A dose of pragmatism in the debate about fossil fuel development

This follows Rishi Sunak’s recent pre-election pledge to issue hundreds of new oil licences for the North Sea. With typical Labour hypocrisy, Keir Starmer has promised not to issue any more such licenses – but to “honour” any that Sunak has already signed off. Which means, of course, that Starmer wants to have his climate cake and eat it.

So what is actually happening to oil and gas production? In a nutshell, America and Europe (in which, for now, we’ll include the UK) have effectively lost political control of global and gas output since the outbreak of the Russo-Ukraine conflict. Petroleum production decisions are now back in the hands of the so-called Opec Plus countries (which includes Russia) with a helping hand from China. Pivotal in this is a move by Saudi Arabia to exit the American political orbit. We are now in a multipolar world, particularly in energy matters. This new ball game fundamentally affects why London wants to hold onto Scotland.

Think back to 2016. The new boss of Saudi Arabia – Crown Prince Mohammed Bin Salman, aka MBS – had failed in his bid to bankrupt the American shale gas industry by pumping more oil and so causing global energy prices to collapse. America had reversed decades of dependence on oil imported from the Arab world by expanding domestic production using “fracking” – an environmental disaster but one that gave America energy independence. What was MBS to do?

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Answer: in September 2016 Riyadh sought a de facto political alliance with Moscow, creating Opec Plus – a new oil cartel involving Saudi, the Arab countries and Russia. The aim was to create enough leverage over oil and gas production to control world prices independent of Washington. But this was only a start. No effective oil cartel was possible without the involvement of Shiite Iran, Sunni Saudi Arabia’s arch rival.

Result: In recent years, MBS has moved to defuse the toxic Saudi-Iranian proxy war in Yemen and – haltingly – to mend fences with Tehran. Even before the Ukraine crisis, a new axis was being formed between Saudi, Iran and Russia. This emerging alliance involves more than just oil. It extends to investment, arms sales and military cooperation.

Of course, there have been political hiccups along the way to this geopolitical realignment. In 2019, Tehran used drones to knock out a substantial proportion of Saudi oil refining capacity. The failure of Saudi-owned (and expensive) US Patriot missiles to actually work on this occasion had the effect of making MBS more dubious of his ostensible American protectors. And more ready to cut a deal with Iran. Then Covid lockdowns temporarily led to a drop in Chinese oil demand, hurting Saudi exports. MBS responded by pumping more oil, in order to grab a bigger share of a diminishing world market.

This undercut US shale prices. The maniac Donald Trump responded by threatening to end arms sales to Riyadh, thus confirming MBS in his view Washington was an unreliable ally.

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Then post-Covid, the global economy revived but bringing massive inflation in its wake. Plus the Russo-Ukraine war has led to sanctions on Russian gas exports. President Biden responded by reversing ferret and demanding the Saudi pump more oil – not less – to reduce prices. But a wary MBS has refused. This has forced a desperate Washington to replace Russian and Saudi energy by running down America’s own strategic oil stockpile to dangerously low levels.

This spring, America’s Strategic Petroleum Reserve was only a little over half of what it was three years ago. The clock is ticking on America’s energy security. When push comes to shove, Washington will abandon gas exports to Europe to protect its own economy.

Now enter China. China is in global competition with America. Result: Beijing sees strengthening relations with Opec Plus as a key priority. For starters, China is pouring investment into Iran’s oil industry to modernise the latter and so undermine Western sanctions against Tehran.

Recently, in retaliation against American sanctions on China itself, Beijing reversed its cooperation with Washington on pressuring Saudi to increase petroleum output. Instead, Beijing is now accessing cheap Russian supplies. In December, China and Saudi signed a new partnership agreement which states the two countries will “firmly support each other’s core interests”. In the wake of this agreement, Beijing is now selling jet fighters to the UAE. The days of American hegemony in the Middle East are numbered.

It is against these seismic political changes we have to examine contradictory Western moves to boost oil production in the North Sea while claiming to reduce dependence on fossil fuels. The Biden administration’s true reason for cutting fossil fuel use in the short term has as much to do with reducing dependence on Saudi as with saving the planet.

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But there is a wee problem. US shale gas reserves will be depleted in the period after 2030. Unless Washington transitions to green energy, it will be dependent again on Opec Plus oil and petrochemical supplies. For Open Plus is the only possible supplier of extra output in the medium to long term. Unless, of course, the Europeans can help out in the North Sea and Atlantic continental shelf.

THERE is a pressing need to transition to net zero carbon emissions. But there is no conceivable way with current technology – and without drastically reducing Western living standards – that such a transition can take place before the second half of the century. Even then, we will need gas as a transitional fuel, especially in the UK given our current household gas-based energy infrastructure. Which suggests that – politically and economically – there will be huge pressure to develop and exploit the remaining North Sea reserves. Hence Westminster’s need to keep Scotland (and Scottish energy) under UK control. This has become even more apparent since 2014 – so no second indy referendum, ever.

I take a pragmatic view on what to do. Blindly refusing to develop any further Scottish fossil energy reserves – and slash output – will only lead to more gas imports in the period from now to mid-century. I suspect that would plunge an indy Scotland into a balance of payments crisis and falling standards of living, especially if you contemplate a massive, instantaneous reordering of capital spending towards a new domestic energy and heating system. Also, in the current geopolitical climate, depending on imported energy is fraught with political price tags.

Which leads to the conclusion that an indy Scotland should use its fossil energy riches as a bargaining chip to pay for the transition to net zero without adding to the cost of living burden on ordinary citizens. And to protect Scottish interests through the minefield of energy politics that are opening up in the contest between America and China, and between the West and Opec Plus. Energy-rich Scotland – blessed with vital wind and tidal reserves as well as oil and gas – is in a sound strategic position to navigate the uncertain era we are about to pass through. But that is only possible if we control our own political destiny.