The 21st century has been a time of rapid evolution across all industries — from technology to healthcare, all the way to industrials. In particular is the emergence of an energy sector which is not only seeing large change, but also a myriad of complexities due to geopolitical issues and macroeconomic trends; this commodity market, which deals with electricity, heat, and gas, is an extremely interesting one and provides hope for an even brighter future.
Since 2022, energy markets have been fluctuating heavily; particularly, they have been moving in an upward direction.
This translates to higher fuel prices, increasing transportation costs, and thus, more inflation.
While this is taking money away from the ordinary citizen, it puts more money in the hands of powerful oil producers, including Saudi Arabia and Russia. These two oil-producing giants, the main leaders of the Organization of the Petroleum Exporting Countries, have been expected to cut oil supplies by a mere 1,000,000 and 300,000 barrels per day, respectively. They claim these supply cuts will stabilize and balance the oil markets; however, they are only leading to higher prices of oil. As per the International Energy Agency, the markets are going to react to price hikes unfavourably, with oil supply shortfalls and greater volatility. In fact, the second half of 2023 is expected to see a deficit of nearly 1.2 million barrels of oil per day. In Goldman Sachs’ The Markets Podcast, Goldman’s Head of Oil Research, Daan Struyven, has upgraded his stance on the price of oil, up from $93 to $100 per barrel for the next 12 months. Additionally, he writes that decreases in supply and increases in demand will likely go even higher as we approach 2024. The issue of countries holding this much power over society is currently causing a monopoly in the industry, and, as a result, leading to instabilities of the commodity.
In the winter of 2022, a similar issue occurred wherein Russia cut supply to Germany, creating an energy crisis in the region. Having been dependent on the Russians for their oil, the European Union’s decision to cut ties with Russia due to the Russian War on Ukraine led Russia to cut supply to Germany in response (which was once the Kremlin’s largest importer of energy). This meant detriments to ordinary German citizens, as inflation rose and the threat of running out of energy by the end of the winter, was an imminent danger.
The ongoing war in Ukraine, along with the escalation of the conflict in Israel, creates additional upward pressure on oil markets, since conflicts in the Middle East region tend to send oil prices spiralling. S&P Global’s Vice Chairman, Economist Daniel Howard Yergin argues “no question, there’s geopolitical risk in oil price now”, leading to further volatility in prices and a lack of control in oil.
Within this context, the news that Russia and Saudi Arabia are cutting oil supplies could ignite a new global energy crisis in the near future.
As this crisis looms, the world must ask itself: what is the future of energy?
In fact, just last year, JPMorgan Chase & Co’s. Chief Executive Officer, Jamie Dimon, says that occurrences like this are becoming, “pretty predictable”, and are actively, “likening the situation to a national security risk of war-level proportions… [and] should be treated almost as a matter of war at this point, nothing short of that.” Despite warnings like this from leading experts, the world is still facing issues relating to stable oil prices and energy security.
In order to protect itself from energy risk, Dimon believes The West must start pumping more oil of its own, creating better supply, healthier and more stabilized markets. Further, a relief from dependence on the autocratic regimes of Russia and Saudi Arabia are necessary for a better future. However, he notes that this also poses an opportunity to make a transition to a greener future. With more sustainable, alternative energy sources, especially under America’s leadership, the world would have greater security and, of course, tackle environmental concerns at the same time.
Certainly, it appears that the USA has been following the lead in the race to a clean future. With President Biden’s Infrastructure Law, $65 billion will head to the Department of Energy, which agreed on a nearly $8 billion commitment for Regional Clean Hydrogen Hubs. Funding hydrogen-producing companies which they operate will eliminate more than 25 million tons of carbon dioxide and more jobs in the energy sector, making this one of the most ambitious plays by an administration in tackling climate change. Importantly, this major play is being praised by the likes of Big Oil, including Exxon and Chevron, who are actively invested in the Gulf Coast Hydrogen Hub in Houston, Texas, receiving $1.2 billion from the administration.
While the energy sector is going through an unstable and volatile period, this instability presents an opportunity for the sector itself to change. An energy sector that is less dependent on authoritarian regimes and fossil fuels brings with it a future filled with promise and opportunity.
