Global Supply Chain Outlook: Macroeconomic Factors Impacting Energy & Industrials
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The ongoing fight against climate change has become a global matter of importance within the past few decades, leading countries around the world to negotiate how they could not only reduce their emission of greenhouse gasses but enact an energy transition to combat the crisis.
The Paris Agreement of 2015, legally binding international treaty on climate change, was meant to be just that. It established a set of guidelines to encourage global nations to reach carbon neutrality during the second half of this century. However, the means by which they accomplish this was never clearly defined. So while a sense of urgency is expressed to address the crisis by relying only on low-carbon fuels, the lack of guidelines for what constitutes an “energy transition” is seemingly blurry and ambiguous. This room for interpretation has allowed various sectors and industries to claim that they are undergoing an energy transition despite that being far from the truth.
Recent macroeconomic events, more specifically the Russia-Ukraine conflict, have dramatically hindered global supply chains and unintentionally pushed forward the energy transition. When Russia, the largest exporter of natural gas and oil to the European Union (EU), cut off their supply to the union, countries were forced to shape their immediate and future energy needs.
This sudden shift in demand for new energy resources has left analysts, investors, and industry leaders questioning: what is the current global state of the energy transition?
Phasing Out Russia Through Renewable Energy
In response to Russia cutting off supplies, the EU announced a 90% ban on Russian oil by YE22 and a complete ban on combustion vehicles by 2035. But more notably, the European Commission introduced the REPowerEU Plan – an initiative created in response to the hardships and global energy market disruption caused by Russia’s invasion of Ukraine. The Plan emphasizes the EU’s top priority to discover and secure new, diverse supplies of energy while also accelerating a roll-out of renewable energy to replace fossil fuels in homes, industry and power generation.
While the EU plans to expedite its energy transition and reduce its total reliance on Russian energy in the near future, the union’s current energy supply remains unstable. With the EU cutting its dependence on Russian natural gas, demand for natural gas power generation in the EU will most likely drop while other energy supplies increase. If the EU were to cut out their use of Russian natural gas quickly, experts believe that an increase in coal-fired power would emerge in parts of Europe, given its stability and scalability.”With the phasing out of Russian gas, we no longer have enough gas for this so-called transition phase,” said Gorm Bruun, associate professor at Aarhus University. “This means that we have to choose between investing in the immediate installation of large amounts of wind and solar energy or falling back on the other options, including coal.”
Some countries have already reinstated institutions that yield coal-fired power. In Belgium, the service life of two nuclear power reactors was extended by a decade–effectively overturning the country’s goal to no longer use nuclear generation by 2025, while Germany, one of the most impacted countries by the energy crisis, reactivated coal plants reactivated coal plants previously slated for permanent closure. The severity of the issue has forced Germany to reverse its plan to phase out all coal based electricity generation by 2038.
This trend has carried into the private sector as well. For example, Uniper, a German power company, announced that it was reinvigorating a retired liquified natural gas (LNG) import terminal to work towards lessening the country’s dependence on Russia.
While such actions by foreign countries and industry leaders have reverted to antiquated and harmful energy practices, experts do predict that it is a survival strategy for the short term. Time is needed for these nations to gain footing in the energy transition plans they’ve laid out and account for the absence of Russia’s gas and oil supply.
The Impact of Russia’s Invasion in Asia
Without Russia’s pipeline gas, Europe has begun heavily relying on LNG supplies, which has unintentionally forced competition with Asia in the availability of supply, effectively raising the prices of LNG. While some Asian countries like China and India are considering the large discounts available for Russian fossil fuels, others like Japan and South Korea appear to be moving away from the supply altogether. Most speculated that high fossil fuel prices would further the energy transition agenda in governments across Asia due to these foreign economies being powerhouse importers of energy.
“A reduction in Europe’s total gas supply could help accelerate the upscaling of renewable energy sources, provided countries uphold their climate ambitions,” said Ebbe Gøtske, a researcher at Aarhus University. “If not, we simply risk that other fossil fuels will replace gas in the interim period towards full decarbonization,”
Though, as already exhibited in Europe, the demand for renewable resources cannot be immediately met. This inability heightens anxiety over resource supply security in the short term. Inevitably, countries abroad will most likely demand fossil fuels to meet their immediate power needs and fall back on the reliance on these dirtier fuels.
The US Remains Largely Unaffected
Overall, the US has been less affected by the Ukraine-Russian conflict than other regions of the world. Only 8% of the US’s imported gas and oil came from Russia in 2021.
For most European nations, natural gas prices have incentivized a push towards more energy efficiency measures that rely less on Russian gas imports. Similarly, in the US, high gasoline prices stemming from Russia’s oil suspension have pushed forward the green agenda of manufacturing more electric vehicles as an energy security measure. Hydrogen has also become a renewable energy supply with promise for clean technologies. Industry insiders believe it has the potential to replace natural gas in hard-to-abate sectors, as well as nuclear generation.
While high gasoline prices have reenergized the government’s focus on their initial climate agenda, solving the immediate energy needs of the nation and offsetting these prices will most likely mean using fossil fuels in the short-term:
“There is a real opportunity to use this to accelerate the energy transition, but managing these short-term risks requires some decisions that probably aren’t good for the climate,” says Andy Bell, senior director for global energy security at the Atlantic Council. “There is this opportunity if the right choices are made.”
The Energy Transition and supply chain are top of mind across nearly every industry, even more so with Oil & Gas, Automotive & Manufacturing, and Aerospace & Defense. Interested in how the four perspectives–executives, analysts, experts, and journalists/regulatory bodies–are forecasting and discussing supply chains for these three industries? Download our latest report, Global Supply Chain Outlook: Macroeconomic Factors Impacting Energy & Industrials.