The recent rise in energy prices has been described as a retaliatory act by fossil fuels after years of underinvestment. The latest long-term perspective of the International Energy Agency (IEA) makes it clearer: We are not investing in energy, period.
Rather than being a forgotten soul seeking revenge, it’s best to think of the global energy system as a particularly confusing and volatile interpolation. It’s a phase we’re all going through, just a phase that turns out to be of indeterminate duration, course, and outcome, as we shift from a primarily fossil-fueled society to a decarbonized one.
Surfaces fed by solar energy in the year 2050 forecast in the IEA’s net zero emissions scenario will be cleaner and mitigate the ravages of climate change. But the problem will be getting there. Particularly because we depend on two energy systems, one based on carbon and the other not, which are broadly opposite but are also intertwined in certain aspects, the perfect recipe for creating mismatches between supply and demand.
Contrary to the simplistic narrative of environmental activists who attribute this to new wells and mines, the current tension in energy markets is the result of multiple problems colliding at the same time. These include the recovery from the COVID-19 pandemic, the decline in US shale production, OPEC + seeking to seize the opportunity to raise prices, and the cyclical pause in liquefied natural gas capacity expansion.
However, there is no doubt that as time goes on, the growing imperative to decarbonize will have a greater impact. The IEA’s own global decarbonization roadmap, published in March, caused a stir by proposing a future without investment in new fossil fuel supplies.
That would be fine if the downward sloping fossil fuel line was perfectly offset by a clean energy line rising to outshine it. The IEA models that as a scenario, but sees no evidence that it is happening now:
Investment in clean energy remains well below what is required to put the energy system on a sustainable path. At the same time, the amount spent on oil and natural gas is also below what is necessary to maintain current consumption trends. An increase in spending on clean energy is the obvious way out of this stagnation, but something has to change quickly or global energy markets will face a turbulent period.
Headlines on recovery measures could suggest that the river of public money is flowing into renewables. Yet, according to IEA data, of the roughly $ 16 trillion governments dumped into the economic gap caused by the pandemic, less than $ 400 billion, or 2.4%, went to creating clean energy infrastructure. The investment requirement estimated by the IEA to achieve net zero emissions by 2050 is, for this decade, US $ 4 trillion per year. That’s four times the average spent in the last five years.
Meanwhile, we continue to use a lot of oil and gas. Even in our transition to net zero, the latest World Energy Outlook puts crude demand for 2030 at about 65 million barrels per day. For its part, natural gas plays a short-term role in providing support to the renewable energy intermittently until storage options like batteries proliferate, reducing demand by just 18% by 2030.
The growth-oriented oil and gas industry, like any other industry, will focus more on what is lost than what is left, and capital costs will adjust much more accordingly. The fossil fuel supply cycle is inherently long, especially with compromised shale production, making it prone to periodic shortages and glut.
So we are likely to face more episodes of tight or volatile energy markets, but going back to fossil fuels is not an option. The fact that the IEA places a heavy emphasis on net zero emissions this year sends a strong signal about what member governments are thinking. Stimulating faster investment in clean energy technology, especially in demand-side elements like electrification and efficiency, represents the most climate-friendly way to mitigate volatility.
That huge $ 4 trillion figure should also be set in the context of savings since it is, after all, an investment rather than running costs. Furthermore, the shift from an energy system less oriented towards commodity flows and more towards infrastructure availability should provide a greater cushion against traditional price shocks.
On the other hand, focusing on increasing renewables is not enough in the immediate term, as it can create enough anxiety about this vital service, and they have a way of forcing their own changes, either through recession or, more relevant to renewable energy, a political reaction. Managing this means altering the very foundations of society’s energy investment options.
Today, the world subsidizes the development of clean technologies while paying much more for a reasonably constant flow of fossil fuels. We are entering a world where the benefits of renewable energy need to be priced appropriately to ultimately make subsidies unnecessary. But we must also find ways to value some fossil fuels for their ability to act as a backup rather than an ongoing supply.
We need to invest money in the problem. However, with such a spasm-prone system, our investment must be exceptionally well targeted.
Ricardo is a renowned author and journalist, known for his exceptional writing on top-news stories. He currently works as a writer at the 247 News Agency, where he is known for his ability to deliver breaking news and insightful analysis on the most pressing issues of the day.