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A just energy transition cannot be rushed

The JP Morgan thesis will get a resounding welcome among oil producers

A research paper from JP Morgan suggests that the energy transition will take decades, despite the demands of activists from groups such as Just Stop Oil Alisdare Hickson/Flickr/Creative Commons
A research paper from JP Morgan suggests that the energy transition will take decades, despite the demands of activist groups such as Just Stop Oil

As if there were not already sufficient uncertainties in global oil markets – Middle East security tensions, an accelerating war in Ukraine, energy sanctions and uncertainties in major economies – JP Morgan, the blue-blood American investment bank, has thrown another spanner into the works.

In a thought-provoking research paper published recently, the bank’s global energy strategist Christyan Malek has said that a “reality check” is required on the whole convoluted and controversial subject of the energy transition and the apparently inevitable shift from hydrocarbons towards renewables and alternative fuel sources.

If Malek’s thesis is correct, many of the existing orthodoxies of the energy transition will have to be re-thought. These include the natural decline in hydrocarbon production and usage, the fast-track replacement by electrification and renewables, and the 2050 targets for net-zero carbon levels.

The broad scenario advanced by the environmentalist lobby is that hydrocarbon usage will naturally wither away as consumers and governments realise the harmful effects of greenhouse gas emissions.

They either choose low-carbon options via the market mechanism or are “persuaded” by official policies to adopt a progressively lower-carbon energy regime.

For oil prices, this would mean a gradual downturn as demand falls off, the rate of demand decline depending on your choice. Peak 2030 seems fashionable at the moment, though some of the more aggressive green “experts” see it as earlier.

The oil-producing world, naturally, sees it much later. According to the standard position, hydrocarbons are an “essential part of the global energy mix for many years to come”.

Malek asks us to think again about time scales. “Throughout the course of history, each new energy source has taken multiple decades to achieve global scale,” he writes.

It took oil, gas and coal 41, 44 and 54 years respectively to go from 1 to 10 per cent of the global primary energy mix.

He estimates wind and solar currently at around 2-3 per cent of global energy; other forms, like hydro and nuclear, which have been around much longer, have never reached the 10 per cent threshold.

Second, he questions funding models. Scaling up wind and solar will be much more expensive than comparable epoch-changing projects, like the Manhattan Project to develop the atomic bomb or the US Apollo Program to land people on the moon.

Instead of a mad scramble towards unrealistic targets (‘Just Stop Oil’), energy policymakers should go for the ‘low-hanging fruit’

Private sector investment returns on renewables have not been impressive, Malek writes, and amid the current tense geopolitical and economic uncertainties, governments are under pressure to spend public money on other things, such as defence, welfare and higher interest rates.

Finally, he points out – as Elon Musk of Tesla is beginning to realise – that developing clean energy systems itself requires vast amounts of energy expenditure, with an associated cost.

For example, four tech companies – Amazon, Apple, Alphabet and Meta – consumed more energy than the whole of Columbia or Czechia in 2022.

As some western governments have already learned, there is no inevitable sympathy on the part of their electorates towards radical environmental policies and there could be further pushback as financial and economic reality takes hold, as it did in Europe after the Russian invasion of Ukraine.

So instead of a mad scramble towards unrealistic targets (“Just Stop Oil”), energy policymakers should go for the “low-hanging fruit” that can actually be implemented and which would produce meaningful reductions in emissions. A global switch from coal to gas would cut greenhouse gases by 17 per cent, Malek estimates.

And, because emissions are worldwide phenomena, a move to a global carbon market is the best way to balance public and private investment, with a global carbon price setting a consistent benchmark.

“Transition cannot be rushed, it is by definition a decades- or generations-long process and long-term strategies are critical to ensure a ‘just’ transition,” Malek concludes.

The JP Morgan thesis will get a resounding welcome among the oil producers – where the bank already has considerable heft – but will almost certainly be demonised by the environmentalists.

It will also be another factor the traders have to feed into their increasingly complex long-term modelling, alongside Gaza, Kharkiv and Hormuz.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE

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