Uncoordinated events across the world continue to impact global energy markets in a way that is making it difficult to intelligibly predict energy costs, which at current elevated levels are driving world economies towards a recession.
How did the world come to the current economic crisis which seems to overwhelm even the best of central bank brains across the world?
When Covid arrived in early 2020, global economies retreated into lockdowns and oil demands collapsed to a level that discouraged continued production investments by the oil industry. Climate groups on their part saw the low oil demands as a golden opportunity for the world to shift energy demands away from fossil fuels to a “new normal” of renewable energy and green technologies.
The COP26 at the end of 2021 essentially reaffirmed this strategy, with most of the governments producing policies and plans to transition from oil to low carbon energy systems.
Under intense pressure from investors and climate lobbies, the oil industry significantly reduced funding for new oil production projects, with many greenfield oil projects( like Turkana oil project) abandoned. The Organisation of Petroluem Exporting Countries on its part opted to control production to stabilise prices, which has remained the case to date.
In the meantime, the world economies were recovering from Covid pandemic, with oil demands making a surprise return faster than the anticipated energy transition. And with oil production already suppressed, supplies started running low, with prices fast rising above US$100 per barrel.
In a panic, oil dependent countries scampered for more oil which was simply not there. Sustained high oil prices fueled inflation, which slowed down economic growths with strong recessionary threats. This caught the world very unprepared.
Then, early this year Russia invaded Ukraine with the West rushing to impose economic sanctions against Russia which included boycott of Russian oil and gas imports. The boycotts have continued to disrupt global oil and gas supply chains, with energy prices around the world continuing to rise.
It is estimated that by the end of this year, about 4.0 million barrels per day of Russian oil supplies may soon be unavailable to global markets, heralding a period of sustained high oil prices and runaway inflation.
As has happened in the past, when the world firmly enters into a recession, economies slow down and oil demands diminish, and when this happens oil prices drop, further justifying reduced oil production investments.
I see industrialised economies embracing the current economic downturn as a golden opportunity to speed up investments in energy transition projects, so that when the economies recover they will have moved further away from fossil fuels.
I further see governments around the world prioritising energy-security policies and strategies that reduce future dependence on oil. Global forums will likely address climate change and energy security as twin priority subjects, with funding prioritised to support accelerated energy transition.
If anything, this would be the most positive outcome from the ongoing global energy and economic crisis. Accelerated energy transition will further permit de-weaponisation of oil in geopolitical conflicts.
Kenya being fully dependent on imported oil for most of the energy needs, is already feeling the full weight of high global oil prices with nearly every economic sector impacted.
The country will need to fast-track and incentivise investments in alternative forms of energy that make Kenya less dependent on imported oil. If anything, the current foreign exchange deficit challenge should inform Kenya to cut dependence on imported energy.
With what looks like future unavailability of foreign capital to develop new oil production, Kenya will need to wisely decide on the future of upstream oil and gas exploration and production.
Electrification of transportation and other energy uses should be supported by policies and strategies that ensure accelerated uptake.
Brave decisions will be needed to significantly get Kenya out of thermal power generation which uses imported oil. In respect of biofuels, caution should be exercised to ensure that Kenya does not blindly get into “biofuel traps” which negatively impact national food security.
Finally, I had expected the G7 forum over the weekend to delve more into the subject of the ongoing global energy insecurity which was not the case. However, it can be assumed that a reasonable fraction of future infrastructure investments planned by the group will go into sustainable energy systems.
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