Reasons to hope for lower energy costs

THE Philippines, along with the rest of the world, has experienced nearly a year of elevated energy costs due to the protracted war caused by Russia’s invasion of Ukraine. Electricity costs have steadily increased over the past few months, and there have been recent increases in the prices of vehicles and cooking fuel. Surprisingly, however, despite the impact of the war — or perhaps because of it — there are indications that prices of energy-related commodities will improve significantly over the next several months and in the coming years.

The unexpectedly positive outlook comes from a number of sources, one of the most important of which is the International Energy Agency (IEA). The IEA recently published its forecasts for the energy outlook to 2050, in three different scenarios. The least optimistic of these is called the “Stated Policies Scenario,” or Steps, which includes only national or international policies that have been implemented or announced as being under development.

Under the Steps scenario, the IEA forecasts global fossil fuel demand to peak before 2030, and to reach a level lower than the IEA’s previous forecast (in 2021) between 2030 and 2050. All three primary energy commodities — oil, coal and gas — are already declining in demand, though at different rates, and for different reasons.

Another analysis by the renewable energy consultancy RMI, using the same parameters as the IEA, makes the even more optimistic case that fossil fuel demand has already peaked, and that demand and prices will begin to drop at an increasing rate this year.

Finally, a forecast for selected energy and non-energy commodities in 2023 published by the Economist Intelligence Unit last month falls somewhere between the two outlooks described above, but focuses on the shorter time frame of just 2023. The peak of demand and prices for energy commodities is definitely behind us, the EIU concludes, though they will remain somewhat elevated at their current levels and decline only slowly through the rest of the year. EIU’s forecasts for so-called soft commodities such as grains, food oils and beverages, as well as hard commodities such as rubber, metals and fibers also follow a somewhat similar trajectory, but are less optimistic than the energy outlook.

Turning back to the big three energy commodities, what is happening? All three analyses identify some common factors in the overall decline in demand. The most significant drop is in gas demand. Russia’s attempt to obtain by economic extortion what it has not been able to win on the battlefield has evidently backfired spectacularly, hastening the world’s move to alternatives to gas in two different ways.

In the developed countries, led by Europe, the reduction in Russian gas supplies has accelerated the clean energy transition, as well as encouraged some more stopgap responses, such as delaying the retirement of some coal and nuclear plants. In developing countries, the consequences of the war have slowed the shift from coal to gas as a cleaner energy option. Obviously, this is not entirely a good thing; besides the environmental implications, it slows the decline in coal demand. But for countries like the Philippines that do have a greater demand for gas, the beneficial effects of falling gas price will largely offset the other drawbacks.

The demand for oil is declining the slowest, and is actually expected to remain more or less stagnant over the next several years, but the overall demand data does not tell the whole story. Demand for oil in the form of fuel — mainly for cars — is dropping at a fairly rapid pace, and is simply being largely canceled out by elevated demand for oil for industrial and manufacturing applications. The primary reason for this is the accelerating adoption of electric vehicles; the IEA estimates they will make up 25 percent of all new vehicles sold by 2030, up from 10 percent in 2021.

Thus, even though present circumstances in terms of energy costs may be somewhat discouraging, there is relief in sight, though it may take some time for its effects to be felt. The Philippines can help to hasten the relief from high energy costs by maintaining the momentum on the energy transition, and doing more to encourage the adoption of energy-saving vehicles and equipment.