The economic risks of the world's heavy dependence on oil and gas have been laid bare twice in four years, first with Russia's invasion of Ukraine and now with the U.S.-Israeli war on Iran. This has undermined President Trump's flagship push to double down on fossil fuels. The reliance on these energy sources is becoming increasingly unsustainable as global economies face supply disruptions and price spikes.
The ongoing Middle East conflict has seen the closure of the vital Strait of Hormuz, through which roughly 20% of global oil and gas shipments flow, sending shockwaves through energy markets. This has led to a sharp increase in Brent crude prices, currently standing at around $90 per barrel, despite being 24% higher than their starting point since the start of the war.
The physical shortages that are rapidly developing are heaping pressure on economies worldwide, reviving fears of higher inflation, weaker industrial output, and slower growth globally. The pain has been particularly acute in Asia, which relies on the Middle East for nearly 60% of its crude oil imports. This highlights the need for governments to prioritize energy security.
The crisis is a reminder that fossil fuels, like renewables, can be unreliable and volatile, and securing domestic sources of energy is critical. This is altering the debate about the global energy system's two supposedly competing objectives: tackling climate change and ensuring access to cheap, reliable energy.
It appears that the latter may end up helping with the former. The Era of Energy Shocks has highlighted a stubborn reality: fossil fuels remain deeply embedded in the global economy. Despite record growth in renewables last year, oil and gas still account for almost 60% of global energy demand.
The Russia-Ukraine war is not the only force that has reshaped energy geopolitics over the past decade. The rise of the U.S. as the world's top oil and gas producer, powered by the shale revolution, has also had a significant impact on the energy landscape.
The Trump administration's push for 'energy dominance' has been met with skepticism from many experts, who argue that it is a 'destructive illusion'. The shift to renewables imposes unnecessary costs on consumers already strained by inflation, according to some critics. However, others see this as an opportunity to develop more domestic sources of energy.
The notion that the world can quickly switch from fossil fuels to renewables is clearly unrealistic. However, viewing the situation through the lens of energy security makes it clear that governments should look beyond fossil fuels. The push for energy security may thus end up doing what climate policy alone could not: pushing countries to move faster toward a more diversified and resilient energy system.
Governments will take notice of the global energy system's vulnerability, especially the most vulnerable economies, and will likely seek to develop more domestic sources of energy, whether they be fossil fuels or renewables. This shift in focus may ultimately lead to a more sustainable energy future.
