A rally that took oil prices to their highest levels since 2008 shows no sign of easing anytime soon, as the Ukraine-Russia conflict has resulted in high market volatility and a coordinated round of sanctions targeting Russia, the world’s third-biggest oil producer.
The increase has prompted fears about drastic implications that could alter world economic and political dynamics. However, one serious effect that could be overshadowed amid markets and political turmoil is the impact that $100+ a barrel could inflict on the world’s energy transition.
The rise in oil prices is expected to take world inflation rates to new highs and shatter hopes of economic growth. It is also expected to shift economic and political power from oil importers to oil exporters. OPEC countries are poised to take centre stage on the world geopolitical scene.
But how can the increase in oil and gas prices affect the world energy transition towards cleaner energy? The energy transition is seen as an indispensable action in the world’s struggle to limit the rise in global temperatures to below 2 degrees above pre-industrial levels and to pursue efforts to limit the increase to 1.5 degrees.
Some see the rise in fossil fuel prices as a golden opportunity for renewable energy sources to flourish. It’s time for electric cars to be more feasible for customers for example.
However, many experts believe that quite the opposite will happen.
Although investment in oil and gas has fallen by about 30 per cent since the outbreak of the coronavirus pandemic, there are signs that rising demand and rising prices could lead to a turnaround.
Producing countries and companies are expected to rush to compensate their losses incurred during the pandemic with more drilling for oil and gas around the globe, which should make oil abundant and affordable again.
The rise in oil companies’ profits may also give them the confidence to postpone their net-zero emission plans and depend on fossil fuels exploration for their future growth.
As renewable energy is still unable to meet the needs of sectors such as manufacturing, marine transport, aviation, and agriculture, countries will opt to secure their reserves of fossil fuel rather than invest in new energies. Concerns even have grown that higher oil prices could prompt some countries to go back to coal, which already was on the rise in 2021.
Such scenarios could hinder clean energy investment for a long time.
Still hopes linger on how much of the financial windfall associated with high oil prices will go towards the energy transition, and whether net-zero ambitions can be achieved if funds are still poured into new exploration and production projects, and if countries such as Saudi Arabia and UAE will stick to their net-zero emission plans.
In a plan to make Europe independent from Russian fossil fuels well before 2030, the European Commission President Ursula von der Leyen said: “The quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent and master our energy system.”
However, all the immediate actions taken today were going towards securing and diversifying fossil fuels away from Russian dominance.
But after all what is essential now is to keep renewables as an increasingly important part of the energy plans of companies and governments alike even if it was for a longer-term.
