“I’m a strategist, not an epidemiologist.” Just a few years ago, making this statement in a meeting with a client would have led to a room full of confused faces. Yet, in today’s complicated and confusing world, variations of this phrase are still frequently heard in industry in reference to the dangers of trying to forecast events that lie outside the boundaries of traditional economics. , including what is happening in Russia and Ukraine.
Geopolitical crises often fall into this “unpredictable” category. The war in Ukraine shocked the world and its evolution remains very unpredictable.
beware of positioning portfolios based on an expected outcome, but there is one thing we can predict with great confidence: the war in Europe will energize the net zero agenda.
EU members depend on Russia for more than 20% of their oil and almost 40% of their natural gas, and alternative sources are not only difficult to identify quickly, but also much more expensive.
The European Commission has proposed a two-thirds cut in gas imports from Russia by the end of the year, but views on how to achieve this goal vary widely.
In the very short term, the objectives of increasing energy security and reducing carbon emissions generally do not go hand in hand. An increase in the consumption of other fossil fuels is inevitable if Member States are determined to reduce their dependence on Russian gas.
We have already seen, for example, an increase in the number of gas-to-coal conversions triggered by soaring gas prices.
The place of nuclear power in the energy transition is also revisited. France has now pledged to invest in new nuclear power plants, while other countries such as Belgium have decided to postpone the closure of their existing nuclear facilities.
One solution lies in renewable energy
However, in the longer term, policy makers know that renewable energy will ultimately be the answer.
Encouragingly, we are now seeing the ambition to increase renewable energy translated into action.
The German government has announced its intention to accelerate the implementation of its Renewable Energy Sources Act which will aim to double onshore wind capacity. In Italy, we have examples of utility providers partnering with the European Commission to increase production 15 times.
This followed a statement by the European Commission that it would do “whatever it takes” to rebuild solar manufacturing. The UK government has followed suit with the launch of its Energy Security Strategy which targets 95% of electricity generation from low-carbon sources by 2030.
Problem-solving skills from the corporate sector are also highlighted.
The war is significantly disrupting the world’s food supply given the dominant footprint of Russia and Ukraine in the production of corn, sunflower oil, wheat and fertilizer. Climate change exacerbates these disruptions as it contributes to declining crop yields and extreme weather conditions that can adversely affect food production.
However, we are now seeing exciting advances in the development of more efficient farming techniques and technologies, better waste and water management and more sustainable fertilizers.
With agriculture contributing 18% of global greenhouse gas emissions, these innovative techniques are not only needed to reduce the current pressure on global food production, they are also a key part of the net zero transition over the next decades.
History often provides a guide to how crises can accelerate change. The sharp rise in oil prices in the late 1970s caused per capita oil consumption to plummet. I believe we may be approaching a similar tipping point.
Europe’s determination to reduce its dependence on fossil fuels has never been greater, and the remaining obstacles to the deployment of renewable energy should be quickly removed. We are in the midst of an energy revolution.
Source: Our World in Data, JP Morgan Asset Management. MWh is a megawatt hour. Data as of March 31, 2022.
Hugh Gimber is a global market strategist at JP Morgan Asset Management