The impact of the low carbon transition on the oil and gas economy
EU Institute for Security Studies
The EU Institute for Security Studies (EUISS) is the EU Agency analysing foreign, security and defence policy issues.
The world’s reckoning with environmental degradation and climate change, which has emerged in particularly stark relief over the past three decades, has led to the low-carbon energy transition being embraced as the universal solution to the global climate challenge.
However, enthusiasm for clean energy and low-carbon technological innovation has not always been matched by a commitment to relinquish the addiction to consumption-led growth.
Policy incentives for radical decarbonisation and support to clean energy technologies have driven an unprecedented reallocation of capital and the reconfiguration of conventional energy systems.
The ongoing war in Ukraine and the volatility that it has created in energy markets in Europe and beyond has only reinforced this trend.
The policy dictum that equates the adoption of low-carbon energy sources as the dominant energy carriers with an unequivocal leap into a secure, environmentally sustainable and equitable energy economy has established itself as the prevailing policy narrative.
Clean energy = a secure, sustainable and equitable energy economy? Not so simple.
This vision is at times myopic, impervious to critical scrutiny, and oblivious to the advent of new challenges and the insidious risks that could arise from this new trajectory and derail the clean energy transition.
Unfortunately, the phasing out of conventional energy sources – oil, gas and coal – without a concerted and targeted effort to curtail overall energy demand and fossil fuel consumption in particular might lead to a major distortion in the economy and compromise, rather than enable, the net-zero transformation.
In addition, while the adoption of clean energy solutions is warranted, embarking on a transition to a low-carbon economy without putting in place adequate resilience and stress-testing measures to gauge the ability to balance security, sustainability and affordability priorities could create dangerous volatility and an avalanche of shocks that would pit climate ambitions against national security maxims.
Ultimately, the radical decarbonisation trajectory, if not properly managed, will alter established power equilibriums, eroding the power of petro-states while amplifying the influence of countries controlling green commodity value chains – a shift that might create new dependencies, rampant inequalities, and a new age of scarcity with serious repercussions for economic and social stability.
Navigating the shifting sands of the energy transition
Our new Chaillot Paper examines the transformation of the energy system that is currently unfolding and the contingent macroeconomic impacts on the oil and gas sector, also shedding light on conflicting and contradictory policy signals and their unintended consequences.
It identifies avenues of action for the major oil corporations and producing states, recognising the different pressures to which these stakeholders are exposed, as well as their differing priorities and agendas, but also highlighting divergent starting points and approaches as well as the weight of inherited structures and practices that might impact their ability to adapt to a carbon-constrained operational environment.
The paper also presents a set of recommendations regarding strategies that these stakeholders could adopt in order to bolster their resilience and emerging risk management strategies.
These have been formulated with specific reference to the energy crisis that has been engulfing Europe and the world for the past 18 months, and map both challenges and opportunities ahead. The recommendations propose a series of targeted measures that the EU might pursue in the short, medium and long term to enhance the bloc’s strategic resilience.
Yana Popkostova, ‘The power shift: impact of the low carbon transition on the oil and gas economy’, March 2023.