Opinion: Sustainability drives the car, but energy security is now in the front seat

Joseph McMonigle, Secretary General of the International Energy Forum (IEF), argues for a more balanced approach in policymaking, focusing on three priorities to respond to the challenges of energy security and sustainability.

We are moving from one shock to another in world affairs – from the COVID pandemic to war in Europe and now the return of inflation. These shocks have profound effects on all aspects of political, economic and social life. In the energy sector, these developments hit a market that was already weakened by years of underinvestment, and was unable to adequately respond to the recovery in demand we witnessed as the pandemic-induced lock-downs eased.

In early July, the price of benchmark Brent crude oil is trading in a range around $110 per barrel amid heightened uncertainty. Analysts who once characterised the market outlook as ‘lower for longer’ today talk of ‘higher and more volatile’, although the prospect of a global recession now seems to be on everyone’s lips.

Data from the oil market consistently shows that the demand recovery has led supply, causing a tightening of conditions that now leave global crude and product inventories at nearly 380 million barrels (mb) below the five-year average. That is a large shortfall. Spare oil production capacity is low and there is great uncertainty over the prospects for Russian oil exports. The impact of Russian gas import substitution by the European Union will make an already fragile global gas balance more precarious. We will likely see more volatility and higher prices until either the Russian energy export situation normalises or recession reduces demand.

Policymakers need three priorities

So, how should policymakers respond to these unsettling challenges? While energy policy in many countries has taken a back seat to climate over the past decade, it is notable that recent events have thrust energy security back into the front seat.

I believe we will now see a more balanced approach to the energy-climate challenge, which is a welcome reality check. This new approach should be composed of three priorities.

• Upstream investment

The first may seem a little contradictory to some – because I am going to argue for increased investment in upstream oil and gas. We need to invest in the energy system we depend on today to restore market stability and avoid costly and disorderly transitions.

The transition is a long process that will proceed at different speeds in different geographies. The widespread adoption of natural gas for power generation, for example, produced large reductions in greenhouse gas emissions in Europe and North America and is expected to do the same for Asia, while many African countries look to indigenous natural gas resources as a major growth catalyst.

Pre-emptive underinvestment in the energy system is already having destabilising effects on politics and economics across the world. As we have seen recently, volatile energy markets and high prices do not help the transition – quite the opposite. As prices rise, consumers switch to dirtier and cheaper fuels. We have seen this happen in China in particular, where coal production reached a record high last year.

We need to pay more attention to managing the transition with today’s energy demand. Not just to power the world economy but to ensure that climate action and the transition continue to make progress. I say this because I am concerned that if the public starts to associate high energy prices with the transition, we are in trouble. The result will be lost public support for climate action, and it will be hard to win this back.

For a second consecutive year in 2021, upstream investments were stuck at 25% below pre-pandemic levels, according to an investment report published by the IEF in December.

We estimate that investment should increase by about 50% to $525 billion and remain at that level for 10 years to meet demand. Otherwise we are in for a prolonged energy crisis that could produce all sorts of other socioeconomic problems around the world – especially among vulnerable countries and populations.

• Clean energy R&D

The second priority is a massive scaling up of clean energy R&D. According to the 2020 IEA Technology report, half of the emissions cuts required to achieve net zero must come from technologies that do not exist today or are uneconomic. So there is currently no alternative to hydrocarbons to meet global demand.

We all agree on the need for more wind and solar, but it only gets us halfway there. We don’t yet know which new technology will get us there. This explains why we need more clean energy R&D in high-risk technologies by governments. The focus must be on carbon capture use and storage, hydrogen, nuclear fusion, and other new technologies.

• Improve energy access

The last priority area is to improve energy access. Energy poverty afflicts about 700 million people today and the gap between those with energy and those without it widened during the pandemic.

One real world example of the stark differences on the ground is that Heathrow airport consumes more energy than the entire country of Sierra Leone. Energy poverty has devastating impacts on education and health, especially for women and children. With widespread energy poverty, it is hard to see how we could achieve sustainable growth. Indeed, high energy, food and commodity prices are already acting to slow the recovery.

If there is any silver lining to today’s economic and political upheavals, it is the renewed policy focus on energy that will hopefully lead to a more balanced approach.

We at the IEF are working hard to enhance global understanding of the complex and interdependent energy systems in the hope of stabilising energy markets, boosting sustainable growth and avoiding disorderly and costly transitions.