- Around 20% of global LNG flows and more than 1 billion barrels of crude supply have been disrupted since March, but the IEA still expects oil demand to remain relatively resilient despite lower Middle Eastern output.
- High oil and gas prices are temporarily boosting EV sales, solar demand, and coal consumption, as countries prioritize energy security and affordability during the crisis.
- Analysts argue the long-term global energy mix is unlikely to change dramatically, with oil, gas, and coal expected to regain market share once prices normalize
Roughly one-fifth of global LNG flows has been impacted by the Hormuz crisis. The cumulative losses in crude oil supply have topped 1 billion barrels since the start of March. Governments are rationing fuel and advising conservation. Some are already predicting a complete transformation of global energy consumption patterns. But these predictions are a bit premature.
Earlier this month, the International Energy Agency warned in its monthly oil report that the world’s oil supply this year will be 3.9 million barrels daily lower than it was last year. The reason is, of course, the oil flow disruption caused by the war between the United States and Israel, and Iran, which has slashed production from the Middle East by over 10 million barrels daily.
In other words, the IEA expects most of Middle Eastern production to resume well before the end of the year. Yet the IEA also issued a prediction about demand for , and that is going to decline by a lot less than 3.9 million barrels daily. More precisely, the IEA said it expected global oil consumption to shrink by 420,000 barrels daily, reflecting the resilience of demand for the most essential commodity in any economy.
Other observers and analysts are not as optimistic about the resumption of oil production and expect shortages. “You can only decrease consumption so much, and when inventories run out, they are going to run out,” Ellen Wald, senior fellow at the Atlantic Council’s Global Energy Center, told the Wall Street Journal this month. “At some point the market is going to collide and prices are going to shoot up.” And when prices shoot up, consumption goes down.
This has prompted a wave of optimism among proponents of alternative energy, who now argue that the Middle East war would add momentum to the energy transition. Indeed, sales of electric vehicles have moved higher—substantially, in the case of Europe—since February, and demand for solar is up as well but there is a twist. Not everyone is certain the trend is irreversible.
“Some people are saying this oil-price spike will do what the Paris Agreement and EV mandates haven’t,” Bob McNally, founder of Rapidan Energy Group and former White House energy adviser, told Fortune recently, “which is to convince everybody to destroy demand for gasoline. “But busts follow booms,” McNally continued. “When oil prices drop, I think demand for EVs will wane. You’re on this roller coaster of oil prices.”
Indeed, historical data would suggest that EV sales benefit from subsidies and high oil prices but the moment subsidies are reduced or removed, or oil prices move lower, appetite for electrified transport wanes. The situation is similar in wind and solar as well. India’s solar industry association just called on the government to raise the price cap on electricity prices because the current cap is too low and is affecting solar investments. The same calls have been made by wind and solar lobby groups in Europe as well, suggesting the two are not as cheap and profitable as believed. The war premium on oil and gas prices has masked this, but it is a temporary mask—and coal is erasing it.
Coal consumption has shot up arguably more than demand for wind and solar. Asian economies previously dependent on LNG for power generation have switched to coal, as one of the world’s top-three exporters, Qatar, had to suspend most exports. Global coal shipments and imports surged in March and April, and will likely continue rising this month. Shipments to South Korea, Japan, and the European Union last month surged by 27% from a year earlier, data from BIMCO, the world’s biggest shipowners’ association, showed earlier this month.
This is one more sign that the global energy system will not change so much after the war ends, whenever that may happen. In times of crisis, factors such as affordability and reliability of energy supply emerge as top priorities, while factors previously considered of the utmost importance, such as emissions reduction at any cost, take a back seat. For evidence, look no further than the European Union, which recently said it would suspend its so-called methane directive in order to keep importing LNG from the United States at prices that would not bankrupt the importers.
Once the war ends, one way or another, oil and prices are going to slump, and they will probably slump hard, which would quite quickly reverse the current demand trends in all segments of the energy system. EV sales will drop, not least because governments will be running out of subsidy money, gas will once again replace coal where the price is right, and oil consumption will rebound, proving the makeup of the energy system we have is rather difficult to transform entirely, as net-zero proponents have hoped and dreamed for years.
