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We are learning the wrong lesson from the third energy crisis

To hear some of the comments, one would think that the past 12 months have halted the global transition from fossil fuels. With natural gas and coal prices reaching record highs and crude oil prices not far below their 2008 peak, the world seems more carbon-dependent than ever.

Plans to switch to clean energy are “a chain of sandcastles washed away by the waves of reality,” said Amin Nasser, chief executive of Saudi Arabian Oil Co., in a speech in Switzerland last week. . We are witnessing “the revenge of fossil fuels”, according to Thierry Bros, natural gas expert at Sciences Po Paris.

In the midst of this third energy crisis, it is the legacy of the first two – brought about by the Arab-Israeli war of 1973 and the Iranian revolution of 1979 – that is most important. If history repeats itself, these swaggering figures of 1980s popular culture—the Gulf oil sheikh and the Texas oil baron—suggest that such emergencies always result in a victory for oil and its producers. The lesson of the first oil embargo, according to Marino Auffant, historian of the crisis, is that “the world emerged from it more dependent than ever on hydrocarbons from the Persian Gulf”.

It’s a compelling account – but it’s not true. These geopolitical upheavals certainly did not bring about the end of oil, but they dealt it a blow from which it never really recovered.

In the United States, it took two decades for crude consumption to return to the levels of 18.5 million barrels per day that it had reached in 1978, on the eve of the second oil crisis. European Union countries never returned to their 1979 demand levels of 16.9 million barrels a day, despite having an economy more than twice as big as it was then.

In 1973, oil accounted for about half of the world’s primary energy consumption. It is now 31%. The shift, particularly vis-à-vis the members of the Organization of the Petroleum Exporting Countries, was brutally rapid: between 1973 and 1985, the share of world energy derived from OPEC crude went from 25% at 11%. It has never risen significantly above these levels. The early 1980s in the Gulf States were not characterized by newfound wealth, but by an unusual wave of recessions and (relative) austerity, as collapsing demand pushed global markets from oil in a glut.

Fearing that their economies could be taken hostage by a group of absolute monarchies, the big oil consumers began a largely successful energy transition away from oil.

In the UK, a nationalized coal industry on the verge of bankruptcy has been reignited in a “great coal rush” with the construction of new power stations, the restructuring of collieries and the opening up of reserves. In the North Sea, offshore oil rigs have sprung up to take advantage of Europe’s own crude oil reserves. A rise in demand for solid fuels in the United States has caused a boom in the Powder River Basin, a corner of the Rocky Mountains that since the 1980s has supplied more than 40% of America’s coal.

France has announced its intention to switch its entire production fleet to nuclear energy and has tried to sell the technology to Iran and Iraq to secure crude supplies. Around the world, nuclear production quintupled between 1973 and 1983, before doubling again in 1990. In Brazil, the government introduced ethanol-based road fuel and built the Itaipu and Tucurui dams, which are among the largest power plants ever built to date.

One of the reasons why so many coal-fired and nuclear power plants in Europe and North America have shut down over the past decade is precisely that so many of them were built after the first energy crises, and thus come to the end of a period of power plant standard life of 30 to 40 years.

Even efficiency, best remembered as a punchline after a 1977 speech by President Jimmy Carter in which he compared the energy crisis to a war and called for measures later deemed unpleasantly austere, played its part. US energy demand in 2000 ended up about 20% lower than the lowest estimate in a 1972 long-term study by the Rand Corp. fell by around 10% over the period.(1)

The explanation for this shift lies in one of the oldest lessons of commodity markets: substitution. Whenever a product becomes too expensive or unreliable, consumers turn to something that better meets their needs. The advantage of oil in 1972 was its low price and ready availability. In 1980 it was about eight times more expensive and much less reliable. For decades, the cornerstone of the policy of the major oil exporters was the repudiation of the events of the 1970s, to assure importers that the flow of hydrocarbons would be uninterrupted.

The events of the past year have been a dramatic unlearning of this lesson. With President Vladimir Putin’s decision to use gas as a weapon after Russia invaded Ukraine, gas will be the biggest loser. Consumption will fall this year by about 20 billion cubic meters, the International Energy Agency reported in July. It is the worst drop in history after the global financial crisis in 2009 and the Covid-19 pandemic in 2020.

Medium-term consumption growth, forecast at 1.6% in 2019 and 1.4% last year, will instead be just 0.8% through 2025, the IEA said. “Today’s record prices and supply disruptions are hurting natural gas’s reputation as a reliable and affordable energy source,” he wrote, “sowing uncertainty about its prospects.”

This is particularly the case in developing countries, which were considered to be one of the main sources of future gas demand. A Sept. 15 meeting between Putin and Chinese President Xi Jinping was marked by no announcement regarding the Power of Siberia 2 gas pipeline project. The connection could provide an alternative export route if Russia finds itself cut off from Europe – but it also risks making Beijing as dependent on Moscow as Europe currently is, which explains China’s apparent distrust of the project. Total global gas consumption in 2025 will be about 127 billion cubic meters lower than the IEA forecast for 2020, the agency said, a volume equivalent to all the LNG exported annually from the Middle East.

The outlook for oil isn’t nearly as bad, with the IEA’s consumption forecast little changed so far this year, although it’s well below their expectations as recently as 2020. For gasoline , however – in rich countries, the largest end use of crude, accounting for about a quarter of global consumption – demand has already peaked and will never return.

If you consider the exploration of new oil fields as an indicator of investors’ expectations for future demand, things look really bleak. The area allocated through August this year has fallen to a 20-year low of 320,000 square kilometers (124,000 square miles), according to Rystad Energy, a consultancy. Upstream investment in new field development is still around 20% below pre-Covid levels this year, with only state-owned oil companies in the Middle East spending more than before.

It’s tempting to see this as a simple victory for the climate and the energy transition – but at a time when geopolitics dominates the energy conversation, it’s the dirtiest fossil fuel that goes against the grain. tendency. Although coal consumption is unlikely to ever return to its 2013 peak demand levels, consumption is exceeding previous forecasts as high gas prices force utilities in Asia and Europe to delay plans. abandonment of solid fuels.

Decent coal reserves are found in a much more diverse range of countries than for oil and gas, with China, India and Indonesia alone accounting for more than two-thirds of global production. With energy security paramount, this risks delaying the necessary shutdown of global coal-fired power.

Even there, however, substitution forces favor renewable energy, which is now cheaper almost everywhere. Three-quarters of India’s new power generation capacity installed in 2021 was renewable; until August of this year, the equivalent figure was 93%. Coal generation in China will drop 1% this year, the first drop since 2015, according to the IEA.

Everywhere, renewable energies, and to a lesser extent nuclear, constitute the majority of new demand. Power sector emissions will fall 5% in the Americas and 8% in Europe next year as the brief decline in coal demand subsides. The REPowerEU plan to reduce Europe’s dependence on Russian gas will quadruple the European Union’s solar capacity. In the North Sea, whose oil rigs helped reverse the impact of the energy crises of the 1970s, European governments pledged in May to build 65 gigawatts of offshore wind power by 2030, the equivalent to around 1.5 times the world’s offshore capacity last year.

The US Inflation Reduction Act passed in July is expected to reduce that country’s emissions by 40% below 2005 levels by the end of the decade. The solar panel industry, for its part, is already building a supply chain that would be enough to put this sector on the path to net zero.

As the world was distracted by the Covid-19 pandemic, our gas mileage peaked and went into terminal decline. Although we have focused on the war and soaring fossil fuel prices, it is possible that emissions from the global power grids have also peaked.

Last year’s attempts to prove the world’s dependence on fossil fuels only accelerated our abandonment. The energy transition is not dead. Instead, he was supercharged.

More from Bloomberg Opinion:

• We need a war effort on wind turbines: Chris Bryant

• Putin Squandered Soviet Energy Legacy, Part 1: Liam Denning

• The supply chain to beat climate change is already being built: David Fickling

(1) New Zealand even introduced mandatory car-free days, an unpopular policy that was quickly scrapped as the global oil dump pushed the oil market into a glut.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times.

More stories like this are available at bloomberg.com/opinion