This perspective is part of SEI’s “Currents 2023” project examining key global issues on the horizon. Join us for the online event on 11 January.
An energy crisis triggered by Russia’s invasion of Ukraine has hit natural gas, coal, electricity and oil markets, delivering what the International Energy Agency calls a shock of “unprecedented breadth and complexity ”. The tumult has upended the world’s energy order. As the World Energy Outlook put it: “Many of the contours of this new world are not yet fully defined, but there is no going back to the way things were.”
Surging costs of fossil fuels are a powerful incentive to hasten the transition to a greener, more sustainable energy system. For the first time, global demand for each of the world’s fossil fuels shows “a peak or plateau” across all scenarios envisioned in the World Energy Outlook.
But rising costs come with concerns for energy security, which could have other impacts – for the present and the future. The Energy Outlook 2023 by The Economist Intelligence Unit predicts that, in the coming year, coal consumption will grow to compensate for gaps in gas supplies, and investment in renewables will weaken, despite the increasing returns to renewable energy investment.
Rising costs and rising misery
Inflation in many countries has reached levels not seen for four decades, squeezing living standards at a time when the economic wounds inflicted by the pandemic linger. The World Bank says stagflation is a risk. The International Monetary Fund’s World Economic Outlook is “gloomy and more uncertain”. More than a third of the global economy is expected to contract in 2023, and the three largest economies – the US, EU and China – are likely to continue to stall; the most recent World Economic Outlook sums it up by saying, “…the worst is yet to come, and for many people 2023 will feel like a recession”.
In the winter of the Northern Hemisphere, the poor face a choice between heating and eating. In the Global South, famine is on the rise. Food prices have risen to the highest levels since the UN Food and Agriculture Office began keeping records – “a seismic hunger crisis,” the World Food Programme calls it. Spreading famine in poor, conflict-ridden countries will only make violence more likely. Meanwhile, in higher-income countries, one of seven adults now is said to be unable to afford to eat every day. In November, UN Secretary-General António Guterres warned world leaders that the world must act together to prevent “a raging food catastrophe.” Prices are soaring for the fossil fuel-intensive fertilizers on which much of the world’s crop production depends . A growing global population – 8 billion and counting – must be fed, and the world will need to produce about 70 percent more food by 2050 to feed an estimated 9 billion people, a World Bank report indicates.
Extreme weather events are also a contributing factor – giving us a glimpse of what lies ahead for food production as the climate continues to change. 2022 may have been the driest year on record, with extreme drought ongoing in Africa; a rare “triple-dip” La Nina affecting crops in Brazil and Argentina, possibly for years to come; drought and changing weather patterns affecting production of many crops and livestock in the US; and a water crisis affecting the production of rice and hydropower (and potentially upending supply chains) in China.
Faced with immediate emergencies, governments may well choose to spend time, resources and political capital on the crises of the present rather than on investments for the future. Adding to the difficulty is the rise in interest rates, which makes borrowing more costly for everything – a particular obstacle for renewable energy investments, which cost less over the long run but require much higher upfront capital costs than traditional fossil fuel-based operations .
Rising risks: the pandemic, geopolitics and supply chains
The pandemic “marked the end of a phase of global progress in poverty reduction” and it continues to wreak havoc on the global economy. Lockdown efforts to achieve “zero Covid” in China, recently said to be easing, have nonetheless impacted global supply chains and raised new questions about the risks of global sourcing strategies. The health of people worldwide is likely dragging down productivity – with extremely low vaccination rates in poor countries, questions about the effectiveness of the Chinese vaccines, and lingering poor health leading people to leave the workforce, even in high-income countries.
China plays a critical role as the world’s energy order moves in a new direction. The minerals needed for the energy transition are concentrated to a greater degree than oil and natural gas, with China an important source “across the board”, according to the International Energy Association. The country produces 80 percent of the world’s silicon, a key input in solar panels, and controls large shares of key minerals, both within its borders and through investments overseas. Supply chain issues pose risks linked to geopolitics and global trade. Indeed, at the end of 2022, lithium-ion battery pack prices were rising for the first time since Bloomberg New Energy Finance began its surveys in 2010; the survey said the 7% price increase was due to challenges “from global battery supply chain constraints causing material and component cost rises, logistics issues caused by Covid-19 and soaring inflation”.
A turning point?
The European Central Bank’s Isabel Schnabel has summed up the situation with a whole new vocabulary: “climateflation, fossilflation and greenflation”. In the face of these new “flations”, can the world find a way to turn the page? Will 2023 be a tipping point? And, if so, in which direction?
Will multiple crises lead countries to rely on more polluting sources of energy? Or will soaring costs accelerate the green transition?