Will fossil fuel price volatility endanger the clean energy transition?

Two years ago, the slump in demand for energy, led by Covid-19, drove prices of fossil fuels to their lowest. Today, we are experiencing an increasing energy demand - fuelled by activities targeted at economic recovery - resulting in high prices of fossil fuels in the international market. 

There is a feeling that very high fuel prices might encourage the fossil fuel corporations to further invest in the fossil fuel industry, challenging the greening efforts of the last several decades. This could be a serious dent in the ambition to achieve net-zero emissions by 2050. 

Looking into past crises, such as the global financial crisis, Asian financial crisis etc., it was predicted that the highly likely scenario would be a rebound in energy consumption with increasing investment targeted to economic recovery, rebuilding the broken supply chains and others. 

However, this level of price volatility was perhaps not foreseen, given that the share of renewables in the global energy mix continues to rise. Apparently, the oil market has shown quite prudent management against the rising demand for fuel and thus allowing the market price to grow. 

And the price spike in gas has started to unfold due to high demand from Europe and Asia. Reportedly, competition between Asia and Europe has influenced the surge in gas prices. And then, of course, we now have the Ukraine invasion which has caused literal disarray in global energy prices.  

Altogether, the international fuel market has been extremely volatile for quite some time and has had widespread knock-on effects across different sectors of the global economy. The advocates and promoters of fossil fuels have pointed at messy energy transition as a reason behind this price volatility in the fuel market. 

To them, the fossil fuel industry remains a lucrative investment avenue and the temptation of higher prices could eventually spur huge investment in the fossil fuel industry. 

However, contrary to such observations, the high price of fossil fuels in the international market is unlikely to be sustainable for a longer period due to several reasons. Commitments on climate change mitigation by different countries would drive down demand for oil in the foreseeable future. 

Switching to electric vehicles and enhanced energy efficiency would also lower the demand for both oil and gas. Therefore, the flip side of the new investment in the fossil fuel sector, for example in oil, today, is that when the sector would ensure increasing supply, oil demand might well decline drastically. 

The investors of the fossil fuel industry, despite the temptation for a lucrative price, would certainly be cautious to assess the net benefits of new long-term investment in the fossil fuel sector in light of many uncertainties. 

On the other hand, reducing exposure to fuel price volatility has significant economic value. To the advocates of clean energy, the present crisis, linked to the price spike of fossil fuels, provides yet another call to gear up energy transition to move away from fossil fuels sooner rather than later. 

This opportunity, if taken, could deliver triple dividends, i.e., supporting different countries to make their energy systems cleaner, safeguarding them from external price shocks of fossil fuels and helping them attenuate reliance on energy import to enhance national energy security. 

We don’t have enough renewable energy-based capacity to completely rely on and in the long run, to allow fossil fuel divestment to happen. Photo: Reuters

Given the soaring price of fossil fuels, it is furthermore pragmatic to discourage wasteful energy consumption and increase energy efficiency.

Concerning demand for fossil fuels, there are two dimensions to look into. In the short term, we don't have enough renewable energy-based capacity to completely rely on, and in the long run, to allow fossil fuel divestment to happen, investment in renewable energies should be enhanced by several factors. Simultaneously, energy efficiency enhancement should be supported by suitable financing and policies. 

When we need to keep the vast majority of the remaining fossil fuels underground forever to protect the planet from irreversible damage, any plan to channel new investment to the fossil industry would only jeopardise existing efforts. 

Rather, as the 26th Conference of the Parties (COP26) concluded, we need to gradually phase out harmful fossil fuel subsidies to disincentivise fossil fuels. In the most recent high level of discussions at the COP26, politicians and negotiators acknowledged the challenges of no action on climate change and firmly committed to doing their part to contain climate change. 

But apparently, the world is falling short of what is needed to shift away from fossil fuels. For instance, the trillions of USD that were allocated by countries to recover from Covid-19 could allow them to build back better and cleaner if clean energy and infrastructures are prioritised. 

However, the caveat is that a significant part of the economic recovery packages of different countries is targeted for fossil fuels. By any measure, this is once again our failure to walk the talk.

It is also imperative to take into account that, the economic competitiveness of renewable energies compared to most fossil fuels, and the disinterest of many financial institutions to finance the fossil fuel sector, wouldn't be enough to spur a clean energy transition adequate for a net-zero emissions goal. Alongside the falling cost of renewable energies, firm commitments by the governments would be the key impetus for a rapid transition to clean energy.

To conclude, the present market crisis will be over, one day. As such, for now, governments will need to absorb the shock by designing measures, particularly for the vulnerable ones, and remain unwavering on renewable energy promotion, backed by action plans. More importantly, the measures to ease the suffering should not affect the environment for clean energy promotion. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.