Money & Markets: Conflict hits energy prices, but engineers will have the answer

Europe is caught between the greens and the reds. We can’t have nuclear, we can’t have coal, now we are going to have to pay through the nose for oil and gas.

This is going to prove tricky for Europe, which relies so much on Russian gas and which is already suffering from a lack of supply, with prices for energy rocketing.

With Russia heading for isolation because of its Ukrainian aggression, unless some peace miracle happens there will be an energy crisis in Europe and another spurt of energy price hikes feeding into an inflationary spiral already underway.

If the current situation turns into a Cold War-style stalemate we are in for a long period of extreme energy prices.

It will, however, be engineers to the rescue. Obviously, it won’t be a quick fix, and obviously the greens will be pushed back more in the short term, and on will go the coal-powered power stations and whatever generating capacity they can get back online.

Long term it will mean hydrogen will be front and centre as replacement for gas, and nuclear will have to be back as a large part of the picture.

Certainly, there are many more wind turbines now in the offing and any source of energy that can make up for what is likely to be lost from Russia will go into overdrive.

Oil, which markets were paying people to take away during the Covid crash, is now $95 a barrel, and while this crisis stays in place is not going anywhere but up.

This will accelerate all those technologies which are meant to sort out climate change because, in the end, it is price that dictates economies and when the price of alternatives is lower or similar, then the world will switch over to them. Fundamentally, there is nothing like the abomination of war to accelerate the pace of technology.

From biplanes to jet planes to spaceships is the arc of technology when it is an acute matter of survival, and energy alternatives will be key if this conflict is unresolved. The chronic imperative of climate change will be replaced by the imperatives of conflict, and it will be down to technologists to produce those solutions.

To me it is hydrogen that seems like the perfect solution. The key is you can store it and it becomes a proxy for all the intermittent electricity generation that currently has few practical ways of being stored.

Currently, feeding wind, solar etc into the grid is an incremental process where there isn’t the will or budget to take a headlong leap into the so-called hydrogen economy that will ultimately be the future of energy.

Anything short of a miraculous outcome in Ukraine will set Europe, and thus the world, into a scramble to replace hydrocarbons, where it’s not a matter of fixing the world for our grandchildren but a dash to keep the lights on in our democracies. That shift from strategic to tactical will carve years, perhaps decades, off organic shifts in energy because with 40 per cent of Europe’s gas coming from Russia, the price of energy in itself will create the need and the economic incentives to do it.

That will be a huge upheaval but the short- to medium-term necessities will merge with the long-term ones.

All the exotic metals will be in high demand and commodities as a whole will rise in price, both notionally because of the already high levels of inflation baked in but also because of the demand for buffer stocks of commodities plus a generally heightened anxiety, which always pushes up the price of necessities.

It is sobering to think that Russia, with its 144 million people and its $12,000 GDP per head, has chosen to butt heads with a block of 780 million and a GDP per head of roughly $50,000 and, as such, 20 times the economic force, but there is generally little sense in these matters.

Nonetheless, unless something goes miraculously right, the conflict in Ukraine will turn a lot of things on their head and energy policy will undoubtably be one of them.

Europe will not let Russia use their energy security as leverage and, as such, while the short term may see the dirty technologies of hydrocarbons rear their sooty heads, the future and as soon as possible will have to rely on secure, reliable and ultimately affordable energy that won’t come from unreliable sources.

That is going to happen fast now and it will be the job of engineers and technologist to do what they do best, which is to get stuck in and morph current technology into something, faster, lighter, cheaper and all round better.