Check out the eighth and final episode of our podcast series, TwentyTwenty; Your Podcast for (Un)Precedented Time, here! Find us
Check out the eighth and final episode of our podcast series, TwentyTwenty; Your Podcast for (Un)Precedented Time, here! Find us also on Spotify, Apple Podcasts and Google Podcasts.
Photo: Foreign Brief
Elizabeth Dykstra-McCarthy: 2020. A year of tipping points. New questions of democracy, technology, surveillance, authoritarianism, debt, power – this past year has pushed the bounds, accelerating by years previously slow-moving trends. Each one of these crises has taken place on the grand chessboard of great power politics – the tug of war between the rise of China and the hegemonic United States, concerns about the future of the EU, and the trajectory of emerging markets. Government responses to the COVID-19 pandemic are undeniably colored by political calculation. The climate crisis, and the energy transition in response, is no different. Whilst the threat to our ecosystems and homes is looming, the threat to our power structures is growing too; so are the opportunities. Last episode, we talked with Rachel Kyte and Susan Shannon about tipping points in the climate crisis, frontier technologies, and how scaling up climate investment and commitments will change the landscape of the global economy.
Rachel Kyte: I think it’s the beginning of the end of the tail of the fossil fuel economy,
EDM: As Rachel Kyte described last week, we are not yet at the end of the oil age. But this fossil fuel economy is the one which has defined and delivered the empires of the 20th century. Such decoupling won’t come without a fight; both with those heavily invested in the fossil fuel economy and with the countries dependent on it. Not to mention, there remain myriad decisions to be made about the pathways forward. †
RK: I think there’s still a lot, there’s gonna be a lot of discussion, and a lot of chewing over the future of gas gas was considered the bridge, the bridge fuel from the fossil fuel economy to the renewable energy economy, how short is that bridge? How much gas will still be invested in, in which parts of the world while we make the transition, I think that’s still up for grabs. And there are different views around that. The Secretary General has called for the end of coal. We have to herald the end of coal quickly, that’s not a given yet, although it seems to be moving in that direction. And I think oil is going to be a part of our economy for many decades to come but diminishing, diminishing and diminishing. And the question will be is that is that smooth and just as a transition, not whether or not that transition is happening? So I think that we’ve gone from Is there a transition that Yes, there is. And then how quickly can that happen?
EDM: This transition will have seismic effects on geopolitics as we know it. And the more hastily it happens, the more bumps our geopolitical infrastructure will have to contend with. Today, we will focus on the geopolitics of climate change. Who will win and who will lose from the transition from fossil fuels to renewables? How will the ‘end of the oil age’ alter considerations of power, competition, security?
Robbie Diamond: I first want to start by saying I think we overestimate how oil is not still driving our geopolitics and the importance of OPEC and Petro states. Oil for a long time, I think will continue to drive much of the world’s agenda
EDM: Robbie Diamond is the founder, president, and CEO of Securing America’s Future Energy – SAFE. Headed by prominent business leaders and former military officers, SAFE works to address the United States’ oil dependence by encouraging the adoption of more sustainable fuel sources. He also serves as president and ECO of the Electrification Coalition, a nonprofit group seeking to accelerate the adoption of plugin electric vehicles to preserve national and economic security. Now, Robbie just mentioned OPEC – the Organisation of Oil Exporting Countries. Founded in 1960, OPEC’s 13 member states coordinate output to control the world’s oil supply, giving it the ability to manipulate petrol prices. Controlling 44% of global oil production and about 82% of proven reserves, it is the world’s largest cartel and to say the least, a highly controversial body. Let’s set the scene with the 1973 oil crisis.
RD: Basically, in 1973, the world wakes up. OPEC decides to create an embargo. And that has had an indelible impact on our politics ever since.
EDM: What woke the world up? In response to the outbreak of the 1973 Arab-Israeli War, OPEC’s Arab member states imposed a freeze on oil exports to countries perceived to be supporting Israel, including the United States. The move sparked chaos in the US. Oil prices skyrocketed 300%. Drivers queued for hours to fill up their cars as petrol stations faced shortages. Costs of consumer goods hit the roof as the world’s top oil exporters dealt a massive blow to the West. The crisis laid bare the role played by oil the cornerstone of the global economy. It also exposed the market’s vulnerability.
RD: Oil is the single commodity in transportation. And in a global mobile economy, as long as you can only get around using oil, for the most part still. And there are little substitutes, you are going to care. You have to run the aeroplanes, the ships, the cars, and that is why it’s so predominant.
EDM: So, it wouldn’t be an understatement to say that, at least for a good many decades, OPEC quite literally held the keys to the car.
RD: OPEC has been a cartel that has used its position to try to manipulate politics and you know, for a long time, claim that it was a market manager and was going to be responsible. Now the worst part of having a cartel out there that’s trying to manage markets is when they’re bad at it, and they’ve been terrible at it. Saudi Arabia had always claimed to sort of be this responsible market manager. So look away at the way we treat our people look away at the problems we’ve created in the Middle East, and we’ll manage this market now 2014 because of the threat of new US production, the Shale Revolution, as we’ve heard –
EDM: Let me interrupt. Kicking off in 2011, the Shale Revolution refers to the mammoth uptick in the use of hydraulic fracturing, or fracking, in the US, which allowed the country to dramatically increase its output of natural gas. Once a major oil importer, fracking turned the United States into an industry powerhouse – a welcome change for energy security hawks but a troubling development for environmentalists. So, how did the Shale Revolution impact OPEC’s market strategy?
RD: Saudi Arabia changes course, and decides to flood the market, doing something they had not done in the previous 40 years, in order to drive down the price from about $110 to $26. Hoping to, now they bankrupted 200 American companies, but you know, the thing about the American economy, it’s quite resilient. And the companies just became much more efficient, especially the biggest players. So the price is low, and then they say, well, we can’t support our government budgets. So now we’re going to change course again, and we’re going to cut supplies.
EDM: With such dramatic price changes came financial turmoil. State coffers of major oil exporters – once plump with the riches of inflated oil prices – sat dry post-2014, introducing economic and, with it, political, volatility.
RD: So to me, volatility is caused, it’s just dependence on one commodity for all transportation in a modern global society. And then this volatility created by both unstable regimes and countries as well as, you know, actual machinations of these players.
EDM: Dependence on any one resource, for a company or a country, is dangerous. But when that dependence hinges on unreliable factors, then you’re really in a tight spot.
RD: If you’re an airline, or your car company, or your any business who are making decisions on what to purchase. Now it is you can, you can be a profitable airline at $30 oil, and you could be a profitable airline $140 oil, right. But they’re two totally different airlines, you have different routes you’ve done. And that’s just one example, or the types of cars you’ve produced, because you think that’s what consumers will want based on the price of oil. And the problem is, is, you know, these are big decisions that are made. These are massive capital decisions that have you know, sort of multi year decade long types of decisions. And when you know, you’re waiting for what people decide in a room in Vienna, on what they’re going to do, that is a big problem.
EDM: Even though oil continues to weigh heavily on geopolitics – more than any other commodity – the transition towards renewables is well underway. What does that mean for the future of major oil exporters, particularly those in OPEC?
RD: Look, innovation is on the side of the end of using oil, at least in in the transportation sector. So it has become obvious to OPEC members and oil companies that the future is going to be electric hydrogen and other types of commodities. And you see that because, you know, people like countries like Saudi Arabia are making plans and saying, well, we need to figure out how to transition. And that’s why they have their vision 2030.
EDM: Saudi Vision 2030 is one of the oil-producing world’s most notable shifts away from the commodity. Recognizing the Kingdom’s dependence on oil revenues, Vision 2030 seeks to diversify the Saudi economy by investing heavily in tourism, infrastructure, education, and, indeed, renewables, solar in particular.
RD: So, so I think that that’s important that they’ve acknowledged, you know where the future is, but until that point, it’s still going to be, you know, they’re gonna have a tonne of power.
EDM: Their power is derived from international dependence. What does it mean to not be dependent on oil? How will we know when we’re there?
RD: At the end of the day, do you not believe the United States will go back into the Middle East if it has to deal with an Iranian-Saudi situation? Of course, of course they will. Because it’s the world’s commodity until that point, I say that we are dependent, until you make a decision not based on oil.
EDM: You suggest that the end of the oil age really is a ways away. How long will we continue to sacrifice lives and money to secure our supply?
RD: By 30 and 50 years, I believe we’ll be, we’ll be in a safe position. But see, I worry about every decade, so the faster we can accelerate the transition off of oil, the billions to trillions of dollars will save in both economic value and in the blood and Treasure.
EDM: And what does that transition mean for US foreign policy towards countries, such as Saudi Arabia, with whom we have controversial relations, particularly from the perspective of human rights?
RD: Now, all these countries that have oil we have allowed to get away with not, we don’t we have basically sided with them. Now that doesn’t mean every country needs to look like you know, America or, or, or England. I get that. But at the same time, it’s an egregious abuse. And the reason we allow it is because they have oil, and it’s a commodity we ultimately need and they have some control in that marketplace. And so I think, ultimately, you know, we’re talking about every decade we can accelerate this change is a decade of less blood and treasure expanded, and we can stand up for our values.
EDM: So, let’s envisage this world in which we are no longer dependent on oil because, presumably, we’ve moved substantially more towards electricity to power our cars. The production and functioning of most electric vehicles hinges on rare earth metals, REMs as they’re known. REMs are also critical components in most high-tech devices – everything from smartphones to LED screens to guided missile systems. China produces almost 90% of the world’s rare earths and possesses about a third of global proven REM reserves. This situation, at least as far as market manipulating cartel behaviour is concerned, suggests we might be out of the frying pan into the fire. Or is that alarmist?
RD: It is definitely not alarmism to say that the control that China currently has over the supply chain of the electric vehicle infrastructure is greater by a degree than Saudi Arabia, or any OPEC country had over oil markets. The situation is worse than OPEC, because it’s one country, making all the decisions with one Communist Party able to make those decisions. So this is a major threat. And what we need to make sure as we solve one dependence problem, which is this dependence on one fuel source, we do not create a new dependence problem, we do not want to be the ones that go from the frying pan into the fire.
EDM: Beijing has flexed its dominance in this field before. Back in 2010, a Chinese fishing boat operating in Japanese waters collided with a Japanese coast guard ship. Tokyo detained the Chinese vessel, igniting a diplomatic spat between the two countries. In response, China imposed an unofficial embargo on rare earth exports to Japan, threatening to destabilize supply chains for myriad high-tech goods. What if such an event extended beyond a fishing rights dispute? If there’s a bigger crisis that provokes a similar reaction, but on the global scale? The balance of control over rare earths tips heavily in Beijing’s favour. Without diversified supply chains, particularly REMs, a shift to greater electricity usage might not prove as secure as one might think. China has placed a premium on dominating rare earth markets. It has also been at the forefront of renewable electric technologies, from Solar PV to electric cars.
RD: When looking at China, I would always say one should say what is good for China, they are only doing what is good for China. You know, they might put it in words that you think they’re doing it for you, but they’re not doing it for you.
EDM: Why has Beijing adopted this goal of being an electric powerhouse?
RD: And I think there are three, you know, principal reasons that they’re doing this at the moment. Number one, you know, they have air quality issues that are tremendous, and they need to deal with that in their society. So not even climate change, I kind of just discount climate change. I think that speaks the global language, but it’s really about air quality. And number two, they have an energy security problem. They need oil, they’re the largest importer now, and the Malacca Straits are patrolled by the US Navy. And if there is, you know, a power struggle, they want to not have that problem. And so they have their pipeline coming in now from Russia, but they ultimately don’t want to be dependent. And then third, its industrial, they could not keep they cannot catch up with the internal combustion engine, the thousands of parts, you know, just this head start from the Western World. We’ve been doing this for 100 years. They’re gonna leapfrog over where we are. And so those are the three reasons they’re doing it.
EDM: So how has the rest of the world, or, at the very least, the West, balanced against Chinese supremacy in the realm of rare earth metals and electrotech? Has it begun to recognize and respond to the threat of a new, unipolar, arguably hegemonic, potentially monopolistic energy state?
RD: So I think, you know, Europe, you see this big battery consortium that’s come up, that they’re taking incredibly seriously because the battery is the future of an electrified world. And the United States, as usual, lags a little behind, but when they wake up, they tend to be a pretty, you know, roaring beast. They’ve got these capital markets, and they’ve got all the resources, which is, you know, I think not all of them, but most of them – that’s a little bit different than Europe. Now, the truth is, we should all be working together, and you take that “Made In China 2025” plan – we should be having “Made Outside China 2025.”
EDM: In this competition for energy dominance, where does the West’s advantage lie? Long-term, how can it position itself to best exploit its assets and ensure energy security?
RD: So what you need to do is marry up the environmental goals with an industrial plan. And that’s how you fund this transition forward. I think capital markets are on our side, although we need an industrial strategy, like they have, that sticks with it. You need a long-term strategy and vision. And then you need to find a way for the capital markets, which I do believe are the best way of organising an economy, to work with government support in some key areas, so you can compete with whole-country approaches, like China’s.
EDM: In our last episode, we talked a good deal about stranded assets – investments in the fossil fuel industry that will not produce positive returns in the long or even medium terms. From your perspective, where should the US be putting its resources? From a global energy security perspective, is there an argument for maintaining some investment in fossil fuels? If so, how might that be done sustainably, in a way that doesn’t sacrifice global climate targets?
RD: The United States is really what I like to call like Norway, you know, we should be using both. Norway produces a tonne of oil, they have the wealthiest sovereign wealth fund in the world, actually, they produce their oil at the lowest carbon emissions, because they have a carbon price. And yet they have the largest electric vehicle market in the world. 50% or more of all vehicles now are electric. So they’re smart, they’re not using the oil for themselves, they’re using their hydro, or they’re exporting it to the rest of us, who are a bunch of suckers, and they’re just getting rich. I don’t understand why it needs to taste great, less filling, type of debate, drill more, use less.
EDM: “Drill more, use less” is a fantastic approach from an energy security perspective. However, from a global climate perspective, where a key aim is carbon emissions reduction, the question isn’t whether Norway, or the US, cuts fossil fuel use, but whether the world at large does.
RD: You know, here we have electric cars and electrification, your renewable energy that offers new technology, new jobs, and it’s going to be the future. So we have to get serious about it. And also offers energy security by that diversity. At the same time, we have a tonne of resources ourselves of fossil fuels, so let’s extract them in the most environmentally sound way. And we can share them with the world. Use them ourselves, share them with the world, because I do think that takes away leverage from people who do not, you know, broadly share our values or have the same vision, and how the world should operate. So I do think that the United States has that opportunity to both stabilise a lot of countries
EDM: If the goal is energy security, geopolitical influence, and power projection, this approach obviously makes a lot of sense. And these goals are critical, too. It’s hard for any international affairs wonk not to consider great power competition in the coming century. But all this to say, this strategy alone doesn’t permit the drastic decarbonisation that our planet so desperately needs. The US may extract fuels in the most environmentally sound way, but if others remain dependent on those resources to warm their houses and power their cars, it’s a bit of a wash.
RD: So once again, use the resources we have, and then diversify, so that none of us as countries care about one fuel source and have cleaner, better fuels as we electrify. Now, what you need to make sure, though, is that our environmental goals, which can be both far reaching, but at the same time, have to be matched up with the needs of the economy, and workers. Because what we see if we don’t do that is the politically unstable situation, as we’ve now discovered in many of our democracies with the rise of populism.
EDM: Absolutely. It’s not an easy call. As we discussed in the last episode, as we make this necessary jump to renewables, we will need to ensure that those who lose don’t get hung out to dry. But who wins and who loses from this transition isn’t so obvious. As we march towards renewables, certain natural resources, such as rare earth metals, will become increasingly valuable. While that might seem great for heavily resource endowed states, their situation might not be as rosy as it seems. The resource curse, or paradox of plenty. In general, countries with an abundance of valuable natural resources, such oil, are much less democratic and have worse development outcomes than countries with fewer natural resources. So, in the context of rare earth minerals, take the Democratic Republic of the Congo as an example. It is flush with mineral deposits – particularly copper, diamond, coltan, tin, and gold. The DRC already produces 60% of the world’s mined cobalt, and its untapped mineral deposits have an estimated value of $24 trillion dollars – a sum larger than the economies of both the US and China. Yet it is plagued by corruption, political rents, child labour abuse and the growth of armed groups defending the resources they exploit. That’s not to say the country’s mineral reserves are solely responsible, but history suggests such an endowment won’t alleviate those issues. Looking ahead, how can we work to combat the resource curse so that countries with abundant natural resources can develop without compromising the political, economic, and human rights of their citizens?
RD: I just believe that transparency is really important in the extraction of minerals. And I think our world has to be more serious about that. So there’s environmental regulations, you should have, you know, clearly, we should do it in the cleanest way possible. But at the same time, I think you need some transparency. I think the world when it has cartels, when it has symbol parties, running countries, and owning countries, or it has corrupt militias, that own resources, and we don’t operate with transparency, we don’t put that on our country’s companies that have to do the work. I think that that light shines and disinfects. Let’s have transparency as much as possible, and force our companies and ourselves to live by values. Because the more transparent things are, the less the cartels, the parties, the militias, the bad guys can force us, the less bribery that’s needed. All these things should matter. And if the Western world is actually operating in a similar way, that will, I think, make a big difference.
EDM: Both danger and opportunity await us. Climate inaction will certainly doom us, even as action could set us down a familiar path of dependence – reliance on one commodity or worse, one state. Some strategies, though, could change the shape of global politics as we know it.
RD: And actually, it will make a more peaceful relationship in the world, because there will not be these dependencies hanging over each other. And we can deal with each other based on our own values, and kind of come to compromise. But when one is holding you no one is holding a guillotine over another country’s head. That is a bad recipe for a more peaceful world.
EDM: The transition from oil will bring security and stability for some. It will inevitably destabilize and impoverish others. Sudan, Venezuela, Nigeria, Iraq – all are countries that depend on oil export revenues to fund critical services, fund government budgets, and pay off debts. When such countries are cut off from their major sources of revenue, what paths will they go down? What fresh regional threats will arise should their economies, and possibly governments, collapse? Turning back to Rachel Kyte for a moment – how will the rest of the world respond?
RK: It’s a different story for developing countries for developing countries that are intensely carbon Reliant. Those countries need public support to make the transition. So if they’re going to go to the IMF and ask for budget support, that budgetary support, doesn’t want to be helping them just extend the life of their fossil fuel dependence either. And so that’s going to mean really careful conversations with countries about how they’re going to use that public support. Of course, many of them have state owned enterprises, which are oil companies or coal companies or energy companies that are entirely fossil fuel dependent, and have very, very big payrolls. So a lot of people are employed by those state entities, those state owned entities are in desperate trouble over the next 10 years. And so what the rescue package looks like, globally, for those fossil fuel economies is something we need to start talking about
EDM: We are on the precipice of a new era. The shift to renewables is necessary if we are to leave posterity with a healthy, habitable environment for all. Though humanity will gain, some will emerge from the transition less stable, wealthy, and powerful than before. For others, it will be the reverse; untold treasures await. For many, it begs the question if, and even how, the winners might bring the losers back into play. All this will necessarily change the world’s geopolitical landscape. Looking back at the oil age, can we learn from our experiences with dependence, manipulation and resource-conflict to chart a less volatile course? How will nations maintain energy security, particularly in the face of Chinese monopoly over rare earth metals and dominance in electrotech?
As chapter of oil in the book of humanity nears its end, will we learn from our history with fossil fuels? Or, is the past doomed to repeat itself? Tune in next century to find out.
This episode was researched, written and produced by Max Klaver and myself, Elizabeth Dykstra. Our sound assistant was Rachel Carp and this was the final episode of TwentyTwenty – but watch out for our next series coming up.