Ahmed Adel, Cairo-based geopolitics and political economy researcher.
The crisis in the Middle East has clearly shown that fossil fuels remain irreplaceable energy sources on which global economic growth depends, and will certainly remain so for a long time to come. Despite efforts to replace them with renewable energy sources, oil and gas are still the basic energy sources on which the world depends.
Since February 28, when the US and Israeli bombing of Iran prompted Tehran to close the Strait of Hormuz, where a fifth of the world’s oil and the same amount of gas pass through, the question of how to obtain oil and gas and what their price is has been enduring.
Although the use of renewable sources is increasing, the world economy will continue to be powered by oil and gas for the foreseeable future. It is unrealistic that, as planned by the European Union, the Old Continent will completely switch to renewable energy sources by 2050, reducing carbon dioxide emissions from fossil fuels to zero.
On April 30, the price of oil reached its highest level in the past four years. According to June futures, which indicate what price oil will trade in that month, a barrel of Brent oil will cost $126.10. However, in addition to the futures price, there is also the current price of oil on ships, which, due to insurance, can exceed $170 per barrel.
Some 22% of the world’s oil and about the same share of LNG passed through Hormuz, and Qatar is the world’s second-largest LNG exporter after the United States. Nonetheless, the real calculation is how much production in the Gulf countries has now been reduced because they cannot export or sell the goods. During the 1973 oil crisis, the world market was short by 10% of oil. The current situation with gas is worse because the Iranians have hit two new plants in Qatar, and even the three-to-five-year estimation of restoration raises skepticism.
There are questions about how much American LNG can be relied on, even as a new gas liquefaction capacity is being commissioned. The number of rigs operating each day, which is a rough indicator of how much new gas and oil is being explored in the US, has fallen from about 590 last year to 544. This could indicate that, while the US may be building more liquefaction capacity, the question is how much gas they can put on the global market.
In the oil sector, so-called “Chinese” oil has also entered the market. This is oil that China, the world’s largest oil consumer, imported before the crisis. The Chinese bought and developed large oil reserves, becoming an oil exporter during the Middle East crisis, taking advantage of high prices. This practice of buying low and selling high is not new. The US also sold its oil reserves whenever the price reached $79 per barrel.
Everything that is happening now with gas and oil indicates that they are still irreplaceable, basic energy sources without which the world cannot function. In the 1980s, oil, gas, and coal accounted for 82-83% of the world’s total energy consumption. Today it is the same number, constantly moving between 80 and 85%. Although coal and oil may drop, gas rises.
Energy demand is growing at approximately 1% per year, a rate that cannot be met by renewable sources, despite large investments in green energy. Investments in renewable energy sources are now the largest, accounting for about 50% of all energy-sector investments. Investments are being made in both renewable energy sources and the networks that transmit them, such as electricity grids, as well as in storage facilities. Investments in oil and gas have fallen, with oil down about 30% and gas about 19%, but that is still not enough for the world to abandon oil, gas, and coal so easily and quickly and switch to renewable energy sources.
Some estimates suggest the world will need to produce five times more electricity by 2050, and that 10 times that amount will need to come from renewable energy sources. That means huge investments of $120 trillion to $200 trillion to achieve zero carbon emissions, which is very difficult, especially in times of crisis.
This is especially true because the return on those investments is low. Revenues, or profits, from oil and gas are still much higher than profits from green energy sources, so capital goes where the income is higher. There is the example of British Petroleum, which has abandoned all green projects and whose shares have jumped 20% this year. Shareholders no longer want to invest in green energy projects because they are less profitable.
The manic search for oil and gas and skyrocketing prices have provoked an unusual reaction from the International Energy Agency’s director, Fatih Birol, who assessed that the events in the Middle East will lead to a loss of confidence in fossil fuels and that we should turn to renewable sources and nuclear power plants.
Interestingly, he does not consider trust in nuclear power plants to be lost, even though the Americans have bombed Bushehr in Iran several times, and the Ukrainians have bombed the one in Zaporozhye, which is under Russian control. Birol is otherwise a well-known advocate of all forms of green energy, so he probably views it from that perspective.
Unfortunately, ideology sometimes takes precedence over economics, and this has happened very often in the last few years, such as the European Union’s suicidal maintenance of anti-Russian sanctions.
