One-fifth of global oil trade transits the Strait of Hormuz, a strategic risk that, given current events, has shattered supply-chain complacency in world energy markets. Similarly shattered is the illusion that the world is any less dependent on oil today than it was during the epoch-setting 1973–74 Arab oil embargo. [some emphasis, links added]
Supply-chain complexities in energy markets make forecasting a fraught business.
As one complexity expert notes, “small perturbations can produce disproportionately large effects.” When it comes to energy realities, however, the “direction of travel”—the International Energy Agency’s favored phrase—is robustly predictable.
Energy transitionists say that today’s oil crisis proves that we need to lean harder into alternative energy. But that experiment has been tried, and we know the results.
Over the past 25 years, Europe and the U.S. have spent over $10 trillion on transitionist policies. And yet, the world today uses more oil, not less. The core oil-dependency indicator—global consumption per capita—remains unchanged.
The only feature in energy domains that’s different today than on February 27, the day before the Iran conflict began, is the price of oil. No radical new non-oil technologies have emerged or are visible on the near-term horizon.
Nor are there any new transition narratives.
At a recent hearing, Senator Maria Cantwell admonished Secretary of Energy Chris Wright for cutting back on government support for alternative energy, which she claimed is “the future” for dealing with the next oil crisis.
The senator is not alone in that conviction. The current conflict has emboldened transition advocates.
For example, one enthusiast at the Institute for Energy and Financial Analysis claimed: “China’s approach to energy sector development and geopolitics has been completely validated by the Iran conflict.”
It’s no small irony that China looms as the key geopolitical risk to reliance on alternative energy.
Chinese market share in producing key materials and components in the “cleantech” global supply chain is more than double OPEC’s share of petroleum markets. Thus far, China has not significantly leveraged its near monopoly in that energy domain. Only the naïve would believe that it could never change.
While policymakers can try to shape energy markets, economic factors heavily determine the endgame.
As economists remind us, markets respond to prices in two ways, the magnitude of which depends on how high prices go and for how long. First, in the short term, consumers will respond to high prices by simply avoiding energy use.
Then, in the longer term, sustained price escalation stimulates purchases or development of technologies that are more oil-efficient or can replace oil.
The point of subsidies and mandates for alternative energy is to tilt the economic playing field in a manner that emulates high-priced oil, encouraging adoption of alternatives.
And yet, even the staggering levels of subsidies over the past two-plus decades have not meaningfully diminished global oil dependency.
Thus, energy markets in the post-Hormuz oil era will be shaped by how importing nations derisk their oil supplies, not by how much they commit to funding alternative energy sources.
The enduring reality is that enormous quantities of oil must be physically delivered to markets. Otherwise, economies grind to a halt. Oil-burning engines power over 95 percent of the transportation for all goods and services.
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