🍃 How the death of fossil fuels will change the world
The winners and losers of the renewable energy transition
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The dreaded (or if you’re a sociopath, long-awaited) pumpkin spice lattes are back, which can only mean one thing: it’s a month or two away from Autumn in the Northern Hemisphere.
This, sadly, also means we're wrapping up the end of our summer internships this week. Our heartfelt thanks to them all.
Meanwhile, you know who’s back? Kim Jong-un, or 'Slim Jong-un', as he's now been dubbed. He's been MIA for the past few months, fuelling rumours of ill health (gout?) and other such nonsense (the dear leader is invincible, after all):
Turns out he's just been on a keto-cleanse. We covered this a few weeks back, but now he’s back even more svelte, plus sporting a sharper haircut and glowy summer tan. All just in time for the latest round of everyone’s favourite ‘game’: North Korea fires long-range missiles into the sea
In other news, COP 26 is just a few weeks away and climate change is a central focus at the UN General Assembly's gatherings this month. So this week, we bring you a special edition:
🍃 The geopolitics of energy: how the transition to renewable energy will change the world
🏜 The winners and losers of the death of fossil fuels
You might have noticed (from your couch in your trackies with instant ramen in hand) that the world has changed a great deal since the pandemic.
One of the many ‘victims’ left in the wake of COVID-19 and the global shutdown has been the fossil fuel industry.
As much as the fossil fuel industry might want to blame the pandemic for its record-low revenues last year - and stop me if you’ve heard this line before - “COVID-19 really only accelerated a trend that was already happening”.
ICYMI, fossil fuels are cancelled
Global demand for fossil fuels like crude oil, coal, and natural gas has been dropping for a while. Demand looks unlikely to rebound to pre-Greta levels.
In 2020, the US used fewer fossil fuels than it had in three decades.
Technological leaps (and a nearly unanimous global realisation that the world needs to decarbonise before we’re all dead) has meant that fossil fuels are fast being replaced by renewable energy sources like solar, wind, hydro, and bioenergy.
According to the International Energy Agency, renewable energy use increased 3% globally in 2020 as the demand for all other fuels declined.
Renewable energy sources accounted for 29% of global electricity generation in 2020 (albeit only up from 27% the previous year), and is set to keep growing for 2021. See, the world isn’t all bad, it’s just that good news doesn’t sell papers.
This shift in energy sourcing means significant geopolitical consequences for fossil fuel producing and importing countries. Let’s take a look at how that’s likely to play out.
Key players in energy geopolitics
There are four main types of players in the geopolitics of energy, based primarily on how reliant their economies are on fossil fuels:
🐫 The rapidly diversifying economies
In the first category is a group of countries known as the Gulf Cooperation Council (GCC). These guys are the OG oil titans who went from desert living to gold palaces in just one generation. The GCC is a political and economic union of Arab states formed in 1981 consisting of the United Arab Emirates, Saudi Arabia, Qatar, Oman, Kuwait, and Bahrain.
Aside from setting the agenda for about one third of the world’s oil production, the GCC countries have also been the focal point of US foreign policy (because a world in which Iran or Russia called the shots in the Middle East is unthinkable in DC).
👀 Outlook: This group will likely survive the energy transition just fine. The GCC has aggressively pursued structural reforms (featuring overpriced McKinsey taglines like “Vision 2030”) to reduce the region’s future economic dependence on oil. Proof is in the pudding, for sure, but at least the planning is in place.
🤠 The already diversified, mature(ish) fossil fuel markets
This second category comprises the likes of North America (US and Canada), Mexico, and Brazil. These economies are much more diversified than the other players in fossil fuels, with oil accounting for (on average) less than 20% of export revenues.
A diversified economy makes a country less reliant on foreign sources of fossil fuels; the rapid development of shale in the US has largely broken the country’s dependence on fossil fuel imports.
👀 Outlook: The countries in this group will likely be able to weather the transition towards renewable energy sources, but performance will vary from country to country. It’s likely that projects in Brazil and Mexico (e.g. Mexico’s deep-water exploration projects) will struggle to be financially viable, unlike similar projects in the US or Canada.
🎲 The wildcard
Russia is considered a wildcard in the energy geopolitics landscape. It could sink or swim depending on factors both within and outside of its control.
Russia is a huge player in energy geopolitics. It is the third largest global producer of fossil fuels, and has the world’s second largest proven reserves of natural gas, and the third largest reserve base of coal. Russia is never shy about using its energy capabilities for geopolitical leverage - and that’s substantial power when you consider that 60% of all Russian exports in 2017 were fossil fuels.
👀 Outlook: Much of Russia’s trajectory will depend on how quickly and successfully President Putin can diversify the country’s energy economy. This will need to happen fast, as Europe (one of Russia’s biggest customers) increasingly pulls away from fossil fuel reliance.
🛢 The fragile states
This last category covers the risky-investment countries. These countries are naturally blessed with huge reserves of fossil fuels that could be exploited, but their political environments are too unstable to attract investors.
Examples here include Iraq, Iran, Libya, Nigeria, Angola, Algeria, Venezuela, and Kazakhstan. There’s also little to no state-governed diversification away from reliance on fossil fuels.
👀 Outlook: The future could be quite bleak for this category of states. Put simply, if even the vague promise of exploiting fossil fuels disappears, what will prop up these countries? What will happen to their economies, and more importantly, their citizens?
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🌏 How will the shift away from fossil fuels change global geopolitics?
If I could answer that, I'd be a very rich chap indeed, and it wouldn't be because I write a weekly newsletter. Of course, the question is unanswerable and so sadly, I am likely to remain impecunious.
Here's what we do know:
Renewable energy is on track to displace fossil fuels sometime in the future.
The decline of fossil fuels will fundamentally alter geopolitics.
And here's what we don't know:
How unsatisfying. But in the words of Douglas Adams,
We demand rigidly defined areas of doubt and uncertainty!
- Hitchhiker's Guide to the Galaxy
…so let me outline two of the main answers to the title question that I've seen cropping up among geopolitical experts and analysts.
Answer 1: Within fossil fuel producing countries, the renewable energy transition will lead to democratisation
I'm right there with you if you rolled your eyes at that. But plenty of experts do think that more sources of renewable energy could equal more democracies around the globe.
The theory here is that a decline in income for 'rentier states' will make them less stable.
'Rentier state' is an academic term for a country that derives most of its income from selling resources to foreign countries, and where the government is largely in control of those resources. Those countries tend to be autocratic - think the Gulf States, Venezuela, or Nigeria.
Academics theorise that in these types of countries, reduced foreign income due to lower demand for fossil fuels will:
[R]educe centralised control by political and economic elites and thus help achieve a balance of power between “elites” and “ordinary people” – a key feature distinguishing democratic from authoritarian political systems.
- G. Powell, R. Dalton, K. Strøm in Comparative politics today: a world view
Theoretically, this all makes some sense. Political elites in 'rentier states' control the resources, which means they control the money, which means they have the power.
Recall that one of the key reasons for the breakup of the Soviet Union was a precipitous fall in oil prices in the late 1980s. The reduction in foreign income further exposed economic fragility within the Soviet system, which forced political elites to institute reforms that ultimately broke the system.
So why did I roll my eyes almost clear out of my skull when I came across this prediction? Because we've heard it all before:
The people of China would embrace democracy once the grip of the State on the economy loosened.
The people of Iraq would embrace democracy once the brutal reign of Saddam Hussein was over.
The people of Russia, Iran, North Korea, Belarus, most of the continent of Africa, and, of course, Afghanistan, will all surely embrace democracy if we can just get rid of their autocratic governments.
By now everybody knows that building a functioning democracy is about a lot more than simply throwing off the shackles of a non-democratic regime. Analysts are probably correct that a move away from fossil fuels will weaken the power of autocratic political elites in rentier states, but it is far less clear that democracy will flourish in their place.
Because, like the smartass who immediately wishes for unlimited wishes from a genie lamp, those with power have clever ways of using that power to make sure they don't lose it. 🪔
Answer 2: The renewable energy transition will stabilise relations between countries
While I remain sceptical of the democratising power of the renewable energy transition, I think that renewable energy does have the capacity to stabilise global geopolitics.
🌊 Renewable energy sources are flows, not assets
Geopolitically speaking, fossil fuels have three important properties:
they are finite
they belong to the country in which they're found
everybody wants and needs them
To see how those dynamics play out in real life, I suggest observing a kindergarten sandpit in which there are fewer toys than children and it is long past afternoon naptime.
Renewable energy changes all that. The sun, wind, waves, etc, are all infinite and constant (at least in theory). Sources of renewable energy can be considered 'flows' vs the finite ‘assets’ of oil, coal, or gas.
Solar energy will not pollute our air or water. We will not run short of it. No one can ever embargo the Sun or interrupt its delivery to us.
- Former US President Jimmy Carter, June 1979
🕸 Decentralised energy generation
If the technical barriers to cheap, reliable, and efficient generation of power from renewable sources can be overcome, every country on earth regardless of size will be able to produce its own power.
As Helen wrote above, it's remarkable how many sources of fossil fuels are currently controlled by so few countries. As a result of that, the world is dangerously dependent on maritime shipping to transport oil.
The Ever Given Suez Canal crisis earlier this year clearly demonstrated that not all that much needs to go wrong in one of the world’s maritime chokepoints for the effects to be felt all around the world.
🍦 Incentive to cooperate
But what happens when the sun doesn't shine, or the wind doesn't blow? Surely countries will never entirely rely on inherently unreliable sources of energy?
No doubt. But rather than thinking of decentralised energy generation as each country for themselves, we will likely see regional energy trading blocks emerge. In fact, they already are:
China’s Global Energy Interconnection (GEI) initiative presents a transformational vision for meeting the world’s growing power demand with a globally interconnected electricity grid. The concept involves ultra-high-voltage transmission lines strung across vast distances and smart grid technology tapping large-scale renewable power sources. Chinese President Xi Jinping first touted GEI’s goal to “facilitate efforts to meet the global power demand with clean and green alternatives” at the UN General Assembly in 2015.
Trading blocks built around the concept of comparative advantage tend to work better for all concerned. If you don't believe me, consider a European's health on a purely Irish diet, or his or her punctuality if forced to commute only via a Greek-manufactured car.
Jokes aside, regional renewable energy trading blocks could create powerful incentives for otherwise rival countries to cooperate.
The decline of fossil fuels will be more politically consequential than the rise of renewable sources of energy, though of course the two are linked. Internal power structures in ‘rentier states’ will be shaken up, but we should be very sceptical that the result will be 'more democracy'.
Because renewable energy generation is decentralised, countries will no longer need to rely on the few fossil fuel-exporting countries. Comparative advantages in renewable energy generation will likely incentivise cooperation in smaller regional blocs and create a more 'multipolar' world.
Now that I’ve said all that, remember that any number of 'black swan events' could make everything above irrelevant.
Would countries really rush to diversify their economies if there's a nuclear war in Asia? Or if a new technology makes zero-emission power generation trivial, surely there'd be no incentive to create energy trading blocs at all?
For now, we know that the renewable energy transition is happening, and that things will change. Beyond that, and stop me if this sounds familiar, nobody knows what will happen.
➕ Extra intrigue
Brazil: President Jair Bolsonaro is pushing back against big tech in the name of protecting freedom of speech. Brazil has introduced new laws that restrict the power of social media companies to “arbitrarily remove accounts and content that violate the platform’s policies”. Instead, these companies now need a “just cause and motivation” before removing content that may contain misleading information.
Namibia: is leading the charge in animal conservation, albeit through topsy-turvy methods. This week, Namibian researchers conducted a study which hung 12 live rhinos upside down and measured gravity’s impacts on the animals’ health. Why, you ask? Namibian rhinos are increasingly subject to relocation by helicopter as their natural habitat shrinks. The experiment has been awarded a 2021 Ig Nobel prize.
Tajikistan: most Central Asian countries have pragmatically accepted the Taliban’s takeover of Afghanistan, but Tajikistan’s ruler Emomali Rahmon isn’t on quite the same page. Tajikistan hosts Russia’s largest military base abroad and shares an uncomfortably long border with Afghanistan. Might the international community have found a new strategic partner for any future push backs against the Taliban?
Japan: as if there weren’t enough combustible issues in North Asia. This time, Japan’s in hot water with neighbours China and South Korea over plans to release treated (but still radioactive) water from the destroyed Fukushima nuclear plant into the Pacific Ocean. The water is currently stored in hundreds of tanks, and the plant’s operators want them removed to make room for other facilities.
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