The unprecedented upheaval of the global economy caused by the Covid-19 pandemic and exponentially exacerbated by the war in Ukraine has caused massive upheaval in the global economy and forced countries around the world to rethink their energy policies and energy security strategies, opening a window for a true transition to clean energy without the usual inertia that such a revolution faces, Oilprice reported.
The International Energy Agency (IEA) has for the first time published a forecast that all fossil fuels will either remain the same or decline for the foreseeable future. In fact, the IEA predicts that global demand for fossil fuels could peak within this decade, a huge step up from earlier projections. However, only a few agree with this prediction. In contrast, OPEC argues that peak oil production will occur later than expected as the world puts energy security ahead of climate commitments.
This uncertainty seems to be the new normal, as even the most experienced and respected financial and economic institutions need help to determine which way the wind is blowing. Confused by the myriad market shocks caused by the "three factors" - Covid-19, climate change and conflict - the current economy is throwing out all sorts of mixed messages and conflicting indicators, making forecasting processes unusually hazy.
Given this growing complexity, the World Economic Forum argues that the future of the energy industry will be characterized and shaped by eight key factors:Policy development New challenges to energy security Lack of energy efficiency measures Higher decarbonization costs Public investment and inflation Greater volatility in energy prices Inadequate energy supply Insufficient access to energy in developing countries.
Addressing these eight new realities will be key to new strategies in the private and public sectors to develop new strategies to meet critical energy goals in an increasingly complex environment.
Volatility will be an inevitable part of the energy transition. Geopolitics will change significantly as supply chains shift from fossil fuels to the rare earth minerals needed for renewable energy infrastructure and batteries for electric cars. China controls the vast majority of many of these minerals, creating new threats to energy security. Increased competition for these resources could also raise their prices significantly, leading to what is called green inflation.
Indeed, decarbonization will be expensive, and public investment will be needed, as will major climate finance schemes for developing countries. For now, the costs are far lower than they need to be to provide enough energy in the future. The growing importance of energy security and the need to strengthen 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.
This funding gap is likely to lead to inadequate energy supplies (especially in the global south) and continued volatility in energy prices as energy demand continues to grow while we simultaneously abandon fossil fuels. To minimize the gap between supply and demand, energy efficiency standards will be key, but experts say they are unlikely to be fully utilized.
So policy will be key in the future to help manage all of these factors, to keep the world on track and accountable for its decarbonization commitments. Obviously, this will not be easy, and the difficulty, instability, and cost of the energy transition will push the economy back toward fossil fuels unless sufficient policies and enforcement tools are in place. It is a difficult path to decarbonization, but compared to the alternative, it is the best worst choice in the long run.