Lessons for Europe from Biden, the Gulf and CERAWeek

Reuters

The debate over the transition to “greener” forms of energy – apparently the hottest topic in town at the CERAWeek gathering in Houston Texas this week – tells us a lot about the differing, and sometimes conflicting, approach to the campaign against global warming in three key parts of the energy chain: the USA, Europe and the Middle East.

I didn’t make CERAWeek – the “oil man’s Davos” – for the first time in years. Many of the big players in the Middle East decided to give it a miss this year, for various reasons.

But one who was there, and made a big impact, was Sultan Al Jaber, the UAE oil supremo who is also set to preside over the Cop28 climate change conference in the UAE later this year. He told CERAWeek that the oil industry has the “knowledge, experience, expertise and resources” to square economic progress with sustainability.

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That declaration from the UAE’s minister of industry and advanced technology was music to the ears of the 7,500 Houston delegates, especially the American energy leaders who make up the vast majority of attendees.

People I’ve talked to who were there said that all the chatter in the corridors and lobbies of the Hilton Americas where the event takes place was about President Biden’s Inflation Reduction Act (IRA), the package of economic and financial measures brought in to combat the threat of US recession.

The most notable element in the IRA is a bundle of subsidies and incentives amounting to roughly $370 billion to encourage investment in energy renewables and alternatives such as hydrogen.

Such amounts would be enough to win the hearts of even the most rough-neck of Texan oil executives and make them think seriously of wind farms, solar panels and electric batteries, rather than traditional oil rigs.

For once, US energy policy seems to have hit a winning formula. The IRA will stimulate investment in the energy transition, while at the same time traditional US oil industry muscle will drive investment in hydrocarbons all the way to 2050.

Even Darren Woods, CEO of that bastion of oil orthodoxy ExxonMobil, admitted to “a lot of interest” in the IRA renewables incentives.

The Exxon boss also took a swipe at the European energy industry, which has been badly wrong-footed by the IRA. Given that Europe has recently been a textbook example of how not to run an oil strategy, he had a very good point.

More carrot, less stick

Leaving aside the disastrous over-reliance on Russian oil and gas that was the continent’s preferred option for many decades, since the start of the Ukraine war, and the volatility it caused, Europeans have gone back to burning more coal and importing more expensive gas from the USA and the Middle East, while imposing windfall taxes on their own oil companies.

The kneejerk reaction to the IRA from Brussels was to moan about unfair government subsidies on the part of the Americans, highlighting the damage it would cause to their own industry if European companies went after the subsidies on offer across the Atlantic.

Surely the more appropriate response would have been to emulate the IRA provisions in Europe with their own set of incentives, but – as more than one Houston delegate pointed out – Brussels has long preferred the stick of bureaucratic prohibition over the carrot of financial incentives.

The Middle East is showing that there is a third way. The big oil producers of the Gulf will of course continue to invest big time in hydrocarbons (as Al Jaber underlined at CERAWeek) but, at the same time, are putting multiple billions of dollars into renewables, alternatives and all the other capital intensive technologies needed to tackle global warming.

This investment largely comes direct from governments, led by Saudi Arabia and the UAE, in the form of state spending on “green” initiatives by the kingdom and other Middle East countries to combat climate change and global warming, totalling more than $200 billion.

This is in addition to the huge sums spent by national oil companies such as Saudi Aramco and Adnoc on technology to mitigate greenhouse gas emissions.

So, the US and Middle East models seem to have hit the “Goldilocks” spot on balancing energy transition with sustainable economic development, while the Europeans lag behind.

Will they be able to get their act together in time for Cop28 in the UAE towards the end of the year? With the EU’s dismal track record in energy policy, don’t bet on it.

Frank Kane is a communications consultant focused on Saudi Arabia and the UAE