{"id":587180,"date":"2023-05-23T00:00:00","date_gmt":"2023-05-23T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/goinggreens\/oil-prices-are-on-a-rollercoaster-what-does-it-mean-for-the-green-transition\/"},"modified":"2023-05-23T00:00:00","modified_gmt":"2023-05-23T00:00:00","slug":"oil-prices-are-on-a-rollercoaster-what-does-it-mean-for-the-green-transition","status":"publish","type":"goinggreen","link":"https:\/\/enterpriseam.com\/egypt\/goinggreens\/oil-prices-are-on-a-rollercoaster-what-does-it-mean-for-the-green-transition\/","title":{"rendered":"Oil prices are on a rollercoaster. What does it mean for the green transition?"},"content":{"rendered":"

<\/span>Could volatile oil markets shake up the world\u2019s renewable energy plans? <\/span>The oil <\/span>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 \u2014 so what exactly is going on in energy markets and what will the impact be on the green transition? <\/span><\/p>\n

Oil markets had been set for a hot year: <\/span>Less than a month ago, signs of strong post-covid <\/span>growth out of China had the International Energy Agency predicting that global oil demand would hit an all-time record of nearly <\/span>102 mn barrels per day<\/a><\/span> 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, \u201cpushing both crude and product prices higher\u201d and potentially piling further pressure on global inflation.<\/span><\/p>\n

But a few weeks is a long time in the energy markets: <\/span>China\u2019s post-lockdown rebound <\/span>appears to be fizzling out, the Federal Reserve\u2019s 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 \u2014 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, <\/span>Bloomberg<\/a><\/span> reports. <\/span><\/p>\n

All th<\/span>is volatility could spell trouble \u2014 with potential knock-on effects for othe<\/span>r sectors: <\/span>If the demand outlook improves or <\/span>OPEC<\/span> 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, <\/span>analysts<\/a><\/span> told the business newswire earlier this month. <\/span><\/p>\n

So what does this all mean for the green transition? <\/span>Volatility breeds uncertainty, and with <\/span>the outlook on oil prices through the end of the year so unclear, it\u2019s 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:<\/span><\/p>\n

Higher oil prices could incentivize green investment: <\/span>\u201cAll else equal in the medium term, <\/span>higher prices are good for clean energy,\u201d John Larsen, partner at research firm Rhodium Group told <\/span>CNBC<\/a><\/span>. The argument is that when prices are high in the wider energy market, the risk of investing in clean energy is reduced. \u201cThe higher the cost of traditional fuels, the bigger the incentive to continue the transition,\u201d Ole Sloth Hansen, head of commodity strategy at Saxo Bank told <\/span>Bloomberg<\/a><\/span>.<\/span><\/p>\n

And force governments to double down on the transition: <\/span>Tighter oil and gas markets raise <\/span>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. \u201cRenewables 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,\u201d IEA Director Fatih Birol <\/span>said in December<\/a><\/span>, referencing the energy crunch brought on by the outbreak of war in Ukraine.<\/span><\/p>\n

Consumers paying more at the pump may be tempted by EVs: <\/span>Higher crude prices <\/span>translate into higher fuel prices \u2014 and that could accelerate global demand for electric vehicles as households look to save where they can. The IEA says <\/span>nearly one in five cars<\/a><\/span> sold in 2023 will be electric. \u201cIf the oil producers try to push prices up, this will only accelerate the electric cars\u2019 penetration,\u201d Birol said last month, according to <\/span>Bloomberg<\/a><\/span>. <\/span><\/p>\n

But higher prices will likely trigger more oil production in the short term: <\/span>Climbing pr<\/span>ices mean climbing profits for oil and gas firms, who may look to ramp up <\/span>drilling<\/a><\/span> as much as possible while markets remain hot. That can lead to a flood of supply that soon brings prices back down, CNBC notes \u2014 but the concern is that renewable energy development takes a backseat in the meantime.<\/span><\/p>\n

And expensive energy could also make renewable projects more costly: <\/span>One <\/span>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 \u2014 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 \u2014 as we\u2019ve seen in the US and almost everywhere else in the past year \u2014 meaning borrowing to finance renewables expansion also becomes more expensive, Bloomberg points out. <\/span><\/p>\n

In the long term, fossil fuels are still on the way out: <\/span>The eventual phase-out of fossil fuels is <\/span>more or less assured \u2014 even if high prices cause a short-term spike in drilling. \u201cYou might see marginally higher oil and gas investment in shale but energy majors won\u2019t be adjusting transition plans\u201d in response to a potentially tighter market, says Bloomberg Intelligence Analyst Will Hares. <\/span><\/p>\n

Energy prices can rise or fall \u2014 but the real killer is volatility: <\/span>Not knowing where oil prices <\/span>will go next makes it hard for investors to plan new projects, and sudden changes in price can see projects canceled, Reuters reports. \u201cThe much bigger risk for the energy transition is volatility,\u201d one US-based energy researcher told the newswire. \u201cIt's not high prices or low prices, it's this ongoing shift.\u201d<\/span><\/p>\n

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