How does Political Instability Effect Energy Prices?

Historical Events and Current Hotspots That Shaped Energy Economics

Two recent geopolitical events have significantly affected energy prices, both involving war zones. The Russia/Ukraine war in 2022 led to a global energy crisis, as Russia is a major oil producer. Allies of Ukraine faced soaring energy costs, affecting businesses and consumers alike. Moody's reported a 33% increase in energy prices within the first 10 days of the invasion.

Similarly, the ongoing conflict in Israel continues to impact energy prices. After the assassination of a Hamas leader in Iran, Reuters reported a 3% rise in oil prices in July 2024.

Analysing the Role of OPEC on Energy Prices

Formed in 1960, the Organisation of the Petroleum Exporting Countries (OPEC) controls about 40% of the world's oil supply. Its 13 members include Iraq, Iran, Kuwait, Saudi Arabia, Venezuela, Algeria, Angola, Congo, Equatorial Guinea, Gabon, Libya, Nigeria, and the United Arab Emirates. OPEC+, which includes Russia, aims to balance and stabilise the oil market. By adjusting oil output, OPEC can influence global oil prices.

Geopolitical Risk Analysis and Management

Geopolitical events, beyond the control of energy buyers, can drastically impact energy prices. Procuring countries can take measures to mitigate these effects:

Restricting Energy

Producing countries can influence energy prices by restricting supply due to poor diplomatic relations, war, or internal conflicts. This drives up costs for importing nations.

Unaffordable Energy

Energy restrictions can make energy unaffordable for residents and businesses. Countries can counteract this by securing long-term, fixed-price energy contracts and budgeting for potential price fluctuations.

Battery Storage Requirements

Storing energy during periods of stability can help mitigate shortages caused by geopolitical issues. Renewable energy sources, supplemented with imported fossil fuels, can provide a buffer during crises.

Restriction of Components

The availability of components for renewable energy infrastructure, like solar panels, can also affect energy pricing. Restrictions on these components can force countries to rely more on external energy sources.

Attacks on Infrastructure

War and geopolitical conflicts can lead to attacks on energy infrastructure, disrupting supply and driving up prices.

Geopolitical Strategy and Energy Price Predictions

As long as countries rely on imported energy, geopolitical factors will influence energy prices. Climate change policies and the demand for renewable energy are likely to increase, with some countries needing to import renewable energy to meet demand. Continued instability in fossil fuel-producing regions will also drive up energy costs, forcing procuring countries to seek alternative sources.

Emerging markets, political instability, and geopolitical strategies will continue to shape global energy prices. Understanding these factors is crucial for navigating the complex energy landscape.

Geopolitical factors will continue to play a crucial role in shaping global energy prices. Countries that rely on imported energy must navigate a complex landscape influenced by political instability, wars, and diplomatic tensions. By investing in renewable energy, securing long-term contracts, and developing strategic reserves, nations can mitigate the impact of these disruptions. Understanding the interplay between geopolitics and energy economics is essential for preparing for future challenges and ensuring stable energy supplies.