Global Update on Energy and Climate
Joseph Majkut: Good afternoon. My name is Joseph Majkut. I’m the director of the Energy Security and Climate Change Program here at CSIS. And I’m very pleased that you’re joining us for this digital program.
Three weeks from now will mark the one-year anniversary of the Russian invasion of Ukraine. It’s fair to say that the energy world has been upended by that conflict, and the reverberations of it in the coming years are part of what we want to discuss today.
If I can briefly set the scene before introducing our speakers: Over the past year, oil prices took a round trip from $80 to $120, and then back down again. Historic and unprecedented releases of strategic petroleum reserves, particularly from the United States, played a new price control role that they had not before. And we’re now facing a market that has price caps on Russian exports and a divided and cleaved market, which had formerly been globally oriented.
In natural gas, Russian pipeline delivery to Europe was half of what it was in 2021 in the past year. EU LNG imports were up 60 percent, and the U.S. provided nearly two-thirds of those. A recent CSIS report covers that story. But this change in the market conditions drove prices nearly 10 times what they had been before. And there have been spillovers to other consumers and throughout the developing world.
At the same time, the world’s on the precipice of energy transition. Bloomberg New Energy Finance recently reported that energy transition and investment in 2022 for the first time matched fossil fuel investment. As we look toward an energy system that is in transition, we want to talk about what the world looks like at an inflection point.
Our guests today are two of the leading global experts in the challenges we face and the policies we’re going to use to respond to them. David Turk is the deputy secretary of energy in the United States. He previously served as the deputy executive director at the IEA but has held government positions here in the U.S. across a few agencies – the Department of Energy, State – the White House, and the United States Senate.
Our other speaker is Fatih Birol, executive director of the International Energy Agency. Dr. Birol has held that position since 2015. Awards and recognition of his international leadership are numerous, but I’d like to highlight two key aspects of his tenure at IEA. First, he grew membership of IEA to cover now 80 percent of the global economy. Dr. Birol also added considerations of energy transition and some very early thinking on how we would secure energy markets amidst energy transition to the IEA’s purview.
I’m really grateful that you’re both joining us today. Welcome to CSIS.
Dr. Birol, maybe we can start with you. Looking forward to 2023, what developments are you watching? And in particular, your thoughts on oil-price caps, the opening of China, and anything else that you think an interested public needs to hear about?
Fatih Birol: So, first of all, many thanks for hosting the International Energy Agency once again to CSIS. As I have said several times, when I or one of my colleagues visited D.C., we are very happy to come to CSIS and share our thoughts, our views, with the colleagues here and to you with your experts and your audience.
Many thanks to the deputy secretary as well to join to this discussion. And as you mentioned, Mr. Turk was the deputy executive director of the IEA, but he is also our hero. So, he has been working not as a deputy, but before he was in charge of our climate work, our strategic initiatives work, and he’s one of the very few colleagues who is loved by everybody at the IEA. So, I should also underline this.
Dr. Majkut: He’s just charming you because on the record you can say it back for him.
Dr. Birol: No, no. I said it before several times. And I am – I was so upset when he decided to leave the IEA, but I know that he had to join the government. And I was very happy to see him having such an important job post at a very important time.
Now, coming back to your question, 2023, when I look at the markets, there are, of course, lots of uncertainties. But I would like to highlight two of them, especially for oil and gas markets; China, number one. How the Chinese economy will rebound and what will be the implications on the oil and gas markets is crucial because last year, 2022, Chinese oil and gas consumption, domestic consumption, declined for the first time since 40 years. We have never seen that.
And let’s not forget that China is the top oil importer of the world and top LNG importer. So as a result of that, if Chinese economy rebounds very strongly, this may well put pressure on the oil markets, first of all. And we will have to see what kind of response on the producer side we come.
Currently, we expect U.S. production to grow about 1 million barrels per day and a few other countries will bring. But we all know that OPEC+ countries, as a position they have declared some time ago. And here Russia production, we believe, will go down close to 1 million barrels per day this next quarters to come.
So as a result of that, I expect volatile oil markets. And China’s economic rebound level will be important. And how the Russia production prospects will look like is also another key point.
But in addition to the markets, one other issue – perhaps I leave it here – 2023, which is the clean energy transition. I believe 2022 has been a year where we are seeing a big turbocharging of clean energy around the world, from renewables to electric cars, from electric cars to heat pumps, heat pumps to nuclear power.
And today the big growth in the clean energy is driven by three factors: One, climate change, as it was the case; but second, energy security; and third, industrial policy of different countries around the world. So, three of them – energy security, climate-change concerns, and industrial policy – it is a very powerful combination. And I expect 2023 we will see a big growth in the clean energy around the world.
Dr. Majkut: Excellent. Thank you very much. I hope we can spend quite a bit of time here at the end of our session talking about industrial policy, and particularly the United States and the Inflation Reduction Act. But I’d like to reside here on the question of energy markets and security.
Mr. Turk, the United States has played a really vital role in energy security this past year, right? We’re increasingly a small net exporter in the global markets. How are you and the administration seeing the benefits of that industry and its prospects as we are also thinking about limiting emissions?
David Turk: Well, first of all, Joseph, thank you for taking time with myself and Fatih. Thanks for all CSIS does. Lisa and all your colleagues. It’s just a terrific organization. I have to say as well a thanks for Sarah Ladislaw, who’s an alumni of CSIS, who’s now our senior director for energy and climate at the White House. So great to have some CSIS talent in the White House right now.
Dr. Majkut: Yeah. We’re very proud of Sarah. We’re really happy that she’s there. No better person for that role.
Mr. Turk: Absolutely. She’ll do a phenomenal job. And I have to say what an honor it is to sit side-by-side with not only a mentor of mine but a good friend of mine, in Dr. Birol Fatih. And it is a bit intimidating, I have to say, because I know, Fatih, you’re a big fan of football, or as we call soccer here in the U.S. And Fatih is, without a doubt, the Lionel Messi of energy – global energy. (Laughter.) So that’s a little – a little intimidating.
But to your question, and building off of what Fatih said as well, the U.S. is, no doubt, an energy powerhouse. And that is across energy. And I feel incredibly proud to be part of an administration that helped play such a stabilizing role with the challenges that we’ve seen, not only in Russia and Ukraine and what has flowed from that, but COVID threw a lot of energy markets out of whack. Oil, natural gas, but supply chains for a lot of clean energy technologies as well. And of course, we’re wrestling and we’re diving right in and trying to take on the climate crisis at the same time. And trying to be smart about all of it, near term, medium term, and longer term.
On the near-term side, especially looking back at 2022, the fact that our LNG was so helpful for Europe in its time of need. And as Fatih has said repeatedly, privately, and publicly, it’s not only this winter, it’s next winter, and the winter after that. And the IEA right now is doing an incredibly important piece of work looking at next winter, for Europe in particular, on the natural gas side of things. And there’ll actually be a ministerial meeting and making sure that we’re all working together to help on that front. But then we also, I think, played a very helpful role on global oil markets as well. The fact that the U.S. is a major producer in the world, and our production numbers have gone up, are going up, I think is an incredibly helpful part of the global landscape, along with other producers going up as well, whether it’s Canada or other countries along those lines.
But we also did the largest historic release of the strategic petroleum last year, which, as was described, was a bridge. A bridge in this time of real challenge where demand was going up, supply was not keeping up with it, we had a gap because of a number of factors. And the SPR, working hand-in-hand with the IEA and other IEA members in terms of their own releases as well, I think helped play an incredibly important role, a stabilizing role, in a time of real challenge in 2022. So, I feel good about what we’ve done.
And now we’re going to lean in even more on the clean energy front with the passage of the Inflation Reduction Act, the bipartisan infrastructure legislation. And that has not only decarbonization benefits associated with it, but it has a lot of jobs, it has a lot of economic opportunities, and it has a whole wide variety of energy security benefits as well.
Dr. Majkut: Maybe we can talk a little bit more about the outlook for Europe and its energy security. One of the things that a lot of U.S. policymakers are interested in, you know, can Europe get through the next winter? It seems to be running a marathon. Maybe it’s made it through the first six miles, maybe the first eight, the first quarter of a football game. But there’s a long way to go before Europe’s able to replace lost Russian gas supply with a combination of renewables, energy efficiency, supply from the LNG market.
Dr. Birol, you know, your – IEA published a great report highlighting this 57 billion cubic meters of shortfall. It’s about 15 percent of European gas demand for next year. Let’s take the negative side of things. Let’s say – like, let’s say winter is cold. Let’s say that demand is high. Let’s say there are other places that require LNG off the global market. Maybe the rise in China will accomplish that. You know, what can the – what’s the IEA preparing to do to help manage what looks like a very constrained market which will drive prices high again?
Dr. Birol: Yeah. So, first of all, I should tell you that Europe did a good job for the winter we have. Many countries moved along the lines that IEA has suggested. First of March, only one week after the invasion, we had a tempo in plan. And we made some suggestions there, which seemed so radical at that moment, such as bring the temperature of the heating at home two degrees lower or acceleration of the permitting and licensing of renewables, or countries like Germany and Belgium, we told them please reconsider shutting down the nuclear power plants – at least, extend their lifetimes. At that time, it seemed to be a bit radical to some policymakers, but we are very happy to see that almost all of them have been carried out by the governments. So, this is good news.
And it seems that this winter we are off the hook in Europe. We will still get some bruises – economic and social bruise – but we will be off the hook. And we are also lucky, to be honest with you, that the weather was a bit mild and moderate. It was a mild winter we enjoyed in Europe.
Now, coming back to next winter, why we are worried, first, this winter and in the last few months we still got Russian gas, much lower than before. As you imagine, in the beginning still we get some Russian gas.
Second, last year, 2022, for the first time in history the LNG imports of China went down with the – now, when we look at the – and therefore, we were – here we were lucky to get more LNG in the markets and we could buy it to Europe. But when we look into 2023, Russian gas may not be with us anymore, which is most likely. China is coming back as a major LNG importer. And, on top of that, the amount of new LNG capacity coming to markets in 2023 will be one of the lowest in the recent history, only 23 BCM. So, therefore, we – it will not be easy.
And what needs to be done? First, solidarity. As Dave mentioned, in a few weeks of time we are bringing all IEA member countries and some of the partner countries together to see how we can move in solidarity. To be honest with you, the U.S. LNG last year was extremely helpful, and in the absence of U.S. LNG coming to Europe we couldn’t manage this way. But we will discuss this with all the member countries how we can move together – IEA member countries, but also some of the more vulnerable Eastern European countries like Moldova and others. So, this is one.
And the second, if we see that the Chinese coming stronger and if we don’t find other gas supplies from different countries, there is one way: Save the gas. Gas demand needs to go down. In the absence of bringing gas demand down, it will be very difficult to overcome the next winter. And we should continue to push the technologies such as the renewables, such as heat pumps, and efficiency.
Last year in Europe, we had the biggest growth ever in terms of renewables. You know what is the reason? The reason is very simple: We cut, in Europe, the licensing and permitting time big time. It was much quicker. And we have seen a lot of solar panels, windmills erected, and we manage it.
I still believe as long as Europe has the solidarity among the countries; as long as the U.S., Japan, all the countries work together; we can go through the next winter as well. But this may be slightly more difficult than this winter. So, in Europe the government leaders shouldn’t be too relaxed that we are off the hook this winter. We have to keep an eye on the next winter.
Dr. Majkut: Right.
Mr. Turk, I’m interested in your thoughts as somebody who’s been in the energy field for a long time about how the energy security picture is changing as governments are thinking about supplying reliable and affordable energy to their citizenry.
As we’re at this kind of inflection point, you know, what intuitions of energy security do you think we’ll maintain and what needs to change?
Mr. Turk: Yeah. I think it’s really good to take a step back and really ask ourselves the question and ask experts like Fatih and our IEA colleagues to really analyze and think about what energy security means now, five years, 10 years, 15 years from now.
It may be helpful, as well, to take a look back as well. Let’s say Europe was able to have done even more on hydrogen, even more on wind, even more on solar, even more on storage, full range of clean energy technologies. I think Europe would have been in a much more secure position and in a better position than it found itself in at the onset of the Russia-Ukraine situation, the blatant violation of international law and everything else of Russia invading Ukraine and everything that flowed from that.
So, we need to think about what energy security really means and how countries can provide for their energy security. Countries like Japan have been struggling and working on that for years and years. There’s a reason Japan has been a forerunner in hydrogen and really exploring that as a potential part of the mix going forward, not only because it offers decarbonization benefits but because it offers energy security benefits.
And one thing I’ve been struck with in a very positive way is in conversation after conversation that I’ve had with other counterparts around the world is they’re seeing a lot of energy security benefits from decarbonizing and moving to a diverse array of clean energy resources. And I think that’s great for energy security. It’s great for the U.S. and our relationship with other countries, especially fellow democracies, going forward. And it’s great from a decarbonization perspective as well.
So, we’ve got to be thoughtful. We’ve got to be smart about that. If you have more solar panels and more wind turbines and offshore wind with higher capacity factors, and you build out your storage and you work on your hydrogen infrastructure and hubs, you’re going to be more energy secure. Much more difficult for a dictator to put a big solar shield over your entire country and stop the sun coming down and you generating electricity than what Russia was able to do by turning off the spigot for some of the oil and gas going to Europe.
Dr. Majkut: Point well taken on the blocking of the sun, but let’s not – let’s remember that renewable supply chains are heavily concentrated in China. IEA just published this incredible report on industrial strategies for clean energy, and one of the – one of the key findings is that for almost everything the world needs for energy transition the supply chain is relatively concentrated in China. But it also – and I learned this from the report – it looks like there’s enough manufacturing planned for supply to meet demand across a host of different technologies – PV, wind, et cetera – for the next 10 years. Dr. Birol, maybe hear – it would be interesting to hear your thoughts on that assessment and the key findings in that report.
Dr. Birol: Yeah. So, thanks. I mean, we talk about the situation in Europe today, why we are in Europe in trouble in terms of energy. I think the main reason for me was overreliance on one single country. In the energy world, diversification is a magic word for me. You shouldn’t rely on one single country, one single company, one single trade route. Diversify as much as possible.
And you are completely right. In our recent report, “Energy Technology Perspectives,” we have shown that the clean energy technology manufacturing today is dominated one single country. Let’s take batteries. Today, 75 percent of the batteries – which is critical for the clean energy technology – is manufactured in one country, in China. Two out of three top battery manufacturers are in China. So, what to do? What to do is diversify, again.
So, in that respect, I think the Inflation Reduction Act is an excellent move. I’ve said it several times, but I wouldn’t mind repeating it. In my view, Inflation Reduction Act is the most single important climate action after Paris 2015 agreement. It is going to accelerate the clean energy transition around the world, diversify it, and make it more secure, because to accelerate the clean energy in the United States means making the clean energy technology more diverse, the manufacturing more diverse; and at the same time, by learning – by doing, bring the cost of new technologies down – as China did, to be honest with you, in the past. So, I very much hope that the U.S. Inflation Reduction Act would be a good source of inspiration for many countries around the world. And they also push the – take a good position in the new industrial age, in the age of clean energy technology manufacturing.
Dr. Majkut: Excellent turn. For the IRA, this is clearly the U.S.’s effort to try and recapture some of the supply chain. The mechanisms that the IRA wants to use to do that are not universally liked. Domestic content requirements, lots of efforts to bring supply chains into the United States, perhaps to the detriment of international partners. I was just reading this Boston Consulting Group report on the aftermath of the IRA, right?
International businesses are flooding into the United States, looking to capture some of the benefits of these – of the tax credits involved. One key question I have is, can we assume that the benefits of the IRA, reduced costs of clean energy technologies, are really going to be globalized in the way that wind and solar saw over the last years? Because the wind and solar story is different, right? That was U.S. IP, Chinese manufacturing, European policy demand.
Mr. Turk, how do we, as the U.S., show that we’re not going it alone? And how do we make sure that the benefits of the IRA can be shared?
Mr. Turk: Well, first of all, I think we have to look at the world clear-eyed for what the challenges are right now on clean energy supply chains. And I think Fatih and the IEA analysis has just been phenomenal here, laying it out very starkly. And it’s not just the mining piece of it. In fact, the part that’s most concerning is a lot of processing steps where China, in particular, really dominates. And that goes against the diversification mantra that Fatih and our IEA colleagues have been saying for years and years, is diversify. And so that’s the state of the world we currently find ourselves in.
On the IRA, the way I’d look at it is maybe threefold, and trying to be responsive to some of the concerns raised by our European friends and colleagues, but other countries as well. One is, this was the climate legislation to be had in the U.S., right? This is not a parliament. This is not President Biden gets to dictate everything we wanted exactly how we wanted it. He provided an awful lot of technical expertise to those in Congress writing the bill. They accepted some of it. They didn’t accept some other parts of it.
But if there was going to be an ambitious climate piece of legislation, clean energy piece of legislation, industrial strategy piece of legislation, this was it. This is the one that was going to pass a 50-50 Senate and work through the tight majority in the Senate – or, in the House as well. So, this is – if people who want to tackle climate change – and I’m one of them. I know Fatih’s one of them. A lot of friends and colleagues around the world need and want the U.S. to be in the game and pushing aggressively on the climate front and the clean energy front, this is the way we’re going to do it. And the modeling and the analysis of what impact this has, just as Fatih said, is immense going forward.
Secondly, I am a firm believer that, whether it’s the U.S., or Europe, or Japan, or any country around the world, when they invest in clean energy, when they drive those costs down, that will ultimately have benefit for everyone, including and especially, and I hope we get into this a little bit as well, Joseph, is both the challenges faced by a lot of our friends and colleagues in developing countries right now, and how to make sure that they benefit from all these clean energy technologies all throughout the supply chain as well. And there’s a real challenge there from a financing perspective and from other problems as well on that front.
So, I’m a firm believer, just as we’ve seen with solar PV. We did a lot of research in the U.S. Germany had programs that drove the cost down. India went to scale with PV. China did its thing at scale. That drove down costs. And I think that ultimately is benefiting countries around the world. We’ve seen the same phenomena with wind, and offshore wind, and other technology areas – storage along those lines. So, I do think there will be benefits along those lines.
And then, third, it is a big market out there. And it needs to be an even bigger market. I know, Fatih, you all have done phenomenal analysis about the trillions and trillions that we need. We need huge investments in the U.S. We need huge investments in Europe. We need huge investments elsewhere. My hope is that we have a race to the top instead of a race to the bottom. By that, I mean, President von der Leyen has been out there saying that they need to up their game, and they need to do more things in Europe to make an even more favorable investment climate there.
From an overall perspective of doing what we need to do at the scale and pace to solve global climate change, that’s what we need. We need everybody to up their game to really do what they can, different models in different places. And then we need to have honest, candid conversations, and we’re engaging in that right now with our European friends in particular. And how do we navigate through the challenges that are, the rough edges that are part of any legislation that passes in a democracy like the U.S., and to work through that and figure out ways that we can work together going forward.
Dr. Majkut: So let me accept your challenge and we’ll talk a little bit about the international challenge before we close. The U.S. is making massive investments in carbon capture and storage. One of the things that the IEA report highlights is the challenge of building infrastructure. We’re not going to talk about permitting reform. We could talk about permitting reform for an hour. We don’t have the time for it. But infrastructure is the – is the connecting piece between production and use.
So, let’s take a technology that the IRA will probably really support: cost reductions in, carbon capture. Infrastructure for carbon capture includes CO2 pipelines. Let’s then think about the developing or emerging markets, right? We want to see industrialization; we want to see economic growth. How are we going to finance CO2 infrastructure in India, sub-Saharan Africa, throughout Southeast Asia? Dr. Birol?
Dr. Birol: Not just – not only CO2 infrastructure. It is all the clean energy. How do we finance in the emerging world? This is the biggest question. I think the capital and the clean energy projects will meet in North America, in Europe, in Japan. But what will happen in the emerging countries, where the bulk of the emissions will come from, hmm? So, let me give you a couple of numbers. Today the investment in fossil fuels are about $1 trillion U.S. And our numbers show that clean energy investment is about $1.4 trillion.
To be in line with our climate goals, this 1.4 trillion (dollars) today of clean energy investments need to reach 4 trillion (dollars) in 2030. And a big chunk of this growth needs to come from developing countries. And how will this happen? If you look at the – just the solar PV, less complicated than the CO2 – carbon capture and storage. Cost of capital of building a solar PV in Brazil is about 9.3 percent and in United States 3 percent.
So, if we are able to bring this cost of capital in the emerging countries only 2 percentage point down, of this money needed – going from one to four – the share for the developing countries will be reduced by 20 percent. Big reduction, big relief for the developing countries, if we are able to bring the cost of capital of clean energy investment in developing countries. And here, there are many jobs to do, but, number one, a critical job for the multilateral development banks – de-risking, concession of funds, and everything.
And the United States is a major stakeholder in those institutions. I would hope that the U.S. government and other governments altogether give enough priority for clean energy investment in this multilateral development bank to help developing countries to carry out these investments.
Dr. Majkut: Mr. Turk.
Mr. Turk: So, we’ve got a challenge, there’s no doubt about it. And I think this is a huge, huge part of the equation going forward if we’re going to be successful on climate change and taking advantage of these clean energy technologies at scale. There’s also a moral imperative, I think, too, as well, right? Those of us who are lucky enough to live in the U.S. or other countries and have the opportunities we have, we need to take care of friends, fellow citizens, fellow world citizens around the world. And the challenge is immense.
The opportunity is there as well if we get it right, leveraging the World Bank and leveraging other tools in the toolbelt. One statistic – I think it’s an IEA statistic that you all put together, Fatih – was over 50 percent of the solar resource that lands – on Earth on land here around the world lands in Africa, and the current rate of PV in Africa versus other parts of the world is something like 3 to 4 percent. It’s single digits. So that’s both where we’re at and where the potential is going forward, and the huge benefits, first and foremost, to people in Africa – the educational opportunities, economic opportunities if we’re successful at leveraging these clean energy technologies in cost-effective ways. So, I think there’s an awful lot more we need to do.
Completely agree with Fatih. We need to leverage the World Bank. We need to leverage world regional development banks an awful lot more than we’re currently doing. And I know there’s a lot of colleagues at Treasury and other parts of the U.S. government working on that, along with other important countries, as part of that international landscape.
We’ve got tools, like our Development Finance Corporation, DFC, USAID. We, at the Department of Energy, have something called Net Zero World, where we’re trying to make our phenomenal lab expertise available to key countries around the world, developing countries around the world, whether it’s Indonesia, or you name it. Trying to help those countries in a very mutually beneficial partnership, in a partnership that is in the U.S.’s interest, for sure, but is in the interest of those countries and the people in those countries, first and foremost. And trying to help them succeed and help them have the opportunities of this clean energy transition.
Dr. Majkut: Well, unfortunately, our time is already past due. I have to thank both of you not only for your efforts but for joining us at CSIS today. We hope that the next time you’re in Washington, Dr. Birol, you always are welcome here. And, Mr. Turk, the same is extended to you. For our guests, thank you very much. This is Joseph Majkut, signing off for CSIS.