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The COVID-19 pandemic is forcing us to leave the fossil fuel era behind. Europe needs to begin preparing for what comes next.
Oil prices have crashed. The most visible cause has been the measures taken to contain the COVID-19 pandemic, which have triggered record lows in global oil demand.
Yet the crisis also exposes structural vulnerabilities in our fossil fuel-dependent economic system, which requires us to rapidly transition to an alternative energy system if we are to avert economic collapse.
The most important scientific concept to assess and understand these vulnerabilities is ‘Energy Return on Investment’ (EROI) – the foundation of the emerging discipline of biophysical economics. EROI is designed to measure how much energy is needed to extract energy from a particular resource. What’s left is known as surplus ‘net energy’, used to support goods and services in the economy outside the energy system. The higher the ratio, the more surplus energy is left for the economy. That surplus is running increasingly thin.
In the early 20th century, the EROI of fossil fuels was sometimes as high as 100:1: a single unit of energy would be enough to extract a hundred times that amount. But since then, the EROI of fossil fuels has gone down dramatically, as we are extracting fossil fuels from places that are increasingly difficult to reach. Between 1960 and 1980, the world average value EROI for fossil fuels declined by more than half, from about 35:1 to 15:1. It’s still declining: latest estimates put the value at between 6:1 and 3:1.
The decline of fossil fuels’ EROI has acted as a background ‘brake’ on the rate of economic growth for the world’s advanced industrial economies, which has been slowing down since the 1970s.
EU: a post-oil continent
Although not a subject of much discussion, Europe is a case in point. By around the turn of the century, all conventional oil producers across the continent – except perhaps Italy – were past their peak production.
A study published by the Paris School of Economics found that over a 40-year period, GDP is closely correlated with primary energy production across 50 countries. The implication is that unless Europe can transition to an alternative supply of energy for the long term, it faces a future of extended economic contraction.
Previously, Europe’s domestic energy woes encouraged many member states to look to Russian oil and gas as the solution. But even before the pandemic, studies found that Russian production is approaching its limits within the next decade.
The implosion of shale
The vulnerability of global oil markets added new volatility to this challenge in the EU. In 2005, global conventional crude oil entered a long plateau. To meet demand the industry shifted to more expensive, unconventional forms. Since then, US shale has supplied some 71.4% of global oil supply growth.
In February, the Geological Survey of Finland – a Finnish government agency overseeing the EU’s mineral resource modelling – published a comprehensive study finding that this much-lauded expansion was in reality a debt-driven “bubble”.
Although there is “plenty of oil left,” it is “increasingly expensive to access”, the report warned. Record shale oil production came at higher costs and declining well productivity. Most shale oil companies faced negative cash flow, compensated for by drawing down billions of dollars of unrepayable debt.
The pandemic was the pin that burst this oil bubble. It may never re-inflate.
Global oil sector collapse
The pandemic has thus ground the global oil industry to a halt, and the demand slump will probably last more than a year, even in the most positive scenario. Yet oil wells cannot just be turned on and off. Because they are organic deposits needing pressure to extract, a prolonged shut-down risks massive damage to reserves that could be too costly to repair.
Besides the US shale sector, major producers such as Saudi Arabia and Russia, as well as Europe’s North Sea production are all “haemorrhaging cash”.
By the time we make it to a post-COVID-19 world, much of the global and European oil industry could be permanently decimated. Even if demand resurges (and it is likely to do so in a constrained economic context) this might drive exorbitant price hikes, further ‘braking’ economic growth.
In either scenario the implication is that the current oil glut is paving the way for long-term scarcity. Independent petrol stations are already being forced to close as fuel sales dry up, endangering transport networks and critical supply chains.
The global industrial food system, which is fundamentally dependent on oil inputs at every point – fertiliser, pesticides, on-farm machinery, processing, packaging, transport and distribution – could face unprecedented strain. The core mining and manufacturing processes that sustain industry as we know it could also hit a wall. And as oil is needed to produce plastics, this could have drastic implications for many industries dependent on them.
Accelerating the Green Deal
This means that member states calling to ditch the Green New Deal due to the crisis are in effect demanding that the EU commit economic suicide.
Far from ditching the Deal, the EU should double-down on its vision of a sustainable industrial revolution, and member states should integrate this approach in their emergency economic responses to the pandemic. This has to be based on a new energy system that prioritises energy efficiency and renewables.
This requires applying a twin tactic: a ‘life-boat economy’ approach designed to mitigate immediate risks; and a rapid transition to sustainable and resilient economic foundations.
Accelerating the ‘third’ clean industrial revolution
The longer that the transition to a new sustainable industrial infrastructure is delayed, the bigger the impact of the current oil crisis on Europe’s critical supply-chains across energy, food and manufacturing.
We will not be free of biophysical constraints. Renewable energy has its own limitations, and cannot sustain an ‘endless growth’ economic paradigm.
This in turn means that the accelerating transition away from oil must be accompanied by a comprehensive transformation of major industrial sectors to create a vibrant new sustainable infrastructure across agriculture, mobility and manufacturing. These sectors will need to let go of traditional pre-pandemic economic concerns focused purely on profits for shareholders, and instead orient themselves toward social purpose.
Recalibrating markets to work in the public interest
Achieving this may require more extensive government partnerships with the private sector, whether through equity injections or even nationalisation of crucial industries. In some cases, we may need straight-up nationalisation – in others, we may need governments to create incentives for the private sector to produce the goods and services we actually need.
This in turn will require directing finances, lending and subsidies to new clean industrial and agroecological enterprises, including new circular economy practices in plastics and mineral recycling.
Moreover, nationalisation of debilitated oil sectors may be the only way for EU member states to shield their economy as the industry winds down on a science-based timeline. At the same time, this is the occasion to protect, reskill and help transition industry workers into new sustainable and renewable infrastructure projects.
But the EU should also look at radical monetary reform. Money should not be borrowed from the private banking sector, but should be created debt-free by public banks (a process that has now begun in the UK by the Bank of England). This will avoid the risks of overburdening the economy with debt and create a source of sustainable financing to fund the new infrastructure investments that can avoid the risks of inflation, while creating new jobs.
An economic paradigm shift: new measures of prosperity
This barely scratches the surface of the out-of-the-box thinking we will need as we wean our economies from fossil fuels. Ultimately, it is the ‘endless growth’ paradigm itself – born in the era of cheap and abundant oil – which we need to transcend.
On the one hand, this means that Europe will need to face up to the possibility that continued GDP growth may no longer be possible in a post-pandemic context. On the other, businesses will need to reconnect with their fundamental social purpose in order to remain relevant and viable.
Instead of producing endless ‘stuff’, we will need revised notions of prosperity that uphold ‘well-being economies’ within planetary boundaries. Shifting systematically to new measures of prosperity beyond GDP, focusing on well-being, will be a crucial step in enabling many of the proposals outlined above. The ‘doughnut economics’ model, created by Oxford economist Kate Raworth, is a useful guide to doing so. But that model does not take into account biophysical constraints such as in the EROI of natural resource extraction. We therefore need to ground the economic transition in a much greater concern for the true costs of natural resource exploitation.
To some extent this process is already beginning. Around the world, city, state and national leaders are pushing forward innovative economic recovery plans designed to generate newfound ecological resilience, mitigate climate risks and generate greater racial, gender and economic equity. These plans, while nascent, must be scaled-up rapidly at emergency pace.
This means that stimulus packages need to facilitate a long-term re-design of our economies from the ground up. A shift from the laissez-faire economics of ‘each individual for themselves’, to new, cooperative and inclusive approaches. The alternative is economic collapse. But the upshot is that such clean fiscal recovery packages can create greater resilience to looming threats like climate change, while also having the most potential in driving strong economic performance within planetary boundaries and biophysical constraints.
The plunging oil price is a major sign that industrial civilisation as we know it has reached an inflexion point. The COVID-19 pandemic is forcing us to leave the fossil fuel era behind us. Europe needs to begin preparing for life after oil.
Dr Nafeez Ahmed is Executive Director of the System Shift Lab, a Research Fellow at the Schumacher Institute for Sustainable Systems and an award-winning investigative journalist and change strategist. His latest book is Failing States, Collapsing Systems: BioPhysical Triggers of Political Violence (Springer).
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