Beyond the barrel: new strategies for coping with the energy crisis

No-one saw Islamabad United cruise to victory over Quetta Gladiators in the Pakistan Super League. The cricket game was played in Lahore, neither team’s home town, and with no spectators, under orders to save fuel. But as the tidal wave of lost oil washes around the world, governments, businesses and people may soon have to give up much more than cricket.

A temporary ceasefire remains shaky. Implementation will take time, peace talks over the weekend broke down, and there could still be a lengthy period of insecurity. Even in the ideal case of a swift peace deal, it will take months to restore normal logistics, restart fields and repair damaged facilities.

For now, every day that the Strait of Hormuz remains closed, the world continues to lose about 11 million barrels per day of oil supply out of about 105 million bpd of demand. Physical Brent crude prices have topped $140 per barrel and jet fuel prices exceed $200.

Also cut off are 20% of the world’s liquefied natural gas, some 40% of nitrogen-based fertiliser exports, 45% of sulphur exports, nearly 39% of helium, about 34% of methanol exports, from 9-15% of polymers, and 22% of non-Chinese aluminium production. Production of these energy-intensive commodities elsewhere will also be slashed by the loss of oil and gas feedstock.

Planning for a long crisis

The best way to make this into a short-lived crisis is to plan for a long one.

One of the key lessons from the 1970s oil crises was that much of the harm was self-inflicted. Governments’ well-intentioned efforts to cushion the shock instead delayed adjustment and worsened the economic harm. The iconic pictures of drivers queueing for petrol are because of government price controls – indeed, some of these photos date from earlier in 1973, before the October embargo.

Governments also tried various well-intentioned but economically-damaging conservation policies. Edward Heath’s administration in Britain brought in the infamous three-day working week, as a coal miners’ strike coincided with the oil shock.

This time, numerous Asian countries have introduced direct measures to cut energy consumption. Bangladesh has set air-conditioning at higher temperatures and turned off unnecessary lighting. South Korea has asked people to take shorter showers. Ethiopia has told non-essential workers to go on leave. After the Covid-era experience, work-from-home policies are a reasonable approach to cut fuel use in commuting, and cooling offices.

Direct income support

However, capping fuel prices, cutting fuel taxes, or subsidising energy bills, are expensive policies. Major consumers – India, South Korea, Australia and Vietnam – have introduced such measures or are considering them.

Better would be direct income support for lower-income people. More generally, governments should accelerate the deployment of electric vehicles. The UK, for example, could cancel its recent increases on taxes on EVs. With soaring diesel and petrol prices, battery cars are now cost-savers as well as environmentally friendly, but some people may need help to buy one.

Governments can make public transport free for a period, and run more services of buses and trains. City authorities can designate additional bike paths and try to encourage the uptake of e-bikes and electric three-wheelers (tuk-tuks or rickshaws).

Restricting exports

Another popular policy is to restrict oil exports. China has temporarily banned the export of refined products such as diesel, jet fuel and gasoline (petrol), though easing this for a few favoured Asian countries. Thailand has also suspended exports. India has introduced export taxes for oil products. South Korea has limited exports to no more than 2025 levels and banned the export of naphtha outright. Even the US might limit its shipments of crude oil, refined products or both, if rising domestic fuel prices present a political liability to President Donald Trump.

The intention here is to avoid shortages on the domestic market, and keep prices at home lower than on the international market. But such “beggar-thy-neighbour” policies are very dangerous. Countries without adequate refining capacity, such as Australia, New Zealand and Sri Lanka, could find themselves competing for a very small pool of available exports.

Impact on the refining sector

The whole refining sector would become extremely inefficient if refineries cannot export products which are in relative surplus. They would have to cut back runs, worsening the crisis.

It is not in the interests of China, for example, to undermine the minerals industries in Australia, or Congo, or Indonesia, from which it gets much of its raw materials, by cutting off their diesel supplies. The food shock will be magnified if farm machinery and irrigation pumps cannot run.

Unlike 2022 and the shock of Russia’s invasion of Ukraine, this crisis is primarily an oil rather than gas crisis. Electricity prices are, for most countries, a secondary concern this time, though still serious. For instance, Pakistan, which suffered badly from LNG cut-offs in 2022, has improved its position greatly by successfully installing some 27-33 gigawatts of solar power, mostly distributed panels.

Relying on other resources

Many Asian countries are turning back to coal for power generation, trying to restart nuclear reactors as in Japan and South Korea, and hastening renewable deployment. Indonesia, a laggard in renewable energy, now wants to build 100 gigawatts of solar power. Even Germany is rethinking its disastrous nuclear phase-out, although it will not be quick or easy to bring the six remaining reactors back to service.

But two of the big LNG users, China and India, hardly consume gas for power generation, so such policies will have limited impact. Saving gas and oil in industry through efficiency measures is key. So too are measures to encourage the wisest use of fertilisers, which are heavily and inefficiently subsidised in India.

One of the most controversial policies, at least in Europe, is encouraging more domestic oil and gas production. In most cases, additional hydrocarbon production in the short term will be small. It will reduce global energy prices only marginally.

On the other hand, it is better than importing, from the viewpoint of economy, environment and security. It will bring some tax revenues and employment to European countries that are badly short of both. It will be funded by private money, so it does not compete with government support for low-carbon energy. And if the production is small, the climate impact will likewise be small.

Speeding up the transition

But, contra the opponents of “net-zero” carbon policies, if Europe, Australia and others had not built so much renewable capacity since 2022, they would be coming into this crisis in a much worse position.

This energy crisis will dramatically accelerate the adoption of electric vehicles and renewable power. It clears away many of the arguments about the supposed greater reliability and affordability of hydrocarbons. The job of governments is to manage the inevitable short-term dislocations – which will be agonising for many – while speeding the longer-term transition.

• Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis