High energy prices are the result of the energy transition, says Richard Koo.
(Photo: dpa)
Lately there has been a lot of talk about stagflation, triggered not least by the energy crisis in Europe and China. This brings to mind the stagnant growth and high inflation in the 1970s. Most of the price increases for goods and services we have seen this year have to do with temporary supply shortages.
The rise in energy prices is different. It’s because the recent focus on climate change has dramatically changed the business environment for fossil fuel producers. Financial institutions, including central banks, are being urged to reduce inflows into fossil fuel industries.
But as necessary as the transition to renewable energies may be, there is simply not enough of it right now. Investments are still required to secure fossil fuel supplies and keep economies running.
So far, investments in fossil fuels have been made with the expectation that the demand for these fuels would continue to grow. That is no longer guaranteed. Today every investment in these forms of energy has to cover its costs in a drastically shorter period of time. The growing tendency in society to view these investments as a bad thing also discourages many companies from making these investments.
These structural changes mean that supply is lagging behind demand and prices are rising rapidly. The uncomfortable truth is that a high price for fossil fuels is absolutely necessary to economically justify investing in these fuels. Otherwise their costs cannot be recouped in a short time.
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High prices for fossil fuels necessary
Such investments are still necessary to avoid energy bottlenecks while promoting investments in renewable energies. It is therefore unrealistic to expect the fundamental energy transition that the world is striving for without initially accepting high prices for fossil fuels.
You also have to be realistic about the length of this transition period. The complete replacement of fossil fuels with renewable energies will take decades. Only nuclear power is currently available to shorten the transition.
Richard Koo is Chief Economist at the Nomura Research Institute in Tokyo.
(Photo: imago images / Italy Photo Press)
These harsh realities are likely to lead to energy transition fatigue during the long and difficult transition phase. The more the economy suffers from repeated energy bottlenecks, the more so. Since such fatigue and the resulting political pressure can easily lengthen the transition period, it is important that energy bottlenecks are avoided.
It is difficult to expand the supply of something that is almost certain to be severely restricted in the near future. The only way to ensure adequate supplies of coal, gas and oil to keep the economy going in the short term and accelerate the use of renewables in the long term is to keep fossil fuel prices up now.
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