Our multipolar world and its myriad of geopolitical forces presents us and our clients with a vast, multidimensional array of risks. As bleak as this may sound, geopolitics and its impact on energy also offers a number of opportunities.
Poverty, unemployment and social strife
Energy price increases readily translate into increases in consumer and producer price inflation. This prompts households to cut down on spending, businesses to shut down as they cannot sell their products and services at sustainable prices, and rising unemployment levels perpetuate the vicious circle of recession and inflation.
What may be seen as healthy belt tightening in affluent countries of the Western world, can in lesser developed countries reduce access to food supplies, electricity or running water. Eroding living conditions could lead to large-scale social unrest and profound changes on the political scene, challenging international relations and shaking the world order even more then currently experienced. Energy supply has been used by countries such as Russia as a vector for power projection for many years now and is currently used as a weapon of war not only against any single country, but to challenge the global status-quo.
Assuring the security of energy supply requires rearranging existing energy production and delivery infrastructure around the world to reflect the new geopolitical reality. Whilst in the long run it may bring about much coveted decarbonization and decrease in greenhouse gas emissions, in the short and medium term this would require increased levels of production and shipping of raw materials, energy carriers, parts and equipment virtually around the globe to build the requisite infrastructure. This, in turn, means increasing the carbon footprint and global pollution, degrading the environment and accelerating the climate change processes.
An increased volatility of energy prices (and resulting volatility of virtually all price indices that are impacted by energy prices) means increased levels of business risks for all entities undertaking any kind of business activity. From oil traders through manufacturers to crop farmers, everyone can suffer or benefit from this as the maxima for both upside and downside will increase.
This development will increase the demand for risk management services and all kinds of hedging or risk transfer instruments. To some extent, this will require the assistance of modern technologies, such as artificial intelligence and big data.
Energy asset prices
If the increases in energy prices are not a temporary feature but are there to stay (which might also result from factors other than geopolitical forces), it follows that price of assets used for energy generation, transmission and distribution will increase as well to in line with cash flows, they generate until a new cost-benefit equilibrium is reached. The side effect will be increased competition for raw materials, parts, equipment, services and labour as everyone will be rushing into the energy sector to benefit from rising asset prices. This effect can already be seen to a large degree in the field of renewable power generation and storage.
The challenges of energy security in the light of global geopolitics, compounded by the demands of decarbonization to thwart adverse climate change present a vast spectrum of opportunities for innovators who can advance new technologies in energy production, delivery, storage, management and saving. Whilst the invention of a breakthrough technology that could be deployed on a large scale to change the way the entire world operates is unlikely (although not impossible), there is a lot of room for incremental advances that, given increasing energy prices, will make research and development expenditures worthwhile for successful entrepreneurs.
It is estimated that the global scale decarbonization effort requires capital expenditures worth USD 1 billion every day until 2050. This does not include the cost of responding to geopolitical challenges which, as far as energy is concerned, have been briefly outlined above. This presents a huge challenge for business, governments, financial institutions, and individuals who all form a kind of global labour force tasked with making this change happen. It also offers tremendous opportunities for growth and development, for making the world a better place, more prosperous and healthy, and one that can offer more benefits to more people.
GrECo – Making change happen
Geopolitics will still be a major factor impacting global energy markets and energy security across the world. However, if the world population manages to turn these challenges into opportunities, then increased prosperity and improved distribution of wealth across the planet could turn geopolitical forces into everyone’s favour.
As all these processes will be impacting the global risk landscape in a major, perhaps unprecedented way, the years to come will be a challenging and hopefully rewarding time for the risk management and insurance community worldwide. Our role during this time of change in the global economy and technology, prompted to a large degree by energy geopolitics and climate change, is to help make the transition process smooth and predictable to the fullest extent possible for those entrepreneurs and institutions that will be responsible for making this change happen.
Practice Leader Power & Renewables Division
T +48 507 085 066
Insurers, insurance brokers, shipowners and charterers will now be required to check the price of Russian oil cargoes on board ships they own, charter or insure.