Energy and Transition Realities, by Haitham Al Ghais
The energy transition as a concept is itself in need of a transition.
We must move beyond the blinkered view that this is about substituting energy sources, that hydrocarbons should be consigned to the past and that recent real concerns expressed by energy consumers around the world on current transition strategies are temporary blips.
In recent years, there has been much discussion among policymakers of the International Energy Agency’s prescriptive “Net Zero by 2050” scenario. Many ambitious proposals for net-zero polices have leveraged this scenario, but there is evidence that some of these policies are now being pulled back and reconsidered.
There is a refocusing on the daily energy realities lived by billions of people. Yes, we all want energy with lower emissions. That is a given. But we also want to ensure reliable and affordable energy, enable economic growth and enhance energy accessibility.
Ongoing Re-Evaluations
There are a number of reasons for these ongoing re-evaluations.
Firstly, technologies like solar, wind and electric vehicles (EVs) are not replacing hydrocarbons at any real scale. While these alternatives will play a role moving forward, the share of hydrocarbons in today’s global energy mix is over 80%, similar to the level 30 years ago. Wind and solar combined make up under 4% of the world’s energy, and global EV penetration is between 2%-3%. This is despite the fact that $9.5 trillion has been invested in “transitioning” over the past two decades.
The course of history has shown that energy transitions take centuries to evolve and have been about energy additions, not energy subtractions. Previous transitions were technology driven, with policy following suit. This current transition has to date been policy driven, with the hope that technology will catch up.
Cost and Competitiveness Challenges
Secondly, the costs and competitiveness of many of these alternatives remain a challenge. Renewable costs have reduced, but when considering intermittency issues, the levelized cost of “total” electricity from solar is more than seven times higher, and from wind 15 times higher, when compared with conventional power plants. Additionally, reports of the profitability struggles of many renewable developers are testament to their economic challenges.
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For EVs, the volume weighted average retail price of EVs in the US and Europe is higher than gasoline and diesel models, and EVs are heavily subsidized. Such subsidization cannot go on forever. Many automakers are also scaling back or delaying their EV plans, and some have declared bankruptcy. Clearly, the hype around EVs is wearing off, as consumers are showing a preference for continuing to have a choice of vehicles, and as the huge challenges around electricity grids, battery manufacturing capacity and critical minerals increase.
For critical minerals in particular, imbalances between processing capacity and reserves concentration present significant challenges, such as supply chain bottlenecks, price gyrations and geopolitical tensions. Moreover, mining is an energy intensive activity, which runs today on hydrocarbons. In fact, studies show that final energy consumption in mining activities could increase more than fivefold by midcentury.
Developing Country Needs
Thirdly, billions of people are playing energy catchup. Oil consumption in developing countries currently ranges from less than one to just below two barrels per person per year, compared with nine in the EU and 22 in the US. These countries will require more energy, not less, in the future. They cannot wait on costly alternatives when reliable, secure and affordable hydrocarbon options are already available at scale, ones that continue to provide prosperity to the developed world.
And fourthly, renewables and EVs do not have sole ownership of clean energy technologies or efficiency improvements. The oil industry is also advancing efficiencies and investing in technologies to reduce emissions, such as carbon capture, utilization and storage, direct air capture, carbon dioxide removal and clean hydrogen, alongside investing in renewables.
Rethinking Perceived Wisdom
It may make for some awkward conversations, but perceived wisdom on the energy transition is due a serious rethink.
We need to move away from categorizing energy sources as good or bad.
We need to reflect the realities on the ground, and park the misguided narrative of there being no need for new oil and natural gas fields. With oil and gas demand continuing to rise to historically high levels, it is not a prudent or stable way forward for global energy security.
We need to invest in all energies, all technologies and recognize the needs of people around the world, delivering on both our energy security and climate objectives. All the dots require connecting, not just a few. Our energy and climate ambitions necessitate realistic policies that ensure that emissions are reduced, while populations have access to affordable energy products and services they require to live a comfortable life.
Haitham Al Ghais is the Secretary General of the Organization of the Petroleum Exporting Countries (OPEC)
