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A war between Israel and Hamas is now spreading to the Red Sea. Following attacks by Yemeni rebels linked to Iran, the world’s biggest shipping companies and oil producers are halting vessels sailing towards the Suez Canal. Opec+ member nations have agreed to extend oil production cuts. This all sounds familiar and depressing.
When the Ever Given got stuck in the same trade artery in early 2021, at a time of stringent Opec+ restrictions, global supply chains wilted and oil prices surged, fuelling the worst global inflation for 40 years.
But this time is different. Oil and gas prices have barely budged on the recent news. Brent crude is trading a little lower than a year ago while European gas prices are down nearly 70 per cent. US and European economies are much more resilient than two years ago to this sort of disruption and the evidence suggests the gains will persist.
Opec+, the producers’ cartel dominated by Saudi Arabia and Russia, simply is not the force it once was, controlling barely half of global crude oil supply this year. Its domination of global oil supply has been undermined by large production increases in the US, Brazil and Guyana. The US, in particular, is on course to increase oil output by 1.4mn barrels a day in 2023, three times the 0.4mn b/d cut from Opec+ nations. Remember, the US is doing this while also pushing ahead with its green transition.
Progress is not limited to the supply side of energy markets. The pledge at this month’s COP summit to transition away from fossil fuels is important, but we should not fool ourselves that it will change much. It was possible to agree the wording precisely because the transition is already happening.
Solar electricity generation capacity is rising at record levels around the world and projected to accelerate, renewables prices are again dropping and these trends will be amplified if interest rates are likely to fall next year. With a continued rapid growth in the electrification of vehicles and home heating, the International Energy Agency keeps bringing forward its projected date of peak fossil fuel combustion. It now thinks this will happen before 2030.
Technology transfer is part of the increased resilience, but so is increased efficiency in energy use, particularly in Europe following last year’s natural gas price spike. These consumption reductions have mostly remained in place even as energy prices have fallen this year. Germany, for example, has consumed 15 to 20 per cent less gas this year than in the equivalent period during 2018 to 2021.
The good news is that lower demand has not come from worse global economic performance. While European forecasts for growth during 2023 have been cut back, the world economy has done a touch better than expected in the autumn of last year.
Of course, far from everything in energy markets is positive. Russia has increasingly been able to circumvent the G7’s $60 oil price cap, designed to limit funds flowing to Moscow without triggering an energy crisis. But the global fall in oil prices since September has also lowered the cost of Urals, Russia’s main oil export grade. It has fallen from a peak of more than $80 a barrel back below the $60 price cap last week.
None of this means the risk of an energy crisis has disappeared and western economies, along with China, are still vulnerable if malign states suddenly stopped the flow of oil or gas. But year by year, efficiency savings stick, the transition to renewable power intensifies, consumers do not return to fossil fuels from heat pumps or electric vehicles and the US keeps drilling and pumping to ensure Opec+ cannot hold the world to ransom.
The underlying story is positive. Peak oil is within sight and there is not much Opec+ can do about it.
chris.giles@ft.com
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