Towards a new global energy system

Oil powered the vehicles, wars, economies, and geopolitics of the twentieth century. The world is now in the midst of an energy crisis that is accelerating the transition to a new order.

Oil prices plunged earlier this year as the coronavirus pandemic dealt a severe blow to the global economy, with oil demand falling by more than a fifth. The oil market has since staged a volatile recovery, but it is unlikely to return to previous levels, and fossil fuel producers are now facing vulnerabilities.

As public, government and investor awareness of climate change grows, the clean energy sector is beginning to see strong momentum and capital markets are shifting, with clean energy producers’ shares up 45% this year. With interest rates close to zero, politicians are backing green infrastructure plans and projects. Democratic U.S. presidential candidate Joe Biden wants to spend $2 trillion to eliminate carbon emissions from the country’s economic sectors, while the European Union has earmarked 20% of its $880 billion coronavirus recovery plan to support climate change prevention measures, as European Commission President Ursula von der Leyen confirmed the bloc wants to reduce greenhouse gas emissions to 55% below 1990 levels over the next decade.

The energy system of the 21st century promises to be better than the oil age, with greater political stability and less economic volatility, but this transition carries huge risks. If the transition process is not well organized, it will increase political and economic instability in oil-producing countries and strengthen China’s control over green supply chains. Even more dangerous is that this transition may happen very slowly.

Today, fossil fuels provide 85% of the planet’s energy, but it’s a dirty system. They account for two-thirds of greenhouse gas emissions, and pollution from burning fossil fuels kills more than 4 million people a year, most of them in major cities in the emerging world.

The characteristics of a new energy system are beginning to emerge. With bold action, the contribution of clean sources of electricity production, such as solar and wind, could increase from 5% today to 25% by 2035 and to nearly 50% by 2050. Oil and coal use will decline, although clean fuels will remain essential. This structure will ultimately bring huge benefits, most importantly that decarbonizing energy production will allow us to avoid many climate crises, including drought, famine, floods and mass migration.

Once this new system grows and develops, it will help create broad political stability, as energy supplies will be geographically and technologically diversified, while petrostates will be forced to reform their economic base and increase investment in renewable energy and energy projects.

Even if a better energy system emerges, however, there will be obstacles, as authoritarian China could have a temporary impact on the global energy system due to its dominance in manufacturing key components and developing new technologies. Today, Chinese companies produce 72% of the world’s solar panels, 69% of lithium batteries, and 45% of wind turbines, and they also control most of the mining operations needed to produce clean energy such as cobalt and lithium.

China’s influence depends on how quickly other countries act, as Europe is home to developers of wind and solar farms and European companies are leading the race to reduce greenhouse gas emissions. If the United States takes urgent climate action, such as implementing a new carbon tax to reduce fossil fuel use and developing new infrastructure, it will become a powerful green power.