Vladimir Putin’s bloody invasion of Ukraine will be recorded in history as one of the most significant events of this century. The human tragedy of this unprovoked war will create a turning point for all types of international affairs.
When it comes to energy, Mr. Putin’s war will undoubtedly change the future. At first it will be painful. High energy prices will force consumers to conserve and make sacrifices, and a recession is possible. Environmental setback is likely. Greenhouse-gas emissions will increase as more coal is burned to reduce reliance on Russian gas.
However, beyond the next few years, there is room for optimism. Countries will double down on strengthening their energy security and self-reliance; this will inevitably accelerate the development of clean energy.
One of the first symptoms of an energy shock is public outcry over high prices. The anger can escalate into protests. To ease the pain at the pump, governments are likely to subsidize fuel prices. Alberta and some U.S. states have already announced plans to temporarily reduce gasoline and diesel taxes to help consumers.
To ease prices, oil-importing countries that have stored oil for emergency situations will release it. Led by the United States, countries have already announced a strategic oil release. Expect greater volumes to be released over the coming months. While these actions are necessary, they can make things worse by blunting consumers’ response to high prices.
The only enduring way to ease prices in the near term is by changing consumer behaviour. Oil demand slows when enough people start to carpool, use public transportation or cancel trips. Historically, these types of actions have cut oil demand in the range of 1 per cent. But could the impact be much larger today?
The pandemic made people proficient at working from home and accustomed to travelling less. Global oil demand dropped 8 per cent in 2020 compared with the previous year – a loss that is two times larger than the expected supply outage from Russia. If people around the world took even partial pandemic measures, the energy shock could be quickly snuffed out.
Energy shocks often cause recessions. Indeed, three of the past four oil shocks have had one. High inflation now creates more stress. Costs in the United States are increasing by about 8 per cent per year (measured by the Consumer Price Index). Canada is not far behind. To fight the worst inflation in more than 40 years, central banks around the world are hiking interest rates. The combination of high energy prices, inflation and rising interest rates increases the odds of an economic slowdown.
Price spikes and disruptions bring energy security to the forefront. Russia is one of the worlds largest energy suppliers, producing more than 10 per cent of global oil and 30 per cent of Europe’s natural gas. Russia’s war has clearly shown the dangers of too much reliance on oppressive states. To reduce Russia’s leverage over them, Western countries will seek alternative sources of energy.
While it will take several years for Europe to wean itself completely off Russian gas, partial substitutions can happen relatively quickly. The EU can import more offshore liquefied natural gas (LNG), burn more coal for power generation and increase the use of its remaining nuclear power plants.
Europe’s growing appetite for LNG will create an international shortage, forcing Asia to burn more coal. Since generating electricity with coal creates about two times more emissions than with natural gas, global greenhouse-gas emissions will get worse for several years.
Longer-term efforts to increase energy security will be a major focus. Energy-importing countries will seek to secure hydrocarbon supplies from more friendly producers, including Canada, the United States, Britain, Norway and Australia. They will also prioritize the production of domestic clean energy. Locally produced green energy is inherently more energy secure. Once your renewable-power facilities are installed, no other country can turn off your wind or sun.
Expect more investment in renewable power, electric cars, efficiency, energy storage and other alternatives – including geothermal, biofuels and hydrogen. Already as a result of Russia’s invasion, the U.S. has announced a strategy for the development of fusion energy, Germany and Norway are planning a hydrogen pipeline and France is asking that people install efficient electric heat pumps.
Energy shocks create permanent changes to energy systems. Initially it will be tough and bring economic pain and environmental setbacks. Longer term, however, today’s crisis will result in positive change, accelerating the transition toward a more diverse, secure and clean energy future.
This was originally published in the Globe and Mail.