TPI Presents: The World’s First Energy Crisis, From The Foreign Affairs Interview

Jim Lindsay:

Hello everyone it’s Jim Lindsay. We are excited to announce The Foreign Affairs Magazine has started a podcast called The Foreign Affairs interview. It’s hosted by the magazine’s editor, Dan Kurtz-Phelan. We wanted to play an episode to give you a taste of the show. We encourage you to keep listening.

Dan Kurtz-Phelan:

I’m Dan Kurtz-Phelan, and this is “The Foreign Affairs Interview.”

Meghan O’Sullivan:

As we move ahead in the energy transition, what we need to anticipate is that the Gulf producers are going to become more geopolitically important, not less so.

Jason Bordoff:

This is the first global energy crisis. The 1970s was an oil crisis; this is an energy crisis.

Dan Kurtz-Phelan:

Late last year, writing in Foreign Affairs, Jason Bordoff and Meghan O’Sullivan made a provocative argument: a transition to clean energy would be necessary, but messy. It would sharpen, not end, tensions over energy. It would strengthen, not weaken, petrostates.

Fast forward six months, and this vision seems prophetic. The war in Ukraine has reminded us of the power of Russia’s energy resources. President Biden is heading to Saudi Arabia to patch things up with the crown prince. And as Bordoff and O’Sullivan argue in a new piece for Foreign Affairs, the world is at the start of an energy crisis worse than anything we’ve experienced in decades.

It’s great to be here with both of you. Jason, you are the founder and dean of Columbia University’s Climate School, and you served on the National Security Council overseeing energy and climate change issues during the Obama presidency. Meghan, you’re a professor at Harvard’s Kennedy School, and you were a deputy national security adviser during the Bush administration.

Welcome to the show.

Jason Bordoff:

Thanks. Good to be here with you, Dan, thanks.

Meghan O’Sullivan:

Thank you, Dan.

Dan Kurtz-Phelan:

So, it’s not often that you read an argument that so quickly goes from disquieting provocation to this bright light illuminating a major global crisis. But let me read a few lines from your “Green Upheaval” essay. This was published last November, a few months before Russia’s invasion of Ukraine. “Petrostates,” you wrote, “may enjoy feasts before they suffer famines, because dependence on the dominant suppliers of fossil fuels, such as Russia and Saudi Arabia, will most likely rise before it falls.” And about Russia specifically, you wrote, “In the messy transition, Russia’s position vis-à-vis the United States and Europe may grow stronger before it weakens.”

Going back to last year, when we first had discussions about this piece, what were you seeing about the still nascent transition from fossil fuel dependence to clean energy that you think most analysis of these issues, and especially their impact on geopolitics, was missing?

Meghan O’Sullivan:

So, the piece that you reference—we wrote it, again, back at the end of last year. And we did so really in response to a global conversation that often seemed to be a little bit untethered from some cold, hard realities. And there was a sense that the energy transition, to the extent that it really intersected with geopolitics, was going to be a positive and a beneficial phenomenon; that we were all looking forward to a world where green energy had taken away the difficult geopolitics of oil and gas and that sort of thing. And Jason and I, you know, are big advocates for the importance of the transition, and recognize that some of the geopolitics in an actual net zero world may be more copacetic. But we were really focused, and continue to be focused, on the fact that that the road to get there—the actual transition, the years between today and net zero 2050—are going to be very tumultuous in geopolitics, and not at all kind of a straightforward thing.

There’s going to be a lot of inflection points, and they won’t all benefit our geopolitics—and, in fact, many of them are going to stress our geopolitics. And so, our lens, which I think has really been underscored by the Russia-Ukraine crisis, has been that the energy transition is going to be one of the greatest drivers of geopolitical risk in the coming decades. And I would say that it’s probably going to dwarf what we’ve already seen in the century—the pandemic’s impact on geopolitics; even Russia’s invasion of Ukraine, the impact on geopolitics—that this energy transition is not just about substituting one form of energy for another. It’s about remaking the entire global energy system; how we generate, how we use, store, ship energy. And being the backbone of the global economy—we’re talking about remaking the global economy in the space of a few short decades, and that is going to be highly disruptive. And that’s really what we tried to underscore in this article.

Dan Kurtz-Phelan:

So, as you note, it’s really hard to imagine a more powerful demonstration of that risk than Russia’s invasion of Ukraine. When the article was published, we were starting to focus on fears of invasion, but we were still a few months away.

To what extent was does the dynamic that you described—the additional short-term leverage that Putin, had but also a sense that that leverage may be a wasting asset, that that wasn’t going to last forever. To what extent do you think that helps explain the timing of the invasion? Is that part of what is driving Putin in this moment?

Jason Bordoff:

I think it would, in my view, probably be over-interpreting it to say that he was primarily driven by energy factors. But I do think if… Europe has obviously worried for quite a long time about dependence on Russia. When we said we wanted to write this article, the motivation was, when people think about energy security and energy geopolitics, traditionally, they had thought about OPEC [Organization of the Petroleum Exporting Countries] and the Arab oil embargo and dependence on the Middle East—or, if you’re in Europe, dependence on Russian gas. And if you could move beyond oil and gas, geopolitical risk would be diminished in the energy sector.

And as Meghan said, the whole motivation was, we thought that had some truth, but missed a lot of things that would be geopolitically tumultuous about the transition. And if you are a petrostate, like Putin, and you were thinking about using energy as a weapon, his hand was stronger to do it a few months ago than probably at many, many years in the past. And part of that, we should remember, was this was not entirely because of an energy transition, but Europe was in an energy crisis even before Russia invaded Ukraine. Europe was paying exorbitant natural gas bills, utility bills were high, they were subsidizing energy costs for people. And we’ve been writing for a while about what we are concerned about, both from a matter of energy security and the economy—and also the climate crisis—which is a growing, not shrinking, gap between reality and ambition when we talk about goals like net zero 2050.

We’ve had lots, in Glasgow of last year, lots of effort to elevate ambition—1.5 is the gold, not two degrees. Companies, countries, promising net zero by 2050. The reality is oil use is going up, gas use is going up, coal use is going up, other than recession or pandemic. And if investment fails to keep up with the pace of growth in hydrocarbon demand, you see tighter markets and price crunches. And then if you are thinking about cutting off supply or threatening to do so, your hand is strengthened.

And that’s why we were sort of saying there could be feast before famine, as you said, for petrostates like Russia or others like OPEC—particularly Saudi Arabia, which is where the spare capacity sits, the ability to put more oil on the market in short order. Because if we do have mismatches between the pace of transition on the supply side, particularly for oil and gas, and how quickly demand actually falls, we’re going to need the major petrostates more before we need them less, to ensure that we don’t have big price spikes and market crunches and all the economic volatility that we’re seeing now.

Dan Kurtz-Phelan:

Meghan, I’m curious for your view on how that leverage looks from Putin’s perspective. But also, one specific element of this was Nord Stream 2, which was starting to come closer to fully being online in the months before Ukraine. Is that part of what gave Putin the sense that he might have leverage that he hadn’t had a few months before?

Meghan O’Sullivan:

I’m not entirely sure what the thinking was behind doing it at that particular moment vis-à-vis Nord Stream 2. I think there were a lot of things that went into his decision, and I think there’ll be many PhDs written about it—and hopefully, there will be some documents that we can read that will help give us some insights.

You know, Nord Stream, to my best guess: Putin must have thought it was done, he must have thought it was a done deal, there were just a few final hoops that needed to be jumped through. It seems that his leverage would have been even greater had Nord Stream 2 been open. So it does seem a slightly odd in terms of timing, because it seems he would have had even more leverage. But I think he rightly, and we’re seeing it right now, he made the calculation that Europe’s dependency on Russia—which is, and was, quite extensive, both in oil and gas, but also coal and some other important elements as well—he made the calculation that this dependency really would insulate him from some of the worst impacts, political impacts. And I think to some extent he’s been right.

On the other hand, the energy crisis that is ongoing right now unfolded in ways that people didn’t really anticipate. You know, both Jason and I were in the U.S. government, and we probably both had conversations with our European counterparts over the course of decades about how they had this dependency on Russia, and how this could provide Putin with geopolitical leverage. And the imagination was always that Russia was going to be the one to cut off the supply of oil and gas to Europe. And what we’ve actually seen, up until very recently, is the opposite—that actually, Europe has felt compelled to disentangle itself from the energy relationship, because of the moral imperative of not being the funders of this war; and so we’ve had a different political dynamic.

I think we’re going to end up in the same place, which is that there is very little energy trade between these two blocs for a variety of reasons. But it certainly has insulated Russia to a certain extent. And even if we look at the debates happening right now in Washington, in European capitals, there’s a real debate about—how much does the world want Russian oil to disappear from global markets, because of the very real economic consequences of that? How much do we want to provoke the energy crisis at a time of very slowing growth and very, very high inflation? So it’s clear that Russia does have a lot of leverage here.

Dan Kurtz-Phelan:

Jason, how does that very delicate decision and that balance look from a European perspective right now? Has Europe moved more quickly than you would have guessed to cut off Russian supplies?

Jason Bordoff:

A little bit more. I think, actually, Meghan and I talked about this early on, and she was a little more prescient in the insight that you simply can’t have images this horrific of what’s being done in Ukraine. And the position that we’re going to—you know, the whole goal of economic sanctions is impose pain on your target, but minimize it on yourself. And there are some ways you can do that more easily, and energy is one of the harder ways, especially in the market that was already tight before this all happened and at risk of price spikes, that it would simply be an unsustainable position to say, well, we would like to impose more economic pain on Putin, but we just can’t pay the price of the pump or in our heating bills.

And that is, in fact, what we’ve seen: growing pressure where the urgency of putting more and more pressure on Putin is building—but we are starting to see, obviously, cracks. There are different views within Europe, which is why, in the end, they did an almost complete, but not complete, ban, because they wanted to separate some of the pipeline imports from the seaborne imports. There’s discussion now about whether there will be sanctions on shipping insurance that would make it harder for Russia to redirect oil that had gone by pipeline to Europe to maybe other places that buy it at a discount like China or India, and public reports that the U.S. is maybe encouraging Europe not to be as strict on that.

We had Kadri Simson, the European Union energy commissioner, at the energy institute I lead at Columbia a few weeks ago. And I asked her this question: is, in fact, the goal to force Russia to redirect, not eliminate, its energy supplies, but take a big discount for it? And you kind of reduce their revenue [by] 30 percent, but you still get the oil coming to market, which means we minimize the pain on ourselves. And she sort of said, that’s a part of the strategy. So, I do think that we’re trying to walk this fine line, as we always are, imposing sanctions like we did when I worked in the Obama White House imposing sanctions on Iran. How do you put pain on Iran, but not push up prices for yourself, especially in a world today where there’s very little spare capacity, very little alternative sources of energy supply, oil supply, that you can put on the market to offset the loss of Russian oil?

Dan Kurtz-Phelan:

To what extent can those Asian markets, especially China, and India, take up all the slack for Russian oil? And to what extent is that going to reconfigure geopolitical relationships in Asia?

Meghan O’Sullivan:

Sure, it’s a great question, and one of debate: I have some of my economist colleagues at Harvard saying, in a perfect market, it’s a global market, and that Russian oil that will no longer flow to Europe should get absorbed, with some time and some dislocation, but get absorbed completely into other markets. The reality is, I think this is going to be stickier than people assume, for a variety of reasons, and I’ll just throw in a couple. One is the shipping and insurance sanctions that are still unclear. But I’m a believer that if those do go into effect in an aggressive way, they will, as Jason suggested, make it very difficult to reallocate all of the oil. And we’re talking about half of the oil that Russia exports to the global economy has gone to Europe. So we’re talking about a very substantial amount of oil. So if there are those insurance sanctions, if they are aggressively implemented, that will be a big constraint.

But there are other constraints as well, and some of them fall into the basket of political and energy security constraints. China is an obvious place for a lot of this energy to flow, and we have seen that China is absorbing a good part of this energy. But the constraints there are more that China is very, very serious about its own energy security, and it has had a policy that it doesn’t want more than, say, 15 percent of any supplier to provide energy in a certain market. And so there will be a limit to how much China really wants to be fully dependent on Russia for its imported oil: Russia has already become the largest exporter over the last couple of months to China. And I think there will be a lid on what Chinese leaders are comfortable with. What’s interesting now is that Russian oil into China is pushing out Middle Eastern oil into China. And there’s all kinds of political dimensions associated with that if we get into talking about OPEC Plus.

So there are political constraints. India is obviously a place that’s welcoming an influx of discounted oil. But we have to really look at the numbers; so, you’ll hear people say that India has tripled or quadrupled how much oil it’s importing from Russia, but it really was only getting, say, a little bit more than 1 percent of its oil from Russia at the beginning, so it’s a magnitude. So I guess that, one, we don’t know exactly; two, to my senses, this is not going to be complete. That means there’s going to be more upward pressure on oil prices in the absence of something like a recession that really affects demand. And if you put it against some of the other things that we may get into in greater detail about the oil market, we’re moving into a territory where there’s very little excess supply in the system, very little spare capacity, even if Biden is successful in bringing the Saudis and the Emiratis to bring more to market. So there’s very little room for mishaps, accidents, other geopolitical problems like Iran.

Jason Bordoff:

I’m slightly more of the view that in an integrated fungible market, oil has a slippery way of finding its way to buyers, if there’s a willing buyer and the discount is great enough. We’ve seen in the past lots of maneuvers where delivery mechanisms can be found to get oil to market—and then the question is, how much do people in the midst of an energy crisis and high gasoline prices in the U.S. or Europe want to enforce those sanctions? We’re not seeing them enforced on Iran right now, for example, because people are like, well, maybe we need that oil to come to market.

And the only thing to say on top of all of this is whatever decision is made about how much to turn the screws on Putin with regard to oil supply. He, of course, has tools of his own to retaliate and say, well, I’m going to cut off oil and product—refined product, diesel exports entirely, or natural gas—which is what we’ve seen recently in the last several days. In fact, some more announcements that there are maintenance problems and supply problems, which are forcing Russia to curtail gas to Europe. And as we know, it’s much harder to replace natural gas in much less fungible global markets, with some exceptions. And that would be really economically painful for Europe going into this winter, if they lose Russian gas supply.

Meghan O’Sullivan:

If I could just summarize what I tried to say in one sentence: yes, there will be a lot of reallocation into the global market, but it won’t be 100 percent, and it will take time. And that might be okay. But we are in an energy situation where even if only 20 percent of Russian oil doesn’t find a home, or it takes a year to find a home, that could be really disruptive because of the other dynamics in the market.

Dan Kurtz-Phelan:

So, there’s a lot I want to unpack there. One dynamic that I think has been fascinating for those of us who are not as steeped in these issues as the two of you are, is to see the way leverage plays out in these relationships between suppliers and markets. And looking at the China-Russia relationship—which has been one, I think, really fascinating and somewhat mysterious dimension of the geopolitics of this war so far—if we project forward to a time when Russia relies on China more to buy its oil, and China relies on Russia as a supplier, to what extent does that reshape the Russia-China relationship? Does that give Russia leverage? Does that give China leverage? What does that tell us about how that dynamic is likely to shape up from here?

Meghan O’Sullivan:

Sure: a lot has been written in the pages of Foreign Affairs, and there’s a lot of talk about this Russia-China relationship and how one of the legacies of [this crisis] is going to be this much closer Russia-China relationship, and I believe that to be true. The energy piece, however, is an interesting dynamic associated with it. I think, before this crisis, there was a little bit of a more of a mutually dependent dynamic developing. But now we’re seeing something—if the trajectories hold—where in this relationship, which is very strong, the energy dynamic really reinforces the dominance of China in this bilateral relationship.

So as much as they would like to present themselves as equals, and as much as maybe the two leaders see themselves as equals, the reality is that China here is going to be the one that holds the cards. And this will be true in a whole number of ways. But Russia will have a narrowing of markets for its products; China will continue to have the global market to draw upon if it likes to do so. There’s also a whole question of financing: to what extent is Chinese financing going to be essential to maintain the Russian economy, even Russian production? We saw in 2014, after the annexation of Crimea, that China really came in and saved a few key strategic Russian energy projects, like the LNG [liquefied natural gas] projects in the Arctic. So there are many ways in which Chinese help or lack thereof could be really consequential for Russia. So again, I think that dynamic, it will be implicit, if not explicit.

Dan Kurtz-Phelan:

The other really interesting dynamic is between the United States and—as you noted, Meghan—the Gulf suppliers, especially Saudi Arabia. There are now plans for President Biden to go to Saudi Arabia in July. This was after he had called it and pledged to make it a pariah, given the murder of Jamal Khashoggi. Is this trip a good idea, to your mind? How much is Biden likely to get out of this? And to what extent can that help allay the crisis in global energy markets?

Jason Bordoff:

I do think it’s a good idea, recognizing that we should continue to stand up for humanitarian concerns and make clear the principles that the United States has when they’re not consistent with what we see other countries doing. I think a lot has been made about this, particularly in energy circles, about the oil crisis we’re in, and therefore Biden has to go to Riyadh. I think even if energy prices were lower, there would still be a desire and an interest among many foreign policy advisors around President Biden, to say for other reasons, in addition to energy, the U.S.-Saudi relationship is important, and it’s important to repair and restart that relationship. Energy certainly contributes, and is an additional motivation and factor there.

And this is the history of oil markets for decades, right: Saudi Arabia is unique in the world, not only because they’re such a large producer, the U.S. and Russia produce almost the same amount of oil. They’re unique because they hold spare capacity, which is at a cost to themselves: the ability to rapidly put additional oil supply on the market or make a decision to pull oil supply off and that helps to balance volatility in the market. And a moment like this when you’re in an oil crunch and prices are going up and gasoline [is] over $5 a gallon and diesel even higher—there’s not many tools for the Biden administration to try to do something about that. You can release the strategic oil stocks: they’ve already done that. You can try to think about sanctions toward Venezuela, Iran sanctions, some other unpalatable options. The history of oil crises is, because there’s not that much you can do in the near term, one of the first things presidents and both parties do is pick up the phone and call Riyadh. And I think you’re seeing that here.

So it’s important to remember there’s actually a limit to what Saudi Arabia can do to put additional oil on the market right now. They can do some, but probably not enough to balance the dislocations that we have now. And there’s a reason Saudi Arabia holds that spare capacity—part of it is, that is in part where geopolitical influence comes from: their ability to respond to that phone call, and help to damp down oil prices around the world is a pretty powerful tool, because there’s not many other ways to do that. I’m sure that will be on the agenda. We just saw in OPEC a few weeks ago, Saudi say they would put oil on the market a little faster than they had otherwise planned to. And I suspect you probably will see additional supplies coming to market after that. But there is a limit. We shouldn’t pretend that Saudi Arabia and OPEC can solve the energy crunch that we’re in alone.

Meghan O’Sullivan:

Can I add to that, Dan—I think one of the things that inspired Jason I to write that piece that we mentioned at the outset of this podcast was constantly hearing from people: well, the Middle East doesn’t matter as much; the U.S. is more energy independent; that we are, or at least at the time were, the largest producer of oil in the world. And all those things are interesting, and they’re certainly a changing dynamic.

But the reality that I think everybody is waking up to is that the Middle East is going to be important—for a variety of reasons, but also because of oil markets for the foreseeable future. And as we move ahead in the energy transition, actually, what we need to anticipate is that the Gulf producers are going to become more geopolitically important, not less so. And that is because as we move into a world where demand for oil goes down—that’s not where we are today, but we’re anticipating as we move to net zero, the world will use less and less oil—but it’s never likely to use no oil at all. If you look at the net zero scenarios of multiple organizations, they all have some element—and it’s substantial, it’s a lot less than today, but it’s still substantial—part of the world using oil. And because of dynamics to do with costs and carbon footprint, the last standing producers are likely to be Saudi Arabia, the Emirates and some other Middle Eastern producers.

So the Middle East will be a larger part of a shrinking pie, and that means they will have more geopolitical leverage. So the idea that we don’t really need to pay attention to Middle Eastern powers, or we can treat them differently because we don’t need their oil, is a real misreading of reality.

Dan Kurtz-Phelan:

That’s such a fascinating point that cuts against such a strong consensus in the American foreign policy debate. What I think the rest of us are missing, if I understand you correctly, is that even if the U.S. uses less Middle Eastern oil, the Middle East will still shape markets in a way that will affect all of us.

Meghan O’Sullivan:

Exactly.

Dan Kurtz-Phelan:

We’ll be back after a short break.

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Dan Kurtz-Phelan:

Let’s switch gears to the other big element here before we return to this question of how the energy crisis goes from here. And that is, of course, the fight against climate change and this essential and long overdue process to move toward net zero. In your most recent piece for Foreign Affairs, “The New Energy Order,” you wrote, “The current energy crisis has refocused the world’s attention on geopolitical and energy risks, forcing a reckoning between tomorrow’s climate ambitions and today’s energy needs and offering a preview of the tumultuous era ahead.” Given what we’ve seen so far in the last few months, how is this reckoning playing out? Are we seeing climate ambitions losing out thus far?

Jason Bordoff:

We’re not seeing climate ambitions losing out. But I think we are seeing countries recognize that the steps that you can take to deal with the near-term energy crunch may not be the same as what you need to do to make yourself more secure for a longer-term energy transition.

This crisis is notable in a couple of ways. There’s nothing new about energy crises and boom and bust cycles. But this is the first global energy crisis. The 1970s was an oil crisis; this is an energy crisis. Oil, gas, coal, myriad other commodities. And it’s also the first energy crisis of a clean energy transition. And that is a theme that comes through in both the articles that that we did in the pages of Foreign Affairs, and that’s important because, as Meghan said, this is going to be one of the most disruptive geopolitical forces of the coming decades, the energy transition. And we’ve, in recent years, had a growing, not shrinking, gap between ambition and reality. And so, as we said before, we were in kind of tight energy markets even before this energy crisis started. And if you restrict supply of oil and gas by stopping investment, but you don’t actually make demand go down, you are more vulnerable to the kind of crunches that we’re facing now.

So the question is, how do policymakers respond—and I think it is critically important to say the things that make you energy secure can also be many of the things that make you more climate secure. If we reduced our dependence on globally traded hydrocarbons that are inevitably exposed to geopolitical risk, there would be improvements in energy security. And obviously, that’s what we need to do for the climate crisis as well. It’s just that you can’t do those by this winter or next to make sure you can keep the lights and the heat on affordably in Europe, or keep gasoline and diesel prices affordable around the world. So people are taking policymakers—President Biden is writing letters to all the refiners in the U.S. and saying, ramp up your refining capacity immediately. He’s calling the shale producers and saying, increase shale production immediately.

But [policymakers] are reluctant, as are people in Europe, to do things that are inconsistent with where we want to be 10, 15, 20 years from now. And the point of the piece we wrote in the latest issue of Foreign Affairs was, what kind of new tools of government policy might we need to manage the disconnect between the fact that there are things that are needed today to meet energy security needs, which still involve a lot of oil and gas, while at the same time we want to accelerate, not decelerate, the transition moving forward. And we do see plans in the European Union, like the REpowerEU plan, to try to accelerate the pace of deployment of clean energy, green, hydrogen, all these other tools. I’m optimistic many of those will make progress. Again, they just don’t happen in timeframes that help with the immediate energy crisis we face.

Dan Kurtz-Phelan:

I am pleased to hear that you’re optimistic over the long term—but just to linger on the short-term pessimism for a moment, one thing you note in the new pieces that coal has been a big winner from the crisis thus far. And coal is, of course, much worse for the climate than natural gas or oil and other sources before. Surely that’s worrying in the short term.

Meghan O’Sullivan:

Definitely. And I think here’s a great example: Jason and I often have to check ourselves to make sure that we’re distinguishing between hope and analysis, because we, clearly, like many people, have very high ambitions for how quickly and how completely the world can move to a carbon-free energy system. But the realities are pretty stark right now. I think when we look at even just the short-term effects, we’re anticipating from Russia’s seeming move to sever gas exports to Germany, Italy, Slovakia, Austria, other parts of the continent, that there’s a lot that can be done that’s consistent, as Jason said, with moving to cleaner energy. But in the short term, coal is going to be a big winner here. And that was that was true before the Russian gas flows began to be constrained.

And I think that is a trend we’re going to see in the coming weeks and over the course of the summer: the big winner here is going to be coal. And that’s true in Europe: Europe has the ability, both in terms of the institutions, the vision, and at least more of a political consensus than any parts of the world, to make sure that that short term doesn’t translate into the same trend over the medium and long term. But other parts of the world are not so fortunate. I think one of the real impacts here is on the developing world and on the ability of the developing world to make this energy transition. This, of course, was very, very challenging even before the current crisis. And we had a situation where in many parts of the world, people from many of these countries would say, we care about the climate, and we’re the ones that are going to bear the brunt of climate change—and that’s already happening—but at the same time, we really care about the ability to deliver growth and prosperity and energy security to our country, our citizens, and our constituents.

So that was already a challenge—this addressing energy access and addressing climate change—and now we pile on top of it the reality that natural gas is exorbitantly expensive for the developing world now, so it needs to go to coal—coal is actually more expensive. So we see places like Pakistan and India and other places having real challenges even getting coal to generate electricity. And when we have record-breaking heat waves, this becomes a humanitarian crisis. So I think we see the developing world having to grapple all at the same time with an energy crisis, an energy access crisis, a climate crisis, an inflation crisis, and a looming food crisis. So to expect the developing world to be able to stay on a good climate trajectory without enormous support from other parts of the globe is really overly optimistic.

Dan Kurtz-Phelan:

Let me stick with pessimism for a second before we try to try to take that turn toward some optimistic policy solutions. A line that I’ve thought about frequently in the last few months comes from the piece “Green Upheaval” that you published last year. It’s really about the political effects of this kind of crisis, and this was before we were facing something quite as bad as we are now. Quoting that piece, you wrote, “If people come to believe that ambitious plans to tackle climate change endanger energy reliability or affordability, or the security of energy supplies, the transition will slow.” I imagine most people around the world, even those who believe in climate change and believe we have to do something about it, are seeing exactly that kind of effect, and making a decision that their short-term economic needs are going to outweigh those long-term concerns. Do you see that happening?

Jason Bordoff:

I do. I think that what we wrote in November has sort of been borne out by what we’ve seen in the last several months, unfortunately. The idea behind that sentence you read was: you can’t have an energy transition if you’re in the middle of an energy crisis. Now, someone disagree with that and say, that’s exactly when you have a transition, right? If you look at efforts in the 1970s to increase fuel economy standards, or reduce oil dependence in U.S. power plants, it was born out of crisis. But I think what we saw even more was, whatever efforts needed to be taken to deal with the immediate crisis, whether they were aligned or not with the transition, is where you would go. And I think that’s what we’re seeing in the last several months. Again, even before Russia invaded Ukraine, Europeans were struggling to pay their energy bills. And what did we see in the policy response? We saw European government subsidize energy prices, eliminate or roll back fuel taxes—exactly the opposite of the sort of policies you would want to put in place if you were trying to accelerate a clean energy transition.

And so I think the urgency of meeting immediate needs—again, President Biden saying we need more shale production, we need more refining capacity to be used in the U.S.—all of those overwhelm the focus that we need to have on saying, let’s stay the course and do the things that are going to make us more resilient in the longer term, to transition to electric vehicles, transition to electricity, transition to renewables, et cetera, et cetera. The reason we wrote that piece, “Green Upheaval,” which said that this is going to be one of the greatest and most messy geopolitical and economic factors around the world, to have an energy transition, was not to say don’t have an energy transition, we want the energy transition to be happening faster. But if we’re not clear-eyed about what the pitfalls will be along the way, and how jagged and messy the process will be, it’s going to make it harder, not easier, to get there, because our political system can’t sustain that level of volatility, disruptiveness, messiness. We need more, not fewer, tools to smooth that volatility moving forward, so we can have an energy transition.

Dan Kurtz-Phelan:

You noted in the recent piece that in the 1970s, government intervention made the crisis worse. You try to look at some of the lessons of government intervention in that period to point us to a better course. You note in the piece that if done well, government intervention is going to be the solution to these dual crises, the energy crisis and the climate crisis. When you look at the lessons of the 70s, what’s going to determine whether intervention is effective or counterproductive?

Jason Bordoff:

Well, we talk in the in the piece about what happened in the 1970s, the energy crisis of 1973, then 1979, the iconic lines at the gasoline station that we all remember—if not personally, remember photos of. And that was instigated by the Arab members of OPEC putting in place an oil embargo, of course, but it was made much worse by government policy. Then, you had in place price controls and import restrictions, a complex allocation system where the U.S. federal government micromanaged who could buy energy and at what prices, and it really made it much harder for the market to respond to an energy crisis and reallocate supplies. One of the benefits of the response to the 1970s was a general sense that there’s a lot to like in free market forces to create more energy security because you’re part of an interconnected market. Then if a hurricane hits the Gulf coast or worker strike hits Venezuela, markets can adjust and suppliers can move around, and we have a global, interconnected energy market now.

But we went on to say that that doesn’t mean there aren’t market failures. Where does energy security come from? The market alone doesn’t provide the redundancy, the extra infrastructure, the sorts of things that are not going to be used—you’ll have low capacity utilization, you might build LNG terminals The cheapest gas for your economy might be pipeline gas imports in Europe, but you want to be resilient to the idea that those pipeline gas imports might be disrupted, so you want to have a few LNG import facilities on standby. There’s not a commercial rationale to do that, government would have to socialize those costs for energy security. The same with the refining capacity in the U.S. today, or a number of other examples. So there are ideas—including in the newspaper just this week, where the Biden administration, people are speculating, might restrict the exports of U.S. crude oil, or refined petroleum products.

Dan Kurtz-Phelan:

Listening to all this, many people will look hopefully toward the future, after the energy transition has made more progress, when we’re much more reliant on clean energy.

One of the things that is really striking about the “Green Upheaval” piece is all of the ways in which you show that these geopolitics will continue to be really complicated, even in a world where we’ve moved beyond oil and coal and natural gas in most ways. You note that Russia builds more than half of the nuclear reactors outside of Russia—and then China accounts for another 20 percent. You note that in all sorts of ways, the green energy supply chain is incredibly reliant on a small number of producers for lithium and cobalt, and China has control over solar cells. So none of this gets particularly easier, even once we’ve gotten through this transition. How do you see the balance of international power and the effect on geopolitics when we’re in that that phase?

Jason Bordoff:

Well, I think, as you said, what motivated that piece was the idea that historically, energy security and energy geopolitics has often been viewed as OPEC in the Middle East—or gas in Russia, if you’re in Europe—and there was a sense that if we have a successful clean energy transition, things would be more copacetic from an energy security standpoint, and we wouldn’t need oil and gas and there wouldn’t be any more energy geopolitical risk. And our view was, that was badly wrong, for some of the reasons Meghan said at the outset—that, in fact, this would be a very geopolitically disruptive force, both the process of transition.

So we’ve talked a lot about the end state: we need to get to net zero by 2050, we need to move much faster to get on track for that. But the process of getting from here to there, and how uncertain that was going to be, and who would be the producers—that would kind of fall by the wayside. First, what forms of clean energy would come in, how volatile it’s going to be—we’re seeing that today, it’s inevitably the case, we’re going to have political fits and starts going from Obama to Trump to Biden. We’re going make some bets on technology, and we’re going get those bets wrong; we’re going move to an electricity grid with much more intermittent renewable energy, and we’re going to have to figure out how to manage that. And we can do it. But we’re not going to get it all right. And that kind of volatility, if it leads to price crunches, price spikes is going to make it harder, for the reasons we said before, to sustain that sort of a political support for where we need to go.

So the clean energy sources themselves will also bring new sources of geopolitical risk. Like, as you said, dependence on critical minerals, most of which are refined and processed in China. We write about rising tensions between developed and developing countries for reasons of equity in the energy transition. And this is $3 trillion a year, roughly, of capital that needs to be invested in the transition: most of that will be in the developing world, not the developed world. Where’s that money going to come from? These are parts of the world that did not cause this problem, are not responsible for historic emissions, don’t have the capacity to deal with it. We see rising trade tensions playing out as some countries impose trade restrictions to try to encourage other countries to take stronger climate action.

So there’s a range of geopolitical risks that may arise with new sources of clean energy, too. And again, that’s not a reason not to have an energy transition. We just have to understand them, anticipate them, and build new tools to manage volatility and to smooth the process of transition to ensure energy security in a multidecade process of transition. The challenge, I think, for policymakers now is how do you think about recasting energy security in an era of energy transition? What do those policy instruments need to look like?

Meghan O’Sullivan:

And I would just say that none of this is surprising to anyone who watches energy systems over time. Every time we’ve had an energy transition, they’ve been different from the one we’re contemplating now, but it has had major reverberations into geopolitics. So when we see big changes in energy, we should just instinctively expect big changes in politics. And that will be fraught in many of the ways that Jason just described. But I also think in some ways, they’ll just be different, right? It doesn’t necessarily mean that all geopolitical changes are bad. One way that we expect it will be different is this transition will add momentum to the movement away from globalization, or let’s just say toward regionalization. So ultimately, more countries will have a greater ability to meet their own energy needs. It won’t be complete: they’ll still be components of the energy system, which will be global, particularly if there is a robust ammonia or hydrogen market, that type of thing.

But in general, I think it’s safe to say that there will be more countries that have higher levels of energy self-sufficiency, and that will change politics in a very significant way. And even countries that are not self-sufficient—they will be much more likely to be reliant on their neighbors for shared energy grids, and we see movements in that direction. So, again, some of it brings new risks, some of it brings new opportunities, and some of it just brings change. And part of what we’re trying to do is just sensitize policymakers, investors, individuals, to the kinds of changes we might see, but also to help us be better prepared to manage them to make what will be inherently a volatile period a little less volatile.

Jason Bordoff:

There is one point—I just think it’s worth highlighting. I think it is clearly the case that a successful clean energy transition is going to mean a more electrified economy—could be cars, it could be heat, we don’t know exactly how—but much more electricity use. And electricity is less local, you don’t trade electricity over thousands of miles across borders. You might have some cross-border trade: the International Energy Agency projects in a net zero 2050 world, global energy-related trade is 38 percent what it would otherwise be. So that has an impact on geopolitics itself, just because energy is a less globally traded commodity. Some energy security benefits from that, but also some new tensions that might emerge as well.

Dan Kurtz-Phelan:

Let me close by asking both of you to prognosticate a little bit about where things go from here. First, Jason, how do you see the energy crisis evolving over the coming months? You note in the piece that this is in many ways worse than the 1970s, and it’s certainly more complicated. What do you what do you think happens as the work continues? And as all of these challenges persist and become more global in certain ways?

Jason Bordoff:

Well, I worry that this is the worst energy crisis since the 1970s. It has the potential to be even worse for some of the reasons we said before. We went into it in a tighter structural underinvestment cycle. And it is not just about oil, it’s about myriad other commodities. And I think there’s good reason to be worried it’s going to get worse before it gets better, for some of the reasons we talked about earlier. What does it look like to continue to take stronger and stronger actions against Russia to pull more supply off the market in response to the atrocities in Ukraine? What actions does Putin take in response? And if he really does move much, much more than he already has to cut gas supplies to Europe, that’s going to be economically catastrophic coming this winter—particularly if the winter is cold, when you need your gas for heat, you’re going to be looking at governments rationing energy, you’re going be looking at governments curtailing the activities of energy intensive industrial firms.

And there is no buffer, almost the whole buffer in the global market to cushion that at all. You look at the strategic oil stocks, you look at Saudi Arabia and OPEC. There’s just no room for error, not to mention the fact that something unexpected is most likely, based on history, going to happen tomorrow, whether it’s a hurricane as we head into hurricane season, or something else. We saw this big accident, a U.S. LNG facility, which was a reminder that accidents happen and unexpected things happen. So a little shock like that can have an outsized impact, because there’s no buffer anymore.

So the immediate focus is going to be on finding every additional molecule you can, and finding ways to increase refining capacity or production capacity. I do think we shouldn’t lose sight of the fact—I don’t think we’ve talked about it yet—more, much more should and can be done on the demand side. We need more energy conservation and energy efficiency. It’s a powerful tool, and we don’t talk about it enough. But then you’re headed into an era where there’s going to need to be government policies put in place to subsidize energy costs for people, particularly for low-income people and vulnerable households. I think you’re going to start to see other policies put in place like price caps and trade restrictions. And those come with a lot of risks. But you’re just kind of out of options. And politically, and economically, the situation we’re in is too damaging.

I hope we don’t lose sight of the things we should be doing today that don’t help this winter or next, but make us more resilient for the next inevitable energy crisis, whatever causes it. If it’s not Russia, it will be something else. Every time we have an oil crisis, we look for, we scramble to see what can we do today, and the answer is not much. And if we had done the thing last time that would have made us more resilient today, we’d be less oil dependent in the first place. And then, as soon as the crisis passes, we become complacent. And we forget to stay the course and do the things to reduce oil, use reduce hydrocarbon demand in the first place. Those are things we need to do not just for the climate crisis, but because they can make you energy secure as well.

Dan Kurtz-Phelan:

Meghan, you note in the recent piece that, in a way that I think most of us don’t appreciate sufficiently, the old energy order was, in many ways, the foundation of international order and geopolitics more broadly. So when you look at the new energy order, what do you think, and what can we speculate at this point, about what that means for international order going forward once this new energy system really takes hold?

Meghan O’Sullivan:

Sure. Well, it’s a big question on which to end, but I think some of what we’ve discussed here will be elements of this new energy order. And I would say that there’s still a lot of uncertainty. I’ve talked a lot just in this time that we’ve spent together on the podcast about how energy shapes geopolitics—but we also have to appreciate that geopolitics shapes energy, so it’s a two-way street. And everything we’re talking about happens against the backdrop of a very changing geopolitical scene. And most importantly, perhaps the U.S.-China competition that we haven’t even really spoken about yet. But the big question is, how can we enact an energy transition in a world where the U.S. and China are not cooperating, but they’re more competitive? I think a lot of us, and I put myself in this basket, were hopeful that climate and energy transition issues could be kind of a sea of cooperation in an otherwise competitive relationship between the U.S. and China. That seems increasingly less likely.

So what is the geopolitical world in which we can still successfully make an energy transition, even though there’s going to be more protectionism, more bifurcation of economies, that type of thing. I think that’s one of the challenges, and that will influence what this new energy order looks like. But I think, on the whole, the new energy order—there’s what we’d like it to be and where it’s heading, and these two things are not the same as we suggested. Where it’s heading right now is an energy order where there is definitely more government intervention, and that can be both good and bad if it’s not done well. It’s a world right now where there’s a big and growing cleavage between the developed and the developing world, and that needs our immediate attention. And as much as we’re focused on how Europe is going to manage energy security and climate ambitions, or how the U.S. may have an opportunity, we need to make sure that policymakers are thinking about the developing world’s energy transition as part of the big variable of global success. Again, this movement to a less globalized world, I think, will be part of this new energy order as we as we know it.

Dan Kurtz-Phelan:

Thanks to you both for joining me. And thank you for both of these really insightful, important pieces. We’ll look forward to more as all this continues.

Meghan O’Sullivan:

Thank you. Thanks very much.

Jason Bordoff:

Thank you.

Dan Kurtz-Phelan:

Thank you for listening. You can find the articles that we discussed on today's show at ForeignAffairs.com.

"The Foreign Affairs Interview" is produced by Kate Brannen, Julia Fleming-Dresser, Rafaela Siewert, and Markus Zakaria. Special thanks also to Grace Finlayson, Caitlin Joseph, Nora Revenaugh, Asher Ross, Nick Sanders, and Gabrielle Sierra. Our theme music was written and performed by Robin Hilton.

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