Much of the world is facing an energy crisis with skyrocketing prices of oil, natural gas and coal—or even worse, no fuel at all.
The crisis is stirring debate over this conventional wisdom: Higher prices of oil, natural gas and coal would push our society to adopt cleaner energy resources that have otherwise been too expensive.
This is generally true, but this energy crisis is not just about higher prices. It’s about higher prices in a volatile, sudden and unpredicted way brought on by a (mostly unpredicted) pandemic.
Let’s liken it to a diet.
You could lose weight by suddenly stopping eating altogether. However, such a decision wouldn’t end well. You’d die if you stuck with it long enough. More likely, you’d eventually binge eat and counteract any weight you lost. That’s a volatile situation.
Instead, you should gradually eat fewer calories and healthier food. You should lose weight over months and years, not days and weeks.
The same goes for our energy system (except on even longer time horizons).
The global economic shutdowns caused by the pandemic last year were the equivalent of a starvation diet. Everything, including fossil-fuel production, ground to a halt.
Now, as the economy roars back, everything—including fossil-fuel production—is out of whack. We’re in the part of the analogy where we’re overeating. It’s not going well.
Several factors are driving the current energy crisis. Here’s three: the way electricity markets price energy, a more global market for natural gas and the variability of offshore wind power.
This last dynamic is one of the few direct connections between renewable energy and this current crisis (and it’s not the main factor). Our clean-energy transition has likely made this crisis worse, but it would have happened regardless because of the pandemic.
The crisis is unfolding at different intensities across the globe. It’s particularly acute in Europe, where German lawmakers are cutting a renewable-energy fee to ease the burden of higher energy bills. China and India are scrambling to handle fuel shortages and subsequent high prices.
Frans Timmermans, the European Union’s climate chief, recently said that about a fifth of the spike in energy prices on that continent are likely due to climate policies.
American households are projected to pay more for heating this winter, too, the U.S. Energy Information Administration said last week. U.S. gasoline prices are up more than a dollar from this time last year.
While it’s less bad in the U.S. than elsewhere, it’s still entering the political debate. Sen. Joe Manchin (D-W.Va.) cited the energy crisis as reason to not pursue big climate policy in ongoing congressional negotiations.
This crisis is likely to get worse before it gets better. But it eventually will get better, and prices will fall from their current highs. That’s because almost everything happening was not by policy design but by the knock-on effects of the pandemic.
Consumer sentiment about cars is a clear example of this dynamic. Car buyers make minor, short-term shifts in shopping habits to more fuel-efficient cars when gasoline prices are high. Once price-spikes ease, consumers revert to earlier choices.
“Economics and history suggest only sustained higher fuel prices would move the needle in terms of a permanent shift toward more efficient vehicles,” said Bob McNally, president of consulting firm Rapidan Energy Group. “Any sustained higher price would require taxes. But the political will to impose higher fuel taxes remains low.”
This crisis is mostly about things other than the energy transition, but the energy transition may well be the lead cause of volatility in the future if we’re not intentional about investments, the International Energy Agency said in its flagship annual report released last week.
The IEA is warning of a potential imbalance between the amount of investment going into oil and gas resources and the demand for these fuels in the future. If the demand doesn’t drop, but the investment into those resources does, that raises “the risks of higher and more volatile prices,” the IEA wrote in its report.
As recently as 2018, IEA Executive Director Fatih Birol said more investment in oil and gas was needed to fix supply and demand imbalances.
The world’s zeitgeist has changed since then: Governments, finance leaders and activists all agree the world must tackle climate change.
Last week, Birol instead implored the world to invest more in cleantech—not oil and gas—to fix the imbalance and ensure this crisis doesn’t derail the energy transition. Birol joins Timmermans, the EU climate leader, who has said similar things.