How Spiking Energy Prices Complicate the Fight Against Global Warming

WASHINGTON — While world leaders have vowed to scale back the use of fossil fuels to help keep a lid on global warming, a drastic upheaval in the markets for oil, natural gas and coal could complicate the shift toward cleaner sources of energy.

Global oil prices have soared to their highest level in seven years, nearing $90 per barrel, as fears grow of a Russian invasion of Ukraine. Europe is in the grips of a severe natural gas crunch that has roiled energy markets worldwide. And global demand for coal, the dirtiest of all fossil fuels, has surged to record highs as economies bounce back from pandemic lows.

There’s a broader lesson here, energy experts said. Even as governments and businesses invest in low-carbon energy sources like wind and solar power, the world will remain deeply reliant on fossil fuels for years to come. Unless that transition is carefully managed, many countries could face volatile energy prices and other disruptions that, in turn, threaten to undermine support for policies to reduce greenhouse gas emissions.

Here are four big trends to watch.

Higher Oil Prices, More Drilling?

After the coronavirus pandemic struck in 2020, global investment in oil and gas projects declined by 30 percent and has been slow to recover. But global demand for oil has snapped back faster and is projected to reach records this year, as economies rebound. Supplies have struggled to keep up.

On top of that, recent geopolitical turmoil — including supply disruptions in Kazakhstan and fears of a Russian invasion of Ukraine — have lifted oil prices to their highest levels since 2014.

Although Western oil companies have been drilling fewer wells since the pandemic began, partly held back by investors wary of unprofitable projects, high prices could shift that calculus. On Tuesday, Exxon Mobil announced it would increase spending on new oil wells and other projects by up to 45 percent this year after reporting $23 billion in profits for 2021, its best result in seven years.

Carbon Tracker, a London-based think tank, cautioned last week that higher oil prices may lead energy companies to invest billions in new drilling projects that could undermine international efforts to fight climate change.

In the United States, rising gasoline prices — currently averaging $3.40 per gallon, a dollar higher than a year ago — have been a drag on the approval ratings of President Biden, who is struggling to persuade Congress to pass climate policies aimed at reducing fossil-fuel emissions. At the same time, the Biden administration has defended moves to issue new oil and gas permits on public lands, although those efforts have been slowed by federal courts.

But high oil prices aren’t always bad news for clean energy. They can also depress oil demand by, for example, pushing people to buy electric vehicles that don’t require gasoline. Last year, electric cars made up 20 percent of all new sales in Europe and 15 percent of new sales in China, according to BloombergNEF, a research group.

A Gas Shortage Roils Europe

In recent months, the world has struggled with spiking prices for natural gas, a fuel used in both power plants and home heating, that has caused ripple effects across the globe. Utility bills have soared from Italy to South Korea, while fertilizer plants in Britain and Germany have had to curtail operations. (Natural gas is a key ingredient in nitrogen-based fertilizer.)

The causes of the gas crunch are numerous: Global demand has rebounded faster than supply since the pandemic began; lower output from hydropower dams in China and Brazil have led to a surge of gas imports; a cold snap last spring across Europe increased demand and reduced gas inventories.

The crisis is particularly acute in Europe, where natural gas prices are now five times as high as they were a year ago. Officials are racing to procure new shipments of gas from overseas in case Russia, which provides one-third of Europe’s natural gas, curtails supplies in the event of a conflict over Ukraine.

There are also signs the gas crunch could undermine unity within the European Union over policies to fight climate change.

Officials are currently debating a sweeping new set of clean-energy measures aimed at cutting emissions by 2030. Some nations, like Spain, have called for a faster shift away from fossil fuels to reduce Europe’s exposure to gas markets. But others, like Poland, have urged a delay in stricter climate action amid the crisis.

And there’s the possibility that skyrocketing energy prices could bolster unrest akin to the “Yellow Vests” protests in 2018, which forced the French government to backtrack on plans to increase fuel taxes as a way to reduce emissions.

Coal Reaches Record Highs

Across the globe, rising natural gas prices have provided a boost to coal, which typically produces twice as much carbon dioxide as gas when burned for electricity, driving up planet-warming emissions.

Global coal consumption reached a record in 2021 and was on track to rise further in 2022, the International Energy Agency recently said. That was partly because electricity demand is surging in countries like China and India, and investment in renewable energy has not kept pace. But high natural gas prices have also spurred many electric utilities to turn to coal.

The United States is one example. Over the past decade, as advances in fracking led to a boom in domestic gas production, the country has become one of the world’s largest exporters of liquefied natural gas.

Those exports have become a key source of global supply during the latest crisis. But they have also boosted natural gas prices at home, which in turn means that some utilities are finding it economical to run their coal plants more often. Last year, U.S. coal power emissions increased 17 percent after years of falling steadily, putting the country further off course from reaching its climate goals.

“It really illustrates how much we’ve depended on cheap natural gas prices to keep coal in decline,” said Kate Larsen, a partner at the Rhodium Group, a research firm. “Overall, we still expect coal to decline further in the years ahead, but unless there are new policies put in place to clean up the power sector, the coal industry could see a bit of a lifeline if there are big swings in the gas market.”

A Bumpy Transition

In a recent essay, Fatih Birol, executive director of the International Energy Agency, argued that climate change policies were not to blame for the current global energy crisis. But, he warned, “that does not mean that the road to net zero emissions will be smooth.”

One problem, he said, is that while many countries have cut back on investments in fossil fuels like oil and gas in recent years, energy demand is still rising, and nations have not spent enough on cleaner sources like wind, solar or nuclear power to fill the gap. If the world wants to limit global warming to 1.5 degrees Celsius above preindustrial levels — a goal many leaders have endorsed to avoid the worst consequences of climate change — global investment in clean energy would need to triple from current levels by 2030.

Mr. Birol also noted that, because many countries will remain reliant on fossil fuels for years to come, they will need to take steps to prepare for market disruptions, such as improved gas storage in Europe or energy efficiency measures that can blunt the damage from rising prices. “This needs to happen quickly,” he wrote, “or global energy markets will face a turbulent and volatile period ahead.”