IEA's Birol warns of high prices 'locking in' new wave of fossil fuel spending

High energy costs caused in part by Russia's invasion of Ukraine should not be used to lock in a new wave of fossil fuel investments which threaten to create significant business and climate risks in the future, the head of the International Energy Agency said May 23.

Although the immediate response to the loss of Russian oil and gas to world markets should include bringing on stream spare capacity where it exists, any near-term upstream spending must be balanced with the need for higher growth in clean, renewable energy, Fatih Birol said.

Platts, S&P Global Commodity Insights, assessed Dated Brent at $113.815/b May 20, compared with $100.49/b the day before Russia invaded Ukraine Feb. 23 and $79/b at the start of the year.

"My worry is that some people may use Russia's invasion of Ukraine as an excuse for a large scale, new wave of fossil fuel investments...My worry is it will forever close the door to reach our climate targets...and it may not be a lucrative investment," Birol told the World Economic Forum in Davos.

"Even if countries do 50% of what they say [with regards to net-zero emission targets], those fossil fuels investments may be idle in the future," he said.

Noting that new oil discoveries require years to bring on stream, Birol said the world must choose between a clean energy transition and short-term energy costs. "I understand the current priority today is to fix the energy security problem...but we shouldn't forget that one of the reasons that we have such high prices is the heatwave which is a result of climate change," he said.

Investment gap?

Key oil producers Saudi Arabia and the UAE and some investment banks have warned of further upside to oil and gas prices due to a growing mismatch between the ongoing energy needs and a pull-back by many Western energy majors to invest in new upstream oil and gas projects.

Birol's comments also come two months after, US Energy Secretary Jennifer Granholm said her government is urging its oil and gas sector to maximize output immediately in response to the crisis stemming from the invasion of Ukraine.

The IEA has said that for the world to hit its climate targets by 2050, no new investments in oil and gas should be sanctioned. Under the IEA's landmark net-zero energy scenario published in May 2021, oil demand would plummet to 25 million b/d by 2050 in order to hit climate goals.

In its latest long-term world energy report published in October, however, the IEA warned of rising volatility due to depressed spending on new projects after price collapses in 2014-15 and 2020, saying current investment levels were geared toward stagnating demand. At the time it called for investment in demand-side policies such as electric vehicle adoption, efficiency and renewables.