HQ Team
October 28, 2022: Europe is at the centre of an unprecedented global energy crisis that has significant implications for markets, policies and economies worldwide, according to an IEA report.
“The strains did not begin with Russia’s invasion of Ukraine, but they have been sharply exacerbated by it,” the International Energy Agency’s 2022 World Energy Outlook stated.
Extremely high prices are sparking a reappraisal of energy policies and priorities. “The Europe-Russia energy relationship lies in tatters, calling into question the viability of decades of fossil fuel infrastructure and investment decisions built on this foundation.”
A reorientation of international energy trade is underway, bringing new market risks even as it addresses longstanding vulnerabilities.
No going back
“Many of the contours of this new world are not yet fully defined, but there is no going back to the way things were,” according to the report. “We know from past energy crises that the adjustment process is unlikely to be smooth.”
The adjustment will also be taking place in the context of commitments made by governments to clean energy transitions.
The Paris-based agency looked into how the levers of technological change and innovation, trade and investment and behavioural shifts might drive a secure transition towards a net zero emissions energy system while minimising the potential risks and trade-offs between various policy objectives.
Short-term responses have focused on securing available supply and protecting consumers. At the same time, many governments in the US, the EU and elsewhere have adopted new policies that boost investments in clean energy and efficiency.
80% cut
Russia has cut its natural gas pipeline flows to the European Union by around 80% since invading Ukraine.
European sanctions on coal and oil imports and Gazprom’s decisions to cut gas supply are triggering a profound reshuffling of trade flows worldwide.
High fossil fuel prices are stoking inflationary pressures. A combination of falling real incomes and rising prices creates a looming global recession risk.
CO2 emissions from global fossil fuel combustion saw a record rise in 2021, but a robust expansion of renewables and electric vehicles may dampen growth in 2022.
One key question is whether today’s crisis will lead to an acceleration in energy transitions or a combination of economic turmoil and short-term policy choices will slow momentum.
On the one hand, high fossil fuel prices and record levels of emissions offer strong reasons to move away from reliance on these fuels or to use them more efficiently. On the other, energy security concerns may spur renewed fossil fuel supply and infrastructure investments.
Seventies oil price shock
The report compared the current energy crisis with the 1970s oil price shocks.
The crises in the 1970s focused on oil markets, and the global economy was much more dependent on oil than it is today. However, the intensity of use of other fossil fuels has remained relatively high, and for natural gas, it has risen in many cases.
The global nature of the current crisis, its spread across all fossil fuels and the knock-on effects on electricity prices are all warning signs of broader economic impacts.
Governments made a host of commitments to sustainability in the run-up to the COP26 meeting in Glasgow in 2021, and these remain the bedrock for many energy strategies.
In some cases, these ambitions have now been brought on track by new measures seeking to reinforce long-term energy security and accelerate energy transitions, including the US Inflation Reduction Act and the REPowerEU Plan.
The total government spending committed to clean energy transitions since the pandemic’s start amounts to $1.1 trillion.
