Hormuz crisis underscores risks shaping energy transitions, expert says

Governments may need to absorb greater costs to strengthen energy security.

Energy transitions are shaped by market-driven changes from technological innovation and supply expansion, and policy intervention to address energy security and environmental risks, according to Ken Koyama, Senior Advisor at the Institute of Energy Economics, Japan.

The closure of the Strait of Hormuz has driven sharp increases in crude oil and other internationally traded energy prices, raising concerns over energy supply security and prompting countries to develop contingency measures, Koyama said on 20 August.

The crisis could lead to policies that reduce dependence on the Strait of Hormuz and address vulnerabilities exposed by the disruption.

“Any departure from a market-determined equilibrium necessarily entails the acceptance of additional costs,” Koyama said.

The extent of any resulting energy transition will depend on the severity and duration of the disruption, the economic capacity available to respond, and the willingness of governments, industries, and consumers to absorb higher costs, he said.

A severe disruption could strengthen policy responses and increase momentum for an energy transition. A short-lived disruption could see societies return to previous energy patterns after the immediate crisis passes.

Koyama identified technological innovation and the expansion of supply frontiers as the first major driver of energy transitions.

Technological advances can change the economics of energy options and alter supply-demand structures through market mechanisms.

The internal combustion engine, for example, supported the expansion of oil demand, whilst the development of petroleum resources enabled supply to meet that demand.

The expansion of Middle Eastern oil production after the Second World War increased oil's competitiveness and contributed to the shift from coal to oil. Japan referred to this change as the “fluid energy revolution.”

The US shale revolution offers a more recent example. Horizontal drilling and hydraulic fracturing increased US oil and natural gas production, transforming the country from one of the world's largest energy importers into the world's leading producer and exporter.

“What is particularly significant about these examples is that such dramatic developments emerged through autonomous market processes,” Koyama said.

Policy intervention forms the second major driver when market outcomes create vulnerabilities that governments seek to address.

Koyama cited dependence on Middle Eastern oil, Europe's reliance on Russian energy, dependence on individual suppliers of critical minerals, and climate risks linked to fossil fuels as examples of such externalities.

Energy-security policies after the First Oil Crisis contributed to a decline in oil's share of global primary energy consumption from its 1973 peak, with restructuring most pronounced in OECD countries, he said.

The EU also sought to reduce its dependence on Russian energy after the Ukraine crisis through initiatives including REPowerEU.

International climate policies, from the Kyoto Protocol to the Paris Agreement and carbon-neutrality targets, have also supported energy transition and decarbonisation.

Koyama said such policies respond to challenges that markets alone may not resolve.

“The world now confronting the Strait of Hormuz crisis is likely to embark upon a new set of policies designed to address and overcome the vulnerabilities revealed by this event,” he said.

The outcome will also depend on whether technological innovation continues to create more competitive energy options.

“Ultimately, the success or failure of energy transition efforts will depend on the strength, interaction, and effectiveness of these governing forces,” Koyama said.