, Australia, and the U.S., or even European players like Poland (Europe’s biggest coal producer) or the UK (with new significant gas production potential) – are increasingly well-positioned to displace Russia. A new geo-political alignment is emerging – where the traditional dominant suppliers like Russia, or Venezuela, or Middle Eastern regimes see their energy positions threatened by “freedom energy”.

Even before the Ukraine crisis, however, Europe’s pattern of energy demands was changing because of the third trend: growing resistance by industry and consumers to artificially rising energy prices. For over a decade European governments passed laws compelling energy utilities to derive a growing percentage of power supplies from expensive fuels, notably renewables, and to pass the costs of this onto the consumer in monthly bills. Mrs. Merkel canceled Germany’s nuclear program overnight in a panic response to the Fukushima nuclear leak. The British government set an unobtainable and expensive target of an 80 per cent reduction in carbon emissions by 2050. And “Green” parties continually upped the ante.

Pipeline - above groundThese policies had a number of unanticipated and expensive results: In Germany, for instance, the closing of nuclear power stations has meant greater use of coal which has a much higher rate of carbon emissions. Wind turbines have proved more expensive than promised because, since the wind doesn’t always blow, the turbines need to be “backed up” by conventional supply. But the main overall impact has been a rise in energy bills, producing threats by industry to relocate out of Europe and demands by voters for the state control of energy prices.

Now that governments face the consequences – unpopularity, falling poll numbers, and the prospect of electoral defeat – they are desperate to find ways of reducing energy prices. The new energy revolution is therefore a godsend to them. It will help to cover up the impact of their past policies. Encouragement of oil and gas exploration, legislating for “fracking,” greater use of coal, investments in liquid natural gas terminals, pipeline approval for oil deliveries—all these are happening in fact or in prospect because cheaper energy is suddenly more important to politicians than environmentalist virtue.

“The new energy revolution will help to cover up the impact of their past policies.”

And that leads to the fourth trend: growing doubts about the consensus on global warming. The consensus in question is not about whether carbon emissions are rising or temperatures are changing. But there are growing doubts about how quickly changes are occurring and with what impacts. Partly as a result of those doubts, there has been a shrinking of the consensus that the best response is mitigation (i.e., policies such as carbon taxes and subsidies for wind farms) and growing support for the alternative policy of adaptation (i.e., changing our habits to adapt to changing climate). And that reduces, if it does not remove, a major factor driving the official energy policy of recent decades. Mitigation requires an energy policy rooted in de-carbonization; adaptation means that we can be more cautious. If there is strong public opposition to current energy policies of mitigation, then maybe we can adapt, grow richer, and advance in scientific knowledge to better equip us to address challenges over time.

PIGGY BANKAs a result of these four trends, the world is likely to enjoy an energy glut starting very soon. The last such glut was sparked by Ronald Reagan’s adoption of a free market energy policy in the early 1980s. It ushered in a world economic boom that lasted for about a quarter of a century. It is possible the world is set for another long boom, provided that wars and rumors of wars don’t get in the way. There will be many winners from this, and a few losers. To pick, somewhat arbitrarily, a few examples of both, winners will include:

“Countries which had energy resources in the ground long deemed uneconomic to extract can now develop them thanks to innovation.”

Governments in the advanced industrial world that will win re-election on the basis of a boom they did a lot to prevent—the first example of this is President Obama in 2012 who won votes where fracking had created a local state boom without much help from him;

Map of Canada - Outline of Country (RED OVERLAY)Countries which had energy resources in the ground long deemed uneconomic to extract but which can now develop them thanks to innovation – America is again the largest energy producer in the world for this reason but other beneficiaries include the U.K., Australia, Nigeria, and—ahem—Canada; and

Energy-importing nations, especially poorer ones, which will see one of their most important factors of production fall in price, such as China, India, Japan, and much of Africa which has an opportunity to surf out of poverty on a wave of affordable energy.

Losers will include:

Those countries which suffer from the “raw materials curse,” relying on massive wealth reserves in the ground to the detriment of both other industries and their human capital, and are likely to suffer a massive loss of wealth and influence when new energy powers arrive in the markets and energy prices fall—Russia, Venezuela and Middle East producers being the main likely victims.

Versatile_Frame16All these developments will mean another shift of economic power in the world. That shift will not reverse the previous one from the West to Asia since China, India, and Japan will all benefit from the energy glut. But it will qualify it substantially. America as both a leading energy producer and the most advanced economy will grow dramatically, enabling it to solve its main problem: its vast budgetary and international financial indebtedness. Just as the industrial revolution enabled Britain to grow out of its vast debt from the Napoleonic Wars, so the U.S. could ride the energy glut to solvency. Other “Anglosphere” countries that enjoy a similar (if lesser) mixture of energy reserves, technological expertise, financial and industrial enterprise, and economic openness—Canada again, Australia, Britain —will also be part of this growing and inventive West. Poland has an opportunity to emerge as a major energy player within continental Europe. And Germany will benefit disproportionately from cheaper energy and overall world growth as an industrial power with a strong export-based economy, its only real threat being its disproportionate reliance on the sluggish and over-regulated economies of its EU partners through the single currency. As for Russia, unless the Kremlin abandons its neo-imperial mindset, it will become another “Sick Man of Europe” as the value of its energy reserves fall and its kleptocratic economy discourages either foreign investment or local enterprise.

“Just as the industrial revolution enabled Britain to grow out of its vast debt from the Napoleonic Wars, so the U.S. could ride the energy glut to solvency.”

Inevitably, events will not turn out so neatly and favorably as I have just sketched. To begin with, real history is full of by-ways and accidents; secondly, every trend eventually produces its own resistance. In this case, the favorable trends towards cheaper and more available energy may well be stimulating an increasingly aggressive and well-funded anti-industrial environmentalist movement. In a recent Financial Post article, researcher Vivian Krause listed some of the funding sources of the Tar Sands Campaign that opposes the building of the Keystone Pipeline from Alberta to the United States.

“Real history is full of by-ways and accidents.”

She estimates that its main funders—the Rockefeller Brothers Fund, the William & Flora Hewlett Foundation, the Oak Foundation, the Sea Change Foundation, the Tides Foundation and other charitable foundations—have donated in total as much as $75 million for all sorts of legal and political obstruction.  This campaign has been effective enough to postpone any decision on Keystone by the Obama administration—and its avowed aim is not simply to stop the Keystone pipeline but to prevent Canada from developing one of its main energy resources.

Chess BoardUltimately, of course, this is a struggle for power in both senses. It is a battle—not between environmentalists and energy executives, who are merely intermediaries, but between Trust Fund kids and disinvestment students (who enjoy a life of ease, comfort and moral self-congratulation) and the working poor around the world (who need energy for light, heat, mobility – and who need jobs.) The former may perhaps win the skirmish over Keystone; but they can’t win the wider war over energy. The most they can achieve is to influence who wins biggest.

John O’Sullivan is the director at the Danube Institute as well as being editor and columnist, director of 21st Century Initiatives and senior fellow at the National Review Institute in Washington. Earlier posts include editor of National Review, associate editor of the London Times, senior fellow of the Hudson Institute, and special adviser to Margaret Thatcher.