We are living through not just an energy crisis but a food security crisis, a supply chain crisis, a cost of living crisis – and all of it following a global public health crisis. No wonder we are all scrabbling around for answers and a route through the turbulence.
The headlines alone in recent weeks call the nature of the storm. The
Financial Times recently had a 'Long Read' (usually a signal not to read) entitled: 'The week that could unravel the global oil market'. The subtitle was: 'As Western countries prepare to impose a price cap on Russian crude, many of the industry's norms are being undermined'.
And then the
Economist a couple of weeks ago had its top leader entitled: 'Frozen out'. Subtitled: 'Europe faces a crisis of energy and geopolitics that will weaken it – and threaten its global position'. And there was the FT's recent
Energy Source Bulletin, with the slogan 'Profit. Power. Politics', which had the headline: 'longer-term trend shift that is imploding global politics'.
The
Economist's 'Inside Log' –
Briefing in Europe and Energy – was entitled: 'Chilling prospects' and said 'despite appearances, the costs and ill-consequences of going without Russian gas are growing'.
It is therefore a bleak picture – and EU nations only just decided (with some difficulty) to put a cap on Russian oil prices before it took effect at the beginning of December. Russia angrily attacked it. The same weekend, the nations in the OPEC+ group – which includes Russia – decided on no change to oil production, refusing to reduce the global price.
Simultaneously, the US through its Inflation Reduction Bill has been seeking (with some serious implications for European industry) to drive for greater sovereignty in both energy and high tech.
Meanwhile, the energy industry is in the midst of trying to do the impossible. At one time, Scottish Labour politician, James Maxton, said this in a tight spot: 'If you can't ride two horses, why are you in this circus?'
The industry is now involved in precisely that kind of circus trick. One fast galloping horse is the drive to net zero and the necessary transition to that important goal. The other bucking horse is the equal necessity – in the teeth of the ripple effects of the Russian attack in Ukraine – to maintain the supply of fossil fuels. That is vital to both keep the lights on and also satisfy shareholders who will finance the transition to renewables and who unashamedly want short-term returns on their investments.
Self-evidently, this is a global circus, and the energy industry, and the rest of us too, have no alternative but to ride the two horses and hope for the best. It will not be easy.
2022 was a uniquely turbulent year and that turbulence is far from finished. Not just in the UK with three Prime Ministers, four Chancellors, scores of ministerial changes and a mini budget which crashed the economy in a single week. But politics elsewhere too is in a turbulent condition.
With this as a background, the whole world order we have grown used to, and maybe complacently taken for granted, has been thrown into disorder by that act of naked aggression by President Putin invading – and trying to obliterate – his sovereign neighbouring state.
With recovery only beginning from the pandemic paralysis, the world was shocked by the invasion on 24 February. The tectonic plates of Euro Atlantic stability have moved decisively – with no easily foreseeable destination.
For one of the five permanent members of the UN Security Council to break the UN Charter as it did, but also the Helsinki Accords, the Budapest Memorandum, the Paris Agreements, the NATO Russia Founding Act and the Rome Declaration – all of them guaranteeing respect for exiting borders and the right to territorial integrity – is an event of fundamental geo-strategic significance. It took the world's breath away.
President Putin, who I met and did business with nine times in my time at NATO, who with me set up the NATO/Russia Council, has now turned his back on his signature that day. He is setting out to deliberately destroy and eliminate Ukraine and absorb it into his deluded vision of a Greater Russia.
His declared object was to stop the onward advance of NATO (and two new countries have applied) and the EU (with Ukraine making full application there). He also sought to divide Europe – and we have seen it welded together as never before. His object of separating the US from Europe has been similarly defied by an even stronger Alliance.
It is strategic failure of epic proportions – and all done in the name of a delusional bid to regain the respect and equality he believed was enjoyed in the Cold War by the Soviet Union.
The pariah status Putin has achieved completes a royal flush of failed objectives and the tenacity, bravery and sheer skill of the Ukrainian people will mean their success will be the final failure for him.
What now for the energy crisis and all its malignant effects?
First: Inflation and the inexorable rising cost of living will erode support for democratic governments and dilute support for Ukraine.
Second: Poverty levels will grow, fuelled by the cost of goods and especially heating and food. A recent report from Ernst & Young covering 70,000 householders in 18 countries on the energy transition, showed 71% cutting their energy costs and a third of people in fuel poverty (defined as spending more than 10% on gas/electricity). Make no mistake, poverty and inequality drive migration and we can expect more waves of refugees to come to our shores with all the consequent instability and unpopularity we already experience.
Third: The energy crisis will be exaggerated by the food crisis as grain cannot be exported in sufficient quantity from both Ukraine and Russia. Wheat accounts for 20% of all calories consumed in the world and the biggest exporter of wheat is Russia. As supplies continue to be stopped or delayed and as hunger increases, the potential for trouble is self-evident.
Fourth: The energy crisis is just on hold. European dependency has gone down from 40% from Russia to 15% – partly by saving and partly by the closure of the pipelines. However, European storage of gas is now at 95% and a buffer for both industrial and retail customers this year. However, 2023 promises to be a return to serious problems. There will be no Russian supply to refill the storage and with China and Asia coming back into the market, prices will be driven up again. We cannot be complacent or even relaxed now just because we've had a mild autumn and full storage.
Fifth: The panic moves will increase to find alternative supplies to the Russians and that will accelerate new configurations in geography.
Liquid Natural Gas (LNG) terminals are being urgently built in Europe. New countries and regions are being accessed like Algeria and the Middle East. Having been sidelined by cheap Russian gas and US shale, new countries will come back into focus. These countries will drive a hard bargain.
Sixth: Maybe the only glimmer of light at the end of this dark tunnel is the renewed drive to renewables. The transition to renewables was already underway but will have to accelerate. It will not be a quick fix but the drive has become not just desirable, but urgent. More onshore wind – however controversial – will be needed. Small modular nuclear generators have to be constructed. More carbon capture storage will be required.
Climate change lobbying and the pressures of annual COPs will highlight and condemn the short-term resort to coal as in Germany and the fashionable hostility to nuclear in that country. And, indefensibly, in Scotland.
Governments will have to make serious moves to reduce domestic demand. Some subsidy regimes actually encourage increased demand and that has to be revamped and much more publicly given to saving power. We cannot afford to consume as much as we did before Ukraine and the availability of cheap Russian gas has proved a nasty bargain.
The geopolitical map of the world is being redrawn as we watch. It will never be the same after Putin's reckless breach with the existing order but there has to be an alternative model discovered and designed to protect us – and indeed future generations.
It won't be easy, but the effort needs to start soon.
Lord Robertson of Port Ellen has been Shadow Secretary of State for Scotland, UK Defence Secretary and Secretary General of NATO. He was a Scottish Labour MP for 21 years
