In the past decade, we have seen a rapid series of energy crises around the world, fueled by extreme weather, military conflict and supply chain snarls. The highly interconnected oil and natural gas markets are fragmenting and the transition to a low-carbon economy is accelerating. This may lead to recurring shocks.

The first was the post-pandemic inflationary surge of 2021. This was quickly followed by Russia's invasion in Ukraine in 2022, which amplified this. Four years later comes the Iran War, which has caused the largest disruption in?oil & gas supplies ever. Three such shocks in a short time span are far beyond the norm. Since World War Two, there has been an average of one "major energy" crisis per decade.

The underlying causes for the recent crises, geopolitical fragmentation and trade fragmentation, suggest that the world could face more shocks in decades to come.

FRACTURED TRADE SYSTEM

The energy markets of today are more globalized than ever. This is due to a shift of the energy demand centre in recent years away from Western economies, and towards Asia, especially China.

According to the Energy Institute's Statistical Review, global oil imports increased by 55% from 2000 to 2024, to 70 million barrels of oil per day. China's oil imports alone increased six-fold to 13,4 million barrels per day over the period. The U.S., the world's number one energy consumer, has also dramatically changed global energy flows. The U.S. has transformed from being the world's No.1 energy consumer into its top oil and natural gas producer and exporter.

U.S. Oil Exports grew more than 12 times between 2000 and 2026 to approximately 12 million bpd, or 11% of the world's market. This puts Washington in direct competition with other traditional exporting powers like the Organization of Petroleum Exporting Countries (OPEC) and Russia. The U.S.'s booming exports of LNG (liquefied natural gases) have also contributed to this globalisation, improving efficiency, stimulating growth, and strengthening the ties between importers and producers.

All of this worked for a while.

The conflict in Ukraine revealed both the strengths and weaknesses of this model. After the invasion of Russia and subsequent Western sanctions, Europe was left in a state of confusion due to its dependence on Russian energy. Europe was forced to reassess its energy security and diversification. The Iran War has also shattered another long-held assumption: that Gulf producers would never engage a conflict that would seriously hinder energy flows. Tehran's decision, to attack the Gulf neighbours energy infrastructure and block the Strait of Hormuz through which previously 20% of world oil and gas flowed, has shattered decades of tacit restraint by Middle Eastern producers. This "new norm" could be the seed for future tensions in the region. The ease with which Iran has disrupted world energy supplies raises concerns about the security at other key chokepoints, from the Red Sea and the South China Sea.

TRADE UNDER STRANGE

Trade conflicts have risen in number alongside the increase in military conflicts and undermined the efforts of post-war multilateralism to promote peace.

The tensions were heightened by President Donald Trump's decision to impose tariffs on the majority of trading partners last year. His use of America's dominance in energy as a negotiation tool increased concerns about the U.S.'s long-term reliability as a provider, and reinforced calls elsewhere for greater self-sufficiency. China's growth as an economic and industrial powerhouse has contributed to the breakdown of old trading orders and created a two-tier market for oil and gas. Beijing has openly flouted Western Sanctions - that have?expanded significantly over the last decade - by importing large quantities of oil and natural gas from Russia. Iran, and Venezuela. The Chinese government has also helped to accelerate the development of alternative payment, shipping, and trade networks, which fragment global markets.

ENERGY TRANSITION, NEW RISKS

There is also the energy transformation. After a record-breaking surge in solar installations last year, renewable power accounts for almost half of the global electricity production capacity. This shift will likely accelerate in the wake of recent crises, as reducing dependence on fossil-fuels is increasingly overlapping with government efforts to boost energy security. The European Union made this point explicit in a "plan" aimed at protecting consumers from volatile gas and oil prices.

"We need to accelerate the transition to clean, domestic energy sources." The plan will provide us with energy security and independence, as well as a better ability to weather geopolitical crises.

The transition brings with it new vulnerabilities. The reduced reliance on fossil fuels may lead to a heavy reliance on low-carbon technologies, from solar panels and battery storage, which are largely concentrated in China. This dependency is already emerging and a major source of tension between Beijing and Western governments over trade and industry.

A slowing in demand will also intensify the competition amongst major producers, including Gulf States, Russia and U.S. Energy could become a more powerful geopolitical tool.

Even if energy transition slows down climate change, it will not reverse it. Global temperatures are rising and extreme weather events - such as hurricanes, droughts and floods – are becoming more common. This is already affecting energy production, transportation and power grids. The future looks gloomy. The global energy market will be characterized by volatility, not stability. To be able to withstand future shocks countries will have to build energy systems which are flexible, diversified and most likely domestic.

You like this column? Check out Open Interest, your new essential source for global financial commentary. Follow ROI on LinkedIn and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets seven days a weeks.

(source: Reuters)