This Time Must Be Different

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Oil crisis 1973 - Rush on petrol

The reaction to the 2022 energy crisis must be fundamentally different from past energy crises. New innovative policy initiatives are required as the world grapples with the twin problems of the aftermath of Russia’s invasion of Ukraine and the longer, more important threat of global warming. And we believe a rapid transition away from fossil fuels — especially Russian and Middle Eastern oil and gas — can happen thanks to the global economy’s drastic restructuring since the 1973 energy crisis. This includes financial system reforms, the end of large, entrenched corporations dominating innovation, and the incredible expansion of funding for creative ideas as forces that can and likely will make the consequences of the 2022 energy crisis unique compared with those of past events.

We see an energy future dominated by new ideas, entrepreneurs, inventors and democracies. The rapid changeover will be led by inventors in the EU, where Russia’s actions over the last year have emphasized the grave economic risks inherent in relying on its energy supplies. Europe’s energy shock occurred as the EU was already mobilizing to address global warming, and we expect the region will now adopt policies that maximize globalization, innovation and the use of robust, competitive capital markets to achieve a “quickie divorce” from fossil fuels.

The EU’s efforts will also encourage large international companies and numerous countries to follow suit. By 2030, their actions will have marginalized most fossil fuel-producing countries and many major oil and gas firms. Simply put, we believe the outcomes of this energy crisis will be different. Indeed, they must be different.

Previous Responses

The Yom Kippur War that began in October 1973 marked the start of the first major global energy crisis and between 1974 and 1980, many consuming nations adopted myriad laws and regulations. These efforts were all of a kind. They focused primarily on boosting energy supplies to reduce the leverage of oil-exporting countries. Most efforts focused also on expanding domestic energy supply using available resources and present technology rather than innovation. The goal was to ramp up the use of known resources such as coal quickly.

Reducing energy use through conservation, an alternative way to improve energy security, received far less direct government or industry backing, although energy users when faced with high energy prices did themselves find many ways to conserve. Indeed, conservation programs only succeeded if reducing energy use was associated with profit. The manufacturers of airplane jet engines, for example, pushed hard to cut fuel consumption because their customers, the airlines, demanded fuel savings.

Mistaken Assumptions

To many, the challenge today seems daunting or impossible. Indeed, many forecasters and certainly officials of large oil-exporting countries such as Saudi Arabia see the task as impossible. In their view, large investments in fossil fuel supply projects are urgently required to forestall energy constraints from causing a serious global recession by the middle of the current decade.

Such assumptions are however mistaken because they are founded on an assumption that the economy remains about as rigid as it was 50 years ago rather than the 21st century economy. The economy of 1973 was one of fixed exchange rates, big corporations and lifetime employment. Today’s economy is as different from the economy of 1973 as perhaps the economy of 1973 was from the economy of 1873. Change has become the norm, not the exception. The ability to adapt will facilitate the rapid evolution of a low-carbon or no-carbon energy economy by 2050.

A New Energy Sector

A broader energy sector that encompasses consumption and production has grown in recent years, both in numbers and market capitalization. A new automobile company, Tesla, which began from nothing, produces only electric vehicles and now has a market capitalization that exceeds that of all legacy automakers. A Danish company, Vestas, exclusively produces wind turbines to generate electricity. It is the largest producer in the world and has supplied 16% of the world’s capacity. The top three producers of solar equipment are all Chinese firms. Fifty years ago, China had no such manufacturers.

It is this 21st century dynamic of investment in new ideas and new businesses that will bring about the rapid growth of new renewable energy sources. Traditional energy sources, particularly fossil fuels, will see volumes, revenues and profits decline. Those that do not find new lines of business will ultimately experience the same fate as Sears and Kmart.

Three key differences between the years around the Arab Embargo and today will cause the 21st century’s energy transition to occur more rapidly and more successfully. These differences relate to the evolving structure of the 21st century economy, the greater intellectual understanding of current issues, and, most importantly, the broad support for rapid change.

A Speedier Transition

The radical difference between the economic structure of today and 50 years ago makes a speedier transition possible. Fifty years ago, large, bureaucratic, slow-to-adapt corporations dominated the global economy — including essentially all investment in energy supplies and infrastructure. Now, in the early years of the 21st century’s third decade, the world economy is characterized by extraordinary entrepreneurship and flexibility. New financial markets have opened as have new financing mechanisms and standards of accountability. New corporations founded on inventions developed at universities and in garages and independent labs open frequently. Many fail, but a few have had great success. These new firms garner backing from a core of wealthy investors and supportive government policies. Leading firms and governments today advocate change, whereas the same forces constrained it 50 years ago.

The issues related to global warming and energy security are also far better understood in 2022 than in 1973. Today, tens of thousands of researchers experiment, study and write on these topics, whereas 50 years ago the tally of scientists, economists and engineers familiar with them was likely only in the hundreds or perhaps a thousand. The knowledge base developed by researchers over the last 50 years provides the basis needed to understand the possible outcomes of actions taken now. Most significantly, though, the acceptance of the need to act is widespread, especially among the key individuals whose support is required.

Moving Forward

The prospects for significant action going forward seem good despite the chaos caused by Russia’s acts. European moves followed by a constructive response from the US may bring much greater success than is apparent today. However, the success will leave most emerging market nations in even more desperate conditions than they confront in 2022. Already these nations face the prospect of worsening famine because Russia is blockading Ukrainian ports and preventing its grain from reaching world markets. The supplies from Ukraine are essential to these countries. Their leaders have appealed to industrialized nations for financial support.

This barrier to the goal of achieving net-zero hydrocarbon emissions by 2050 remains. Whether it will be addressed, or the environmental target reached, remains an open question. The moves made by the EU, the US and other OECD countries, then, will not remove all emissions of harmful gases. They will, however, get the process started — and successes in these core places will create technologies and experiences that can spread more widely. This decisive shift will make the results from the responses to the current energy crisis much different than the reactions to past energy emergencies, and that is a must for the world and everyone and everything in it.

Philip Verleger is a retired professor of economics from the University of Calgary and a nonresident senior fellow at the Niskanen Center. David G. Victor is a professor of innovation and public policy at the University of California, San Diego, and nonresident senior fellow at the Brookings Institution. The views expressed in this article are those of the authors.

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