Could volatile oil markets shake up the world’s renewable energy plans? The oil and gas markets have been particularly volatile in recent weeks, with prices spiking in response to fresh production cuts from the OPEC+ cartel before dropping on recession fears. If prices rise once more, some say it could spur on the transition to renewable energy, while others claim it will encourage even more and faster drilling. Uncertainty abounds — so what exactly is going on in energy markets and what will the impact be on the green transition?

Oil markets had been set for a hot year: Less than a month ago, signs of strong post-covid growth out of China had the International Energy Agency predicting that global oil demand would hit an all-time record of nearly 102 mn barrels per day in 2023. The agency said surprise production cuts by the OPEC+ cartel in a time of high demand would lead to a supply deficit in global markets, “pushing both crude and product prices higher” and potentially piling further pressure on global inflation.

But a few weeks is a long time in the energy markets: China’s post-lockdown rebound appears to be fizzling out, the Federal Reserve’s tightening cycle threatens to slam the brakes on US growth, and US lawmakers are dangerously close to allowing the country to default on its debt — all factors that increase the chances of a global recession this year. The energy markets are responding to the gloomier outlook: Hedge funds are now almost as bearish on oil and fuel as they have been at any time in the last decade, Bloomberg reports.

All this volatility could spell trouble — with potential knock-on effects for other sectors: If the demand outlook improves or OPEC decides to make deeper cuts, investors could scramble to reverse their bearish bets, Bloomberg cites Goldman Sachs analysts as saying. That would send oil prices on a sudden rise and spur additional inflation. On the other hand, a further drop in crude prices could trigger falls in other markets including stocks, analysts told the business newswire earlier this month.

So what does this all mean for the green transition? Volatility breeds uncertainty, and with the outlook on oil prices through the end of the year so unclear, it’s hard to say what the knock-on impacts will be on the green economy. There are a few potential scenarios if energy prices start to climb again:

Higher oil prices could incentivize green investment: “All else equal in the medium term, higher prices are good for clean energy,” John Larsen, partner at research firm Rhodium Group told CNBC. The argument is that when prices are high in the wider energy market, the risk of investing in clean energy is reduced. “The higher the cost of traditional fuels, the bigger the incentive to continue the transition,” Ole Sloth Hansen, head of commodity strategy at Saxo Bank told Bloomberg.

And force governments to double down on the transition: Tighter oil and gas markets raise energy security concerns for countries who rely on imports for their energy supply, which they may look to alleviate by investing more in renewables at home and offering incentives to speed the green transition. “Renewables were already expanding quickly, but the global energy crisis has kicked them into an extraordinary new phase of even faster growth as countries seek to capitalise on their energy security benefits,” IEA Director Fatih Birol said in December, referencing the energy crunch brought on by the outbreak of war in Ukraine.

Consumers paying more at the pump may be tempted by EVs: Higher crude prices translate into higher fuel prices — and that could accelerate global demand for electric vehicles as households look to save where they can. The IEA says nearly one in five cars sold in 2023 will be electric. “If the oil producers try to push prices up, this will only accelerate the electric cars’ penetration,” Birol said last month, according to Bloomberg.

But higher prices will likely trigger more oil production in the short term: Climbing prices mean climbing profits for oil and gas firms, who may look to ramp up drilling as much as possible while markets remain hot. That can lead to a flood of supply that soon brings prices back down, CNBC notes — but the concern is that renewable energy development takes a backseat in the meantime.

And expensive energy could also make renewable projects more costly: One downside to higher oil prices is the knock on effect on inflation. Energy is a key input cost in a huge range of sectors from manufacturing to transport — meaning when fossil-fuel prices go up, so does the cost of building new renewables projects. Higher inflation also spurs central banks to raise interest rates — as we’ve seen in the US and almost everywhere else in the past year — meaning borrowing to finance renewables expansion also becomes more expensive, Bloomberg points out.

In the long term, fossil fuels are still on the way out: The eventual phase-out of fossil fuels is more or less assured — even if high prices cause a short-term spike in drilling. “You might see marginally higher oil and gas investment in shale but energy majors won’t be adjusting transition plans” in response to a potentially tighter market, says Bloomberg Intelligence Analyst Will Hares.

Energy prices can rise or fall — but the real killer is volatility: Not knowing where oil prices will go next makes it hard for investors to plan new projects, and sudden changes in price can see projects canceled, Reuters reports. “The much bigger risk for the energy transition is volatility,” one US-based energy researcher told the newswire. “It's not high prices or low prices, it's this ongoing shift.”

Your top green economy stories for the week:

  • Ministers approved green hydrogen incentives designed to boost the country’s green hydrogen sector and enhance FX inflows.
  • Egypt attracted the most FDI in the MEA region in 2022 and emerged as the second largest recipient globally thanks to planned green hydrogen projects.
  • Egypt plans to allocate 30-40% of its investments in the upcoming FY for environmental sustainability projects.
  • Green panda bonds: AfDB has agreed to provide a credit guarantee for USD 345 mn of the USD 500 mn CNY-denominated bond issuance, which will fund sustainable development projects, such as green transport, renewable energy, and energy efficiency.
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