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Sowing the seeds of oil demand destruction; how Russia has accelerated the energy transition

Eighty years ago, during the height of World War II, the German Wehrmacht operation, Case Blue, set off from Belgorod and Rostov-on-Don to capture the Baku oilfields in the Soviet Union. The Germans wanted to not only increase their own supply of oil, which was already stretched beyond what could be sustained, but also to deprive the Soviet Union of their main oil supply; to starve the Soviet war machine of energy. The Baku oil fields (in modern day Azerbaijan) accounted for up to 80% of the oil output of the Soviet Union during World War II. Fortunately for us all, the operation failed to reach its objective when one of the spearheads for that attack was destroyed at Stalingrad. The failure at Stalingrad forced the rest of the German attack to retreat. The German inability to reach Baku would be a major factor in the defeat of Nazi Germany, as Germany was running out of oil for its war machine; and no oil meant no energy for the continued usage of the vaunted German military.

One year ago, when Russian tanks rolled into Ukraine from those same starting off points, the similarities in starting points of aggression and goals between the opening of the war with Ukraine and the history of Nazi Germany, was startling. It was clear early in the war that Ukraine would not fall quickly; and in retaliation for the world’s support of Ukraine, Putin weaponized Russian oil and natural gas, to starve Europe of energy and force Ukraine and the rest of Europe into submission. Yet, the results were startling, unexpected. Instead of Europe and Ukraine faltering due to the lack of oil and natural gas, other alternatives were considered. The use of energy as a weapon accelerated the energy transition. We may look back years from now and see the Russian invasion of Ukraine as one of the great inflection points of energy; when the world decided to decarbonize to not only help the planet but to create energy independence with clean energy as a base. As the failure of Operation Case Blue led to the downfall of Germany and a very different post World War II world, the Russian invasion of Ukraine may be the impetus for a new world of energy.

Already, the use of energy as a weapon deeply impacted the energy trade, energy prices and the energy transition. The first and most immediate impact was major price spikes as energy imports from Russia to Europe fell dramatically. The price of oil jumped more than 50% and natural gas in European markets increased multiple times from pre-war levels. Inflation challenges developed around the world and caused acute energy shortages in developing nations as LNG cargoes were rerouted to European markets because of the cost premium that existed. This impacted everything from electricity prices to fuel prices and even fertilizer prices; since ammonia-based fertilizers are derived from natural gas. To combat the impact of the Russian moves, energy trade was rerouted and places, such as the US, quickly ramped up production. These challenges, which are being managed in the short term, are also increasing the world’s focus on the energy transition.

The energy transition was already gaining momentum before the Russian invasion of Ukraine. In fact, calls for changes in energy sources because of climate were greater than at any time in history; and countries and companies were growing more vocal in their support of alternative forms of energy. Prior to the start of the Russian invasion of Ukraine, renewables and energy storage had already become cost competitive to fossil fuels. Yet, Russia’s invasion of Ukraine moved national security to the forefront and energy independence became critical and timely. The energy transition has entered a new level now that energy independence has become an issue of national security. Following the Russian invasion of Ukraine, almost $1 trillion in new government incentives globally were committed towards the energy transition. The new incentives are not just out of concern about climate change, but also out of concern about energy security. After all, if a country is willing to weaponize energy to force the world to its will, what effects will that have on energy and worldwide country-level stability? The energy transition and the new incentives allow for more energy independence.

The change in the energy transition is palpable. Before the Russian invasion of Ukraine, the International Energy Agency (IEA) estimated it would take over a decade for renewables to become the largest source of energy. Now, in response to the invasion, the IEA estimates that solar alone will become the largest source of energy by 2027. Also, before the Russian invasion, the IEA estimated that oil demand would slowly grow for the next five to ten years before plateauing; now, it expects that plateauing to start in the next few years and begin declining by the end of this decade. Finally, the IEA expects both batteries and green hydrogen to be cost competitive in the next few years as scale and incentives make those technologies economic. The energy transition is not slowing down and the Russian invasion of Ukraine has quickened the pace.

Another incentive to push the energy transition is based on geology.Many nations in the world lack the geology and the technology to create enough energy from fossil fuels to satisfy domestic demand.That, in turn, has forced most nations to be energy importers.The war in Ukraine and the energy stress and price spikes it has caused led to a chaotic environment: some governments fell from power and in some developing nations, countries defaulted on national debt.The only way to create energy security in these energy importing nations is to transition to renewable energy.After all, every nation has wind and solar power; resulting in a dramatic increase of new incentives for renewable energy and energy storage technology, such as batteries and green hydrogen.The war in Ukraine has, by any measure, quickened the pace of the energy transition. Putin, in his blind desire for power, has now sown the seeds for the decline of Russian energy.The war in Ukraine has become a major inflection point for energy and the energy transition, and perhaps the spark of a changing energy world.

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