Since the end of 2019, one economic reality has stood out above almost everything else: Relying on imported fossil fuels to set macroeconomic policy and power economic activity is becoming a gamble.
During COVID-19 lockdowns in August 2020, oil prices fell from $75 to $18 per barrel. By May 2022, they had spiked to nearly $116 as global economic growth roared back amid supply chain bottlenecks. By the start of 2026, oil prices had declined to $57.50 per barrel. However, the start of the war in Iran in February fueled a price hike to $110 in late March. By mid-July, prices had dropped to less than $74.
Such swings “create an uncomfortable policy environment for central banks,” noted research from ODI Global, a London-based global affairs think tank, published in May. “Inflation shocks reduce room for monetary easing – if not necessitating outright tightening – even as growth slows.”
Fossil fuel price volatility is bound to continue. In July, U.S. President Donald Trump announced that hostilities against Iran would resume 21 days after a cease-fire deal was announced. That meant a partial, if not total, blockage of the Strait of Hormuz, through which 20% of the world’s oil is shipped.
That gives government officials and companies two options. Either continue adapting to greater oil price volatility or pursue energy self-sufficiency. ODI Global noted: “Repeated geopolitical energy shocks strengthen the economic case for the transition to diversified – particularly renewable – energy systems.”
Temporary resilience
According to a July Reuters report, the rapid drop in oil prices between March and July indicates “the world has absorbed with surprising ease the loss of over a billion barrels of oil supply.”
John Baffes, senior economist at the World Bank, told the newswire this “suggests traders viewed the disruption as serious, but manageable, reflecting confidence in today’s more resilient energy and economic systems.”
One reason for such “confidence” is the global trend toward using less fossil fuel to power the same level of economic activity. “Since the oil crisis of the 1970s, World Bank data shows that oil intensity – a measure of the role oil plays in economic activity – has fallen by more than half in most advanced economies and roughly 20% in emerging and developing countries,” reported Reuters.
Another reason is that top oil exporters, Saudi Arabia and the U.A.E., quickly rerouted shipments around the Strait of Hormuz. China, the world’s largest oil consumer, cut its consumption 20% in April, according to a Goldman Sachs report. Chinese GL Consulting estimates the reduction was 15%.
Lastly, the U.S., U.K., China and the 32 International Energy Agency member countries released portions of their strategic oil reserves for domestic consumption or export to stabilize prices.
These efforts will prove increasingly ineffective as “with long-term peace elusive and buffer reserves now drained, [the world] faces the looming risk of future price spikes,” reported Reuters. “It will be years in some cases before [GCC oil exporters] fully repair the damage to their energy infrastructure caused by Iranian attacks.”
In July, Ryan Sweet, chief global economist at Oxford Economics, told Euronews, “The rest of the year hangs on a chain of interlocking risks.” Pressure on that chain “to snap” will continue to increase until the Middle East-Iran conflict ends permanently. It is “the key domino that will determine whether other risks are amplified or dampened,” noted Sweet.
Energy policy shift
Several governments have already taken steps to reduce reliance on foreign oil, accelerating efforts toward energy self-reliance. For countries with untapped oil reserves, this means increasing investment in extraction and refining. However, oil-deprived countries or those already promoting green energy sources are increasingly relying on solar, wind, hydro and even nuclear power.
Teresa Ribera, executive vice-president of the European Commission who oversees the “clean, just and competitive [energy] transition,” said in a statement the “answer is not new dependencies, but faster electrification, renewables and efficiency. The real risk is not moving too fast on clean energy, but too slowly. The clean transition is Europe’s shield against volatility.”
In March, a report from EU-based Octopus Energy found “sales [of] heat pumps [which extract thermal energy from the air, ground and water to heat indoor areas] in the first three weeks of March increased by 51% compared to the same period the month before.”
Meanwhile, sales of hardware related to solar power generation increased 54% across the EU, with the jump driven by new adopters and existing ones increasing their dependence on solar power, Octopus Energy noted. There also was a 20% jump in EV charger sales.
“We’re seeing a massive shift as people stop just asking and start acting … families are tired of being held hostage by global fossil fuel prices,” Rebecca Dibb-Simkin, chief product and marketing officer at Octopus Energy, told Euronews in March. “By switching to solar and heat pumps, they are becoming their own power stations – locking in low costs and protecting their wallets for the long term.”
In March, weeks after oil disruptions through the Strait of Hormuz, South Korea’s President Lee Jae Myung told local media, “I think this would be a good opportunity to swiftly and extensively transition to renewable energy.”
His strategy prioritizes decentralized energy self-sufficiency within the country. “The more fundamental task is to establish the principle of local production for local consumption, where energy is consumed in the regions where it is produced.” Myung said this would happen by introducing a “differential electricity rate system where regions with lower production costs have cheaper rates and areas with higher transmission costs pay more.”
In March, India Prime Minister Narendra Modi told international media the country needs to be less dependent on imported energy, stressing its push to develop renewable energy stations and EVs, Bloomberg reported.
According to the Council on Foreign Relations, a U.S. think tank, “Indonesia, Malaysia, the Philippines, Thailand and Vietnam are now actively pursuing atomic energy. If current plans hold, nearly half [of Southeast Asia] could have nuclear capacity by the 2030s.”
Meanwhile, a report from the International Energy Agency noted “the Middle East conflict has provided a stark wake-up call for … the Southeast Asia … energy system. Renewable capacity could nearly triple by 2035 under current policies or grow fivefold if newly announced targets are met.”
In Africa, Earth.Org, a nonprofit environmental think tank, said in April, “The Strait of Hormuz’s … indirect impact on [the continent] is reinforcing incentives for diversification and deeper regional cooperation. African states are increasingly pursuing mutually reinforcing strategies that reflect different but interconnected models of energy integration.”
A case in point is Morocco, which has experience in large-scale renewable energy deployment and is tapping Mauritania’s vast potential in solar, wind and mineral resources, reported Earth.Org.
New world
The ongoing acceleration in green energy development differs from pre-2020 efforts in that it is now driven not by environmental protection, but by the urgent need to adapt to a new geopolitical reality.
“For much of the post-Cold War era [which started in the early 1990s], markets treated geopolitical shocks as temporary rather than regime-changing.” Since 2020, “this assumption has … been tested by the Russia–Ukraine war and U.S.-China strategic tensions,” ODI Global warned. “The Iran war is another reminder that geopolitical instability is becoming a persistent economic variable.”
For now, the oil and gas sector will remain essential, as “the immediate oil shock may indeed prove temporary,” ODI Global noted. “Lasting economic consequences [of the current shift to green energy] will emerge not over the next few weeks, but over the next several years.” At that point, ODI Global stressed, “the lasting economic impact [of current oil disruptions] will be structural rather than cyclical.”
