Energy guru Daniel Yergin: «I’m sick of the energy transition discussion»

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At the COP28 climate summit in Dubai, countries committed themselves for the first time to moving away from oil, gas and coal. According to the International Energy Agency, demand for fossil fuels is set to peak before 2030. Is this the end of the oil age?

No. Predicting exactly when the demand for oil will fall is like a game. Demand is growing in developing and emerging countries right now. We will probably continue to see growth until sometime into the early 2030s, and even then demand won’t be dropping precipitously. It will be more of a slow decline.

So there won’t really be a big sudden change?

I’m sick of the energy transition discussion. It sometimes loses touch with economic history and reality. If you look at the history of energy transitions, they all last for over a century. To try and make change happen in 25 years, or even half of that time is highly unlikely.

What is the difference between the current energy transition and previous ones?

Well, there is one fundamental difference. All of them were energy additions. Oil overtook coal as the world’s number one energy source in the 1960s. But coal hasn’t disappeared. Last year, the world used more coal than ever before, three times as much as in the 1960s. Now we are trying to go from one system to another in a really short time without paying a lot of attention to the amount of resources and minerals that would be required.

How will the energy transition accelerate? By a lack of demand for fossil fuels or by an increasing supply of carbon-free forms of energy?

Renewable energies will continue to grow. This past year, renewable energy increased by another 6% worldwide. But there are also real-world issues that come up: difficult supply chains, higher interest rates, inflation. There were very optimistic goals two years ago for offshore wind in the United States. Now, those projects have been cancelled or renegotiated. Obviously, we have a huge accelerator in the United States with the «Inflation Reduction Act». That’s on the supply side. On the demand side, we need to look at demographics. There could be 2 billion more people living in the world by 2050. That’s why there will be a growth in demand from developing and emerging countries. These countries need to grow, and they need energy to do that. If they don’t grow, the migrant crisis in Europe is going to get worse, among other things.

Some time ago, things sounded more optimistic.

A lot of the thinking about the energy transition occurred during the Covid-19 pandemic, when prices were weak and energy demand collapsed. And now we’re in a post-Covid world. A lot of things have happened, such as the war in Ukraine, energy shocks, increased price volatility. Our thinking about the energy transition needs to be updated.

In what way?

If we look back a couple of years, people were still working with a very linear notion: They would draw graphs with a clear line, and they got where they wanted to be by 2050. I like to speak of a multidimensional energy transition instead: a process which will move at different times, at different paces, in different regions. This concept also leaves room for technological innovations and breakthroughs.

Some time ago, things sounded more optimistic.

In what way?

The war in Ukraine in particular has shown the world that, in addition to decarbonization, securing supply is also important.

That’s the big difference compared to 2021. Look at Germany, for example, which has just presented a new power plant strategy. It announced plans to build gas-fired power plants so that there won’t be a shortfall in electricity. It has been recognized worldwide that energy security also needs to be addressed alongside the energy transition.

Is there still enough investment in oil and gas projects to ensure a safe transition?

People often forget that there’s a decline rate in oil and gas production of around 5%. We have also calculated a shortage of 3 million barrels of oil per day by 2040. The world is going to require both continued investment in renewables as well as investments in oil and gas. Otherwise there will be shortages and price shocks.

Will the decline in oil consumption be controlled or chaotic? How important will the oil cartel OPEC be?

OPEC, and the organization expanded to include Russia, are really like a trade association for exporters. One very interesting thing we’ve seen is that despite the turmoil in the Middle East, there have been no increases in the price of oil for geopolitical reasons, at least so far. What happened? There was a sharp rise in production in the United States last year. We now have this new factor, a rebalancing of global supply. Canada is already the fourth largest oil producer in the world. Then there is an additional supply from Brazil and Guyana. Apart from Brazil, these are all non-OPEC countries.

What is your assessment of Saudi Arabia’s recent decision not to boost oil production capacity from 12 million to 13 million barrels barrels per day, as planned?

I think they were looking at the supply picture and saw major growth coming from the Western hemisphere. It is also expensive to maintain that production capacity. That money can now be deployed for «Vision 2030,» the crown prince’s big plans, instead. There is currently no urgent need to expand capacity.

In addition, Saudi Arabia also hopes that the oil in the ground will be more valuable in 10 or 15 years than if it is extracted now. The big question, however, is how demand will develop.

That is the question about the nature of the energy transition. Until a decade ago, one thing the oil industry could always count on was that it would maintain its monopoly on transportation. With all of these new electric cars on the market, oil is now competing directly with electricity. This energy transition is also different from others in that it is driven by public policy and not as much by economics and technology. What’s more, according to the UN Climate Change Conference, it should also be based on certain criteria. A transition alone is not enough, it also has to be just and equitable. But what works for the Netherlands, with a population of 17 million, will not necessarily work for Indonesia, with a population of 280 million.

This is also changing the geopolitical dynamic. Is it the last gasp of the petrostates? Do they have a time frame of, say, 20 years left in which they are still important?

The importance of petrostates has always fluctuated. I asked Vladimir Putin a question at the economic forum in St. Petersburg in 2013, in which I mentioned shale oil and gas from the U.S. He literally shouted at me and said that shale gas was barbaric – because he knew that it would compete with Russian gas. But the petrostates are also reacting to the energy transition. The Gulf states in particular are using oil revenues to build a diversified economy.

The U.S. is the largest exporter of liquefied natural gas and the largest oil producer in the world. Is the U.S. a secret petrostate?

With companies like Microsoft, Amazon or JP Morgan, I wouldn’t call the U.S. a petrostate. But this is something that is almost not recognized: that the U.S. is by far the world’s largest producer of oil. That’s a development I would not have expected 15 years ago. It’s kind of funny, because eight American presidents have campaigned on the promise of making the U.S. energy independent. And then one day America woke up, and found out it was energy independent. This is a source of energy security and stability in the world.

Could petrostates become more aggressive because they are nearing their end? In addition to Russia, Azerbaijan has also attacked its neighbor. Venezuela is threatening Guyana.

One has to worry about Venezuela. But the worldwide demand for oil and gas is still going to continue to increase. With electric cars, however, oil now has a competitor which it didn’t have before. The demand for natural gas will continue to grow until the 2040s, partly to replace coal in electricity generation. Oil and gas have different trajectories. But there is another thing to mention: It is only recently that Western governments have woken up to the fact that there is a problem with the supply chains of metals for green technologies. Now the alarm bell has gone off.

Will this change geopolitics?

The struggle for metals is part of the growing great power competition between the United States and China. The aim is to shift supply chains away from China. However, this will be difficult because it is not only about mining, but also about China’s dominance in the processing of metals and minerals. What’s more, the process from discovery to production in mining can take up to 20 years. I think that there has been an underestimation of the supply chain challenges that are apparent in the energy transition. There is a big gap between declaratory policy and what actually happens in the global marketplace.

The production of some critical metals is also more concentrated than in the oil industry.

Three countries produce about 40% of all oil: Russia, Saudi Arabia and the United States. But only two countries produce 40% of the copper supply: Chile and Peru. That makes things more challenging.

In addition to the petrostates, there will also be so-called electrostates which rely on electricity. Is the world becoming more fragmented because of the energy transition?

I think the world is becoming more fragile because of the breakdown of globalization. It’s almost time to be nostalgic, because that era of globalization is now over. And all trends and signs indicate that it’s going to get more challenging. You can see it in terms of computer chips and you can see it in terms of oil. The global environment is becoming more challenging to navigate for companies: Back then, everybody pretty much agreed that globalization was good, and supply chains were all about efficiency. Now supply chains are strategic.

What does this mean in concrete terms?

Just a few years ago, China was the best place to invest. Now, companies are under pressure not to go to China. And they comply. The question is what the next policy intervention by the Chinese government is going to be. It’s a completely different world for companies that are operating globally. You have to worry about rules in one place that cause you problems in other places.

Tensions between the U.S. and the EU are also increasing due to their differing climate policies.

I often hear from European business leaders: Regulation, if not micro-regulation, is increasing in Europe. The American investment program, the «Inflation Reduction Act», on the other hand, is much more about incentives. Government officials have described it as a big carrot. In Europe, governments say that the American regulation exerts a magnetic force on investments. But it turns out that we cannot eat the carrot quite as fast as we thought we could. And there is uncertainty about the outcome of the November election, too.

It’s the million-dollar question: What will happen to U.S. climate policy if Donald Trump is re-elected?

There are different theories about the future of the investment program. The U.S. has now embarked on industrial policy on a massive scale. A lot of money is going to Republican states. It is also argued that this an established law and little would change. On the other hand, there are many ways in which a law can be implemented. Trump could make changes in terms of how the money is spent, on which programs and for how long. But normally it’s hard to take away subsidies once they’ve been given.

But the old geopolitics are still in play. Can Europe really afford to do without Russian commodities?

I think the answer is that Vladimir Putin thought they could not. It was a very rational calculation on his part to speak of an oil and gas weapon – except that it failed. And it failed because of the shale revolution in the United States. If it hadn’t been for shale oil and gas, Putin would have prevailed. But there is a cost: European industry doesn’t have access to cheap Russian gas anymore. But Putin’s problem is what to do with this gas. You can’t just store natural gas. He has to look east, he has to integrate his economy more deeply with China and reduce the historical tensions between Beijing and Moscow. But there are contradictory messages coming from China.

We have been talking about energy security a lot. Are energy security and decarbonization mutually exclusive?

It’s not a contradiction, but it’s a recognition that if you forget about energy security you’re headed for disaster. The energy transition depends on energy security to really work. Otherwise, among other things, there will be a political backlash, which challenges energy transition policies. We already see that in some parts of Europe.

Your best-known book is called «The Prize», obviously referring to oil. What will be the most important prize in the world in five or ten years’ time? Copper, perhaps?

The oil industry is much bigger as a global business than the mining industry. We have to keep that in mind. But the picture is becoming more complex. Oil and natural gas will still be important, but the importance of metals is increasing. We should no longer talk about «Big Oil», but about «Big Shovel». Energy and geopolitics are changing. While I was writing my book «The New Map,» I felt like I was writing about the beginning of a new Cold War.

What does that mean?

Compared to the old Cold War, things are more complicated now because China, Europe and the United States are so deeply integrated. And yet at the same time, there is increasing competition, in military terms as well. These economies are so tied together that mutual self-interest and interdependence should act as a deterrent. But even before the First World War, it was totally irrational to make mistakes.

That sounds gloomy.

I’m just looking at the reality. When I was writing my PhD, one of my professors said to me: Just pay attention to what people say.