For several decades, a culture of boom and bust has embedded itself in the world of oil and gas. The industry has long searched for stability, but tackling the underlying causes of chronic commodity price fluctuations may require herculean efforts and we’re some way off finding long-term solutions.
While COVID-19 and COP26 reinforced the need for urgent action, the Russia-Ukraine war has catapulted the issue into the spotlight. Energy security, supply preparedness and diversification are now top of the agenda for political leaders everywhere. For business leaders, the decisions that are taken by governments in the coming months could have far-reaching consequences for continuity planning and long-term growth strategies.
In my conversations with clients and stakeholders from the energy sector, there’s a widespread recognition that greater collaboration across industry and government is now essential. The global health emergency created by COVID-19 led to a brief dip in prices and consumption plummeted, but it was closely followed by a surge, as restrictions eased and the world gradually returned to a degree of normalcy. We were already adjusting to the ‘new norm’ of rising commodity prices when the Russian invasion of Ukraine began, but the conflict has now significantly amplified an emerging energy crisis.
Russia is among the world’s leading exporters of hydrocarbons. With sanctions taking hold and major players in the sector divesting their interests in Russian assets, there’s a growing acceptance that the price of a barrel of oil will remain high – at least above US$80 for the foreseeable future and potentially above US$100 for months to come.
Rising supply costs play a major part in the inflationary pressures and wider cost-of-living crisis impacting businesses and individuals, as highlighted in KPMG’s recent Global Economic Outlook report, but interruptions to supplies could hasten the challenges – particularly for countries in Europe that have become increasingly dependent on Russian oil and gas supplies.
Business leaders should act now and plan for significant energy price volatility, while also factoring in resilience and contingency planning in the event of potential supply shortages. Mitigating the impact of energy supply risks is a monumental challenge for C-Suite leaders, but planning for the worst now could prove crucial if the ongoing conflict and sanctions become a long-term reality for the world. Many companies will – or should – have started planning for decarbonization and a wider international focus on the energy transition. How far you are on this journey could be crucial in understanding what lies ahead and potentially lessening the impact of increasing volatility.
For political leaders, immediate, consistent action is essential. The European Union is arguably among the most at risk from energy challenges as governments grapple with rising political pressure to take tough action on Russia, combined with the completely realistic prospect of energy rationing and supply shortages – particularly in countries like Germany and Italy that have grown dependent on eastern European supplies.
For businesses and politicians alike, the focus today should be on true diversification of energy supplies – which includes but isn’t exclusively focused on renewable energy sources – and energy security and resilience.
I recently attended the Atlantic Council’s Energy Forum in Dubai where I spoke about the need for all players in the energy challenge to reach across the aisle and work together to tackle the common threat of a climate and energy crisis. During COP26, there were some major commitments and announcements, but energy industry leaders were visibly shut out from the conversation. In November, COP27 takes place in Egypt, but all eyes are increasingly on the UAE, which hosts COP28 in November 2023. There was widespread agreement at the Energy Forum that next year’s summit could finally be a breakthrough moment, where the relevant parties come together and agree on how to balance the climate crisis with the growing energy emergency.
While it’s reassuring to see commitment for action at the next COP summits, we’re rapidly running out of time. The coming months will be crucial. For businesses and politicians alike, the focus today should be on true diversification of energy supplies – which includes but isn’t exclusively focused on renewable energy sources – and energy security and resilience. We’ve been here before. Uncertainty and interruption have become watch words within the energy sector, but now – more than ever – we need to act to tackle the chronic challenges that threaten long-term economic and political stability.
We are continuously monitoring new developments and will update our resources in response to this ever-changing situation.