The world is facing a new era of energy shocks, but this time, the narrative is different. The twin fossil fuel shocks of the 2020s, with Russia's invasion of Ukraine and the closure of the Strait of Hormuz, have sent ripples through the global energy landscape. However, these events are not just about supply disruptions; they are a catalyst for a much-needed transformation.
The Shock of Shocks
The closure of the Strait of Hormuz, a critical chokepoint for oil and LNG, has been an unprecedented event. It has removed a significant portion of the world's oil supply, far surpassing the shocks of the 1970s. But what makes this shock unique is its timing and context.
Scale and Duration: The 1970s crises were intense, but they were short-lived. The current shock, on the other hand, has the potential to linger, with repair works and the lingering risk premium keeping the supply disrupted for an extended period.
A Pattern Emerges: One shock is an anomaly, but two suggest a pattern. The world has become increasingly unstable, and the weapons to disrupt fossil fuel trade are more accessible than ever. This instability, coupled with the changing incentives of fossil fuel exporters like the US, leaves many import-dependent countries vulnerable.
Learning from History
The 1970s oil shocks were a wake-up call, leading to significant changes in the energy landscape. But what can we learn from that era, and how does it compare to the present?
The Power of Efficiency: In the 1970s, efficiency became a game-changer. The link between GDP growth and energy demand was broken, and energy productivity improved dramatically. This decoupling of fossil fuel demand from economic growth was a significant outcome.
The Rise of Electrification: The shocks of the 1970s also accelerated the march of electrification. Oil's dominance in power generation was challenged, and electricity demand continued to rise, even as fossil fuel demand stagnated. This trend has only intensified over the decades.
Limits and Opportunities: While the 1970s saw some progress in reducing oil's grip on transport, it was not a complete transformation. The world adapted, but the underlying issues remained. Today, we have the opportunity to go further, with electrotech offering a more comprehensive solution.
Electrotech: The Game-Changer
The key difference between the 1970s and now is the availability of electrotech solutions. Solar, wind, batteries, and EVs are not just alternatives; they are superior alternatives.
Economics: Electrotech is already cost-competitive with fossil fuels, and the war has only widened this gap. Solar plus storage is incredibly cheap, and EVs are becoming the preferred choice for many consumers. The economics of electrotech are compelling, and they are only getting better.
Scale and Speed: The vulnerable sectors today, like road transport and power generation, are massive. And the alternatives are not small players. Solar and wind have grown exponentially, and EVs are gaining traction rapidly. The speed at which these technologies can be deployed is a significant advantage.
Security and Irreversibility: Electrotech offers a level of security that fossil fuels cannot match. Once installed, these technologies are fuel-free, immune to sanctions, and have near-zero running costs. This makes the transition irreversible, as falling fossil prices will not lure consumers back.
The Future of Fossil Fuels
The twin shocks of the 2020s have the potential to accelerate the decline of fossil fuels.
Asia's Electrotech Fast-Track: Asia, which was expected to drive fossil fuel demand growth, now has the strongest incentive to transition. The continent's reliance on the Strait of Hormuz for oil supplies makes electrotech an attractive and necessary path forward.
LNG's Fate: LNG, which faces the same challenges as oil did in the 1970s, is likely to be pushed out of power generation. With a significant portion of LNG demand coming from Asia, this shift could be rapid.
Oil's Decline in Transport: The transport sector, which has been resistant to change, is now being disrupted by cheap batteries. EV sales are growing rapidly, and the momentum is spreading across Asia. This sector, which has driven oil demand for decades, is now set to drive its decline.
Shockproofing with Electrotech
The shocks of the 2020s present an opportunity to address the underlying issue of fuel dependency. Governments must prioritize:
Regulatory Reform: Sweeping away legacy rules that favor the fossil status quo is essential. Direct fossil fuel subsidies must be reduced, and taxes and levies should be restructured to favor electrification.
Electrification Over Generation: While renewables are important, the focus should be on electrifying end-use sectors like transport, heating, and industry. This shift can significantly reduce import dependency.
Lowering Electricity Costs: Making electricity more affordable relative to gas is crucial to driving change. Legacy costs and cross-subsidies should be addressed to make this possible.
Building Institutions for the Electric Age: The 1970s saw the creation of institutions to manage fossil dependency. Now, we need institutions aimed at ending it. This is a moment for bold ideas and ambitious institutional change.
The familiar playbook of drilling and subsidizing fossil fuels is no longer sufficient. The world has superior alternatives, and it's time to build forward into the electric age.
