Renewable energy investments must not flag even when oil prices fall
- Price fluctuations in a key resource like oil worry not just developing economies dependent on imported fossil fuels, but also developed economies concerned about the impact on growth
- They also affect the investments needed to fund a transition to renewable energy. It is up to regulators to maintain control even when oil prices fall to ensure consistent commitment
Energy prices have been the subject of discussions lately, as the world is ensnared by an upward trajectory in oil prices. Brent crude prices increased nearly US$20 in the three months from June to September, averaging US$94. With the recent conflict in the Middle East, prices reached as high as US$96.
This surge carries a far-reaching impact on global economies, most notably in terms of inflation, exerting sustained upward pressure on prices across various sectors. The culprits behind the climb in oil prices are none other than the giants of the energy world: primarily Saudi Arabia and Russia.
Their shrewd manipulation of oil supply has nearly breached the psychologically significant one-hundred-dollar mark, sending ripples of unease throughout the global economic landscape.
The decision by Opec and its allies to curtail supply was a strategic move aimed at bolstering a market battered by lacklustre demand. This precautionary measure was intended to arrest further downward spirals and stabilise the volatile oil market.
Adding to the mix, Saudi Arabia went the extra mile by promising a unilateral production cut of one million barrels per day from July to restore equilibrium to its budget. The Opec alliance has signalled its commitment to this strategy until at least the end of 2024, indicating that rising oil prices are here to stay for the foreseeable future.
On the other hand, Russia is increasingly concerned about domestic petrol and diesel shortages, leading to a temporary ban on exports, with only intergovernmental agreements spared. According to the Kremlin, the rationale behind this move is to address soaring energy prices within Russian borders.
However, Russia finds itself in a precarious balancing act as its export cuts dent its oil revenues, all while the Ukraine conflict continues to drain its resources; therefore, the duration for which it can maintain this policy remains uncertain.
On the other hand, on top of the intentional supply cuts, the potential impact of the Israeli attacks causes even more unease, even though the theatre of operations is not considered a major production site. Yet, supplies and transit routes can be severely harmed if Iran interferes, especially in the Strait of Hormuz. Even though this scenario is very unlikely to unfold, the fear of disruption was already sufficient to affect prices in the market.
In a world where even those wielding the power to manipulate supply, such as Russia, find themselves entangled in the consequences of their actions, ensuring access to energy at a reasonable cost becomes imperative, particularly for developing countries heavily reliant on imported fossil fuels. The repercussions of escalating energy prices ripple through these nations, affecting their current account balances and posing significant challenges to their development trajectories.
Developed countries like the United States are also grappling with the consequences. Rising oil prices can complicate the US Federal Reserve’s fight against inflation, potentially leading to more interest rate hikes.
The oil market’s unpredictability was recently exacerbated by the drop in oil prices by more than US$5 a barrel in a single day. The fear was that the higher borrowing costs caused by interest rate rises could stifle economic growth and, in turn, dampen oil demand. Consequently, the path ahead for oil prices and demand remains shrouded in uncertainty.
In this context, the “energy trilemma”, encompassing sustainability, security and affordability, comes to the fore. It forces us to re-evaluate whether continued reliance on energy imports is prudent or if we should prioritise access to domestically produced energy. As uncertainty looms, transitioning towards domestically produced renewable and non-fossil fuel sources becomes not just a choice but a necessity.
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To enable a sustainable transition, there is a need to address the factors related to the boom-and-bust cycle: high prices have historically acted as a catalyst for investment in oil and gas drilling, which eventually leads to lowered prices and increasing demand for oil.
Also, the unpredictability of price fluctuations makes it arduous to formulate coherent plans for alternative energy investments, and these abrupt shifts can doom such initiatives to failure.
A two-pronged strategy is imperative to ensure lasting impact and the success of the transition to cleaner energy. There is a need to capitalise on soaring prices and decreasing demand for oil. Regulators must be proactive and adopt strict measures at times of high prices to control investments in oil and gas drilling. Then when energy is available at low prices, they must not relax their control but continue to press on with renewable energy investments.
While the path to a clean energy future may be long and fraught with challenges, it is by no means insurmountable. It aligns with the evolving political agenda of many nations and offers a shield against unpredictable prices and supply shocks. The transition may be gradual, but it is undoubtedly necessary for a sustainable and secure global energy future in line with the “energy trilemma”.
Gökçenur Bay is a researcher at the TRT World Research Centre
