The Global Energy Transition Has A $22 Trillion Problem
The global energy industry is at a turning point. Unprecedented shocks to the global economy stemming from the Covid-19 pandemic and compounded exponentially by Russia’s illegal war in Ukraine have caused massive disruption to the global economy and forced nations around the world to rethink their energy policies and energy security strategies, opening a window for a genuine clean energy transition without the usual inertia faced by such a revolution.
For the first time ever, the International Energy Agency (IEA) has released a projection in which all fossil fuels either plateau or drop in the foreseeable future. In fact, the IEA projects that global demand for fossil fuels could begin to peak within this decade, a huge development compared to earlier forecasts.
However, only some agree with this outlook. OPEC argues that, on the contrary, peak oil will occur later than anticipated as the world prioritizes energy security over climate pledges.
This kind of uncertainty seems to be the new normal as even the most seasoned and respected financial and economic institutions need help judging which way the wind is blowing. Thrown into disarray by the myriad market shocks rising from the “three Cs” – Covid-19, climate change, and conflict – the current economy is throwing out all kinds of mixed messages and contradictory indicators making projection processes unusually murky.
We know that we’re at a crossroads, but it’s hard to know what road to take when we can’t quite see where those roads are going.
With all of this increasing complexity in mind, the World Economic Forum argues that the future of the energy industry will be characterized and shaped by eight key factors:
2. New energy security challenges;
3. A shortage of energy efficiency measures; 4. Higher decarbonization costs;
5. Government investment and inflation;
6. Greater energy price volatility;
7. Insufficient energy supply; and
8. Inadequate energy access in developing countries. Keeping these eight new “realities” in mind will be key for new strategies in the private and public sectors to “develop new strategies to meet critical energy goals in an ever-more complex environment.”
Volatility will be an unavoidable part of the energy transition. Geopolitics will shift considerably as supply chains shift away from fossil fuels and toward rare earth minerals essential to renewable energy infrastructure and electric vehicle batteries.
China controls the vast majority of many of these minerals, posing new threats to energy security. Increased competition over these inputs could also raise their prices considerably, leading to what is being called “greenflation.”
Indeed, decarbonization will be expensive, and government investment will be essential, as will major climate financing schemes for the developing world. So far, expenditures are way below where they need to be to ensure sufficient energy for the future.
“The growing importance of energy security and the need to bolster supply chains will require a level of energy investment not seen since 2007,” the World Economic Forum reports. New technologies also suffer from a $22 trillion gap between current spending and 2030 needs.
These financing shortfalls will likely lead to insufficient energy supply (particularly in the global south) and continued energy price volatility as energy demand continues to grow while we simultaneously move away from fossil fuels.
In order to keep the gap between supply and demand to a minimum, energy efficiency standards will be key, but are unlikely to be utilized to their full potential according to experts.
Policy will therefore be key going forward to help manage all of these factors and to keep the world on track and accountable for its decarbonization pledges.
Obviously, it won’t be easy, and the difficulty, volatility, and expense of the energy transition will push the economy back toward fossil fuels if sufficient policy measures and enforcement instruments are not in place.
It’s a tough road ahead for decarbonization, but compared to the alternative, it’s the best worst choice by a long shot.
By Haley Zaremba for Oilprice.com