The oil shock that the world is experiencing thanks to Russia’s invasion of Ukraine could have a long-term impact on the global economy, just as the 1973 crisis did and changed the way the world looked at its energy needs.
Oil prices hit a high of $140/barrel earlier this month before falling to around $100/barrel and currently settling at around $115/barrel, easing due to economic concerns and a reduction in positions by traders due to extreme market volatility.
The 1973 crisis, which saw oil prices quadruple after Arab members of OPEC triggered an embargo on exports to the United States, Japan, and western Europe, which together accounted for more than half of global consumption in retaliation for Western support for Israel in the Yom Kippur war.
That crisis changed the way the world consumed and produced oil. Countries such as the United Kingdom set out to drill oil out of North Sea and people shifted to smaller, fuel-efficient Japanese cars even as many sought out alternative energy sources such as wind and solar. Energy security became an important political need for nations grappling with a sharp surge in oil prices that led to inflation and a shift in the ways their economies worked.
The latest crisis could lead to further long-term changes in energy markets, forcing countries to think hard about alternatives to not only manage their economies but also ensure political stability. Rising oil prices are already hitting importing nations hard, and going forward the uncertainty in oil supplies and volatile prices could see governments face more social and political unrest.
The International Energy Agency (IEA) said in a recent report that global energy markets are at a crossroads and while it was too early to know how events will unfold, there were reasons to believe that the current crisis may result in long-lasting changes to energy markets.
The current crisis comes with major challenges for energy markets, but it also offers opportunities. Indeed, the latest alignment of energy security and economic factors could well accelerate the transition away from oil. And in that, there are lessons to be learned from the past.
Hasten the shift
The world has been making a conscious shift to renewable energy for several years now and countries such as India – which imports as much as 85% of its oil needs — have taken serious steps to push solar power and electric vehicles in an effort to diversify its energy basket.
That shift should only hasten in other smaller oil-dependent economies as higher prices and uncertain supplies begin to hit home harder. It is not easy for governments to respond to the death of their citizens in oil queues, as it has happened in Sri Lanka which is in the midst of a serious economic crisis further worsened by higher pump prices.
In fact, the implications of the potential loss of oil supplies from Russia – the world’s biggest oil producer – are unthinkable at this point. But imagine a scenario when 8 million barrels/day that Russia currently exports disappear from global markets and Saudi Arabia and the UAE do not increase their output to keep prices high?
According to the IEA, Russian oil continues to flow for the time being due to term deals and trades made before Moscow sent its troops into Ukraine, but new business has all but dried up. India did buy Russian oil at heavy discounts, but buying oil from new sources also means that the refiners will have to make quick changes at their end to be able to process the crude.
Nations don’t like to dig into their reserves, and most don’t even have them, at such times knowing well that it is probably better to wait it out for as long as possible given the long-term uncertainties. And currently, there are few chances of alternative supplies being available in a hurry.
Additional supplies from Iran depend on the direction talks over a nuclear deal head to as sanctions can’t be lifted before there is an agreement. According to the IEA, outside of the OPEC+ alliance, growth will come from the US, Canada, Brazil, and Guyana, but any near-term upside potential is limited.
The supplies have to get normal before things get out of hand, pushing nations down an economic precipice. But for that, the war in Europe has to end. In the meantime, it makes sense for everybody to push hard towards reducing their dependence on oil and expand the footprint of alternative and renewable energy.
It is definitely time to accelerate the shift that is already taking place. Aim for more electric vehicles and focus on solar and wind power to re-energise economies.
(By Rahul Sharma, author and former journalist with a deep interest in geoeconomics)