Consumers are adapting fast, too. For example, in a weak market for vehicle sales generally, global EV sales have kept rising strongly in 2022, with two million vehicles sold in the first quarter—that’s up 75% from the same period in 2021 (according to the Global EV Outlook).
Further Growth in Renewable Capacity Faces Bottlenecks
European and other governments have acted promptly to bring forward their decarbonization targets and to announce new renewable projects and energy conservation measures, with the European Union’s (EU’s) REPowerEU plan a notable example. However, these ambitious programs face practical obstacles.
In theory, it should be possible to expand capacity in solar and onshore wind power, and to create a bigger role for hydrogen, relatively quickly. In practice, though, labor, supply-chain and planning issues all create bottlenecks. And to be truly clean, hydrogen must be generated from renewable sources. It may not be until the 2030s that the world has enough excess clean energy to make hydrogen a substantial contributor to the share of renewables. And while European and other governments may favor relaxing planning controls, they will likely face stiff opposition.
Costs are a further constraint, given the rising prices of metals and components. So the energy transition will be a complex journey.
Oil and Gas Still Have a Place in the Energy Mix
Replacing Russian energy will be an enormous project. Considering the practical obstacles, renewables alone can’t fill the gap over a five-year time frame.
The world currently has less than 2% spare oil capacity (according to Saudi Aramco), which could swiftly be absorbed by normalizing demand in the airline industry and/or the end of COVID-19 lockdowns in China. The crisis in Ukraine further aggravates an already tight supply position. Re-allocating existing oil and gas supplies worldwide is problematic—for instance, creating the infrastructure to transfer more US and Asian liquid natural gas throughout Europe is a multiyear project.
This leaves a continuing role for new oil and gas exploration as well as production in the interest of energy security. Meeting that need presents a dilemma for the energy industry, as companies need assurances from national governments that they will back capital expenditures in low-carbon secure projects through the term of the project life (typically 10 years). Without government endorsement, oil and gas firms are unlikely to develop the necessary assets. Politicians also face tricky decisions in terms of allocating the cost of transition among consumers.
Investors Have an Important Role, Too
Investors’ aversion to oil and gas companies has curbed these firms’ willingness to invest in upstream oil and gas and led them to divert cashflows to stock buybacks and investment in the energy transition. As a result, new oil and gas supply will likely be constrained and prices will stay higher for longer. Low-income groups, particularly in emerging economies, will be hit the hardest by this expense. Faced with a lack of energy security, affordability and availability, emerging countries, in particular, will simply burn more coal, further increasing environmental damage.
Investors willing to engage with oil and gas management teams to advocate action—rather than shunning them and divesting—can help ensure that these companies have robust energy transition plans in place. Renewables remain a fast-growing but relatively small part of the energy mix, so oil and gas companies continue to be vital for today’s economy. Investors that disregard that fact risk abdicating their responsibility to encourage progress. By actively engaging, they can play a key part in reducing the impact of the current energy crisis and ensuring an orderly evolution to clean energy worldwide.
