John Defterios has worked as a journalist within the energy sector for decades. He’s watched the global energy market navigate a host of challenges and transitions over the years, covering many of them in detail. He lent his expertise to this episode of the Siemens Energy Podcast to explain the current obstacles facing the energy sector as it deals with an international effort to address climate change.
Economic and Social Challenges
New developments in climate science and energy innovation have come together over the last several years to force the hand of major energy producers. With the knowledge that climate change is preventable through a shift in energy sourcing, it would seem that the world is moving towards dependence primarily on renewable energy sources. How and when that shift occurs, however, is dependent upon the energy sector’s ability to navigate several complex obstacles.
Chief among them, of course, is the economic hurdle. This poses a problem on two fronts: the current economic dependence on oil production, and the infrastructure investment needed to transition to renewable sources.
In many countries where oil and gas is a primary export, there’s an incentive to slow down renewables production to maximize economic benefit for the longest possible time. In the Middle East, for example, despite the increased affordability of solar and wind energy, the transition is still projected to move slower than in other parts of the world. While much of the US and Europe are aiming for a transition to greater dependence on renewable energy by 2050, Saudi Arabia anticipates a dependence on oil and gas until at least 2070.
In a similar fashion, countries with untapped potential in oil and gas face economic failure and social unrest as a result of the renewable energy transition. In South America and Africa, huge deposits of natural gas could have transformed the economies of many poorer countries. As the world shifts away from fossil fuels, however, these deposits could become stranded assets with no economic value. While on the one hand, it would be in their best interest to transition quickly to renewable energy, it is much more appealing to keep the energy industry focused on the already available fossil fuels in the short term.
The incentives to take advantage of oil and gas are even greater when the cost of the renewable transition becomes clear. In 2021, the International Energy Agency estimated that the cost to hit the 1.5-degree climate change target by 2050 would be $130 trillion. An eye-watering number on its own, it can feel like an utterly unattainable goal for poorer nations with already limited infrastructure and economic capability. Coupled with the seeming wealth available in the form of untapped oil fields, this economic blow could hold the potential for massive social unrest in countries sitting on these fossil-fuel deposits, thus further incentivizing a slow walk towards a renewable energy economy.
A Divided Focus
With the potential for such a massive social and economic impact, it’s no wonder that addressing the ongoing developments within this sector is so difficult. The two major figures effecting these changes (oil and gas versus renewable energy) struggle to even have a seat at the table together to invent solutions.
One significant hurdle in reaching compromise is the generation gap in perception of energy production and the lack of education to bridge that divide. Younger millennials and Gen Z feel a greater sense of urgency regarding the energy transition. For them, the concern is largely environmental. As a group looking towards the long-term future of the world they will have to grow up and live in, the social and environmental responsibility of renewable energy is the most meaningful pursuit of the energy sector. For older generations who find themselves as the leaders of many of these global energy institutions, the immediate financial impact of transitioning to renewable energy is far more apparent and thus more compelling.
In this sense, the divide is largely ideological and so is a steep challenge to overcome. This is best illustrated in John Defterios’ interaction with Greta Thunberg at the World Economic Forum. When the top renewable energy advocates were meeting in the city which held the headquarters of the top oil and gas producers, it would seem prudent for the two sides to meet and discuss future solutions. When John asked if this opportunity was being taken advantage of, both camps balked at the idea.
Clearly, current changes within the energy sector are not occurring seamlessly.
"The human species doesn't plan well for the medium and long term."John Defterios
Despite the seemingly insurmountable obstacles, John sees a pathway towards making these energy industry developments more palatable.
The first step in smoothing the transition is to provide more education regarding the economics surrounding the energy sector. If it were simply a matter of environmental responsibility, fossil fuels might have been abandoned long ago. As it stands, moving from one energy source to the other requires a massive capital investment, a significant time commitment, and a willingness to abandon short-term economic gains. With greater knowledge of these pragmatic obstacles, millennial and Gen Z advocates for green energy, especially those within government and industry, might be more willing to compromise on issues like transitional timelines.
Another area of potential improvement is the trust in energy innovation. What causes much of the hesitation toward renewable energy is the economic investment needed. John sees little trust, however, in the potential gains from that investment. He gives the example of the iPhone. The invention of the smartphone and implementation of the iPhone required a significant capital and time investment at a time when flip phones were ubiquitous and easy sales. The smartphone innovation changed the industry forever and it is now one of the best-selling consumer electronic devices available.
Similarly, energy innovation has the ability to offset the cost of transitioning to green energy. Greater capital investment has the potential to encourage innovation, which itself could create returns on the investment. In other words, renewable energy infrastructure doesn’t have to be a sunk cost but an investment that generates more profit over time.
These two possible paths hold the potential to bring fossil-fuel and renewable industries closer together. Close enough, perhaps, to bridge the gap that is currently stalling meaningful discussions. If the two camps can begin dialoguing, solutions to the current challenges facing the energy sector will be far more attainable. This, then, is perhaps the most needed development within the energy sector: not the transition to renewable energy alone, but the ability of the old guard and the new generation to mutually answer the challenges they both face.