With the United States entering into Israel’s war with Iran over the weekend, commodity experts are anticipating that oil prices could soar to their highest since Russia’s invasion of Ukraine.
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A closure of the Strait of Hormuz, which Iran’s parliament has approved according to state media, could push crude prices – which have cooled from its 2022 highs to about US$78 – to over US$100 per barrel, according to multinational investment bank Goldman Sachs. Over a fifth of the world’s oil supply passes through the vital global trade route daily.
Despite increasing jitters in the energy market, Southeast Asia’s oil and gas players are unlikely to pivot to renewables to hedge against price volatility, said Andy Brogan, energy sector leader at EY-Parthenon, the strategy arm of Big Four accounting firm Ernst & Young.
“It may not seem like it, but prices haven’t been particularly volatile so far. Over the last decade, the majority of the years saw prices going up and down by 50 per cent at some point. So volatility in oil and liquefied natural gas (LNG) prices is kind of normal and people are used to managing that,” Brogan told Eco-Business at a recent media briefing.
Such price volatilities from short-term disruptive events are usually managed through an ecosystem of trading houses, he said. Singapore, which is Asia’s dominant commodity trading hub, is home to over 400 global traders, including the trading units of global oil majors like Shell, ExxonMobil, Saudi Aramco and PetroChina.
“We have had prices well north of US$100 a barrel for long periods of time in the last 10 years and everybody’s coped,” said Brogan. The absolute increases in oil and gas prices are unlikely to make a huge dent on the marginal rate of change, meaning short-term price swings that are expected will not fundamentally affect decisions, he added.
So while price fluctuations sometimes gets used “in a PR fashion” – as described by Brogan – as a compelling reason to shift to cleaner forms of energy, the narrative may not always make economic sense. Unless oil prices “stepped up for a material period of time into hundreds of dollars a barrel” or the price of renewables becomes competitive after accounting for the need for backup capacity to make up for intermittency issues, there will not be a rapid energy transition, he said.
On Monday, Iran responded to the US’s weekend strike on its nuclear facilities, by launching missiles at a US airbase in Qatar – which against expectation, sent oil prices dipping after energy assets were spared. So far, the markets have interpreted the sink in oil prices from the the retaliatory Iranian strike as a de-escalation, while some observers say it reflects how investors have become much more used to greater uncertainty.
Sanjeev Gupta, EY-Parthenon Asia-Pacific oil and gas leader told Eco-Business that it is seeing more industry players getting into spot trading – not just to speculate on commodity prices but to optimise the sources of energy they can switch to, so that they can minimise disruptions to their core businesses.
“Setting up a trading hub in a location like Singapore, for example, is a source of energy security,” said Gupta.
Can governments handle the volatility?
But climate and energy think tanks in the region beg to differ that shoring up trading capabilities are governments’ best bet for hedging against uncertain oil and gas prices.
“While individual trading houses may be used to creating and managing hedges for their private clients, it seems disingenuous to think that Southeast Asian governments are somehow used to managing volatility,” said Grant Hauber, strategic energy finance advisor for Asia at Institute for Energy Economics and Financial Analysis (IEEFA).
“Spending extra cash for the same commodity does not fit in any government’s fiscal playbook, particularly in those countries that still provide fossil fuel subsidies to consumers,” said Hauber.
Volatility in fossil fuel prices, such as during the 2008 global financial crisis and the Covid-19 pandemic in the wake of Russia’s invasion of Ukraine, had “nearly broken” some of the economies in the region, he said. Meanwhile, Big Oil raked in record profits in the aftermath of Ukraine-Russia conflict when energy prices soared. So did the four largest privately-held commodity traders: Vitol, Trafigura, Mercuria and Gunvor.
Current circumstances actually make it the “perfect time” to be moving towards renewables, said Hauber. Firstly, Southeast Asia solar exports – which the US has imposed trade restrictions on – can be redirected for domestic use to meet the region’s renewable targets, he suggested.
In addition, capital costs for renewable installations have “never been lower”, especially with battery storage prices rapidly declining, said Hauber.
“Unsubsidised renewable energy from solar and wind are the cheapest sources of power worldwide and remain nearly the cheapest even when firmed up with battery storage,” he added, citing investment bank Lazard’s latest report comparing power generation technologies in the US.
Southeast Asia is seeing even lower renewables prices and higher comparative gas prices compared to the US, given that the region is a major LNG importer and is on track to become a net importer of the fossil fuel by 2030.
According to Bloomberg NEF, the levelised cost of energy for new utility scale solar is already cheaper than newly built gas-fired power plants in Thailand, Philippines and Malaysia. Even after adding batteries, integrated solar systems are set to be cost competitive against new gas capacity by this year in Thailand and the Philippines, and before the end of 2028 in Malaysia.
Even though some countries are holding out that the LNG glut will lead to a drop in prices and make it more attractive to switch to from more pollutive fossil fuels like coal, Hauber does not expect this to happen until 2027, at the soonest.
“Right now, we have a real crisis… So if you are gambling that it’s all going to work out just fine and average out, I think that’s a poor gamble. A rational, balanced insurance policy for national portfolios is trying to reduce some of that exposure. It’s not an ideological thing. This is about national economic security.”
“Every megawatt of renewable energy that can be put in place now provides a natural financial hedge against fossil commodity price volatility, exchange rate fluctuations and potential inflation,” said Hauber.
While there are hedging strategies available, Hazel Illango, principal researcher at the Energy Shift Institute said that the region’s increasing reliance on fossil fuel imports exposes it to a “vicious cycle of volatility with no clear exit”.
“In a world with increasing instability, energy security should no longer be defined solely as securing steady fossil fuel imports,” she told Eco-Business.
A separate analysis by Zero Carbon Analytics last week has found that four Asian countries – China, India, Japan and South Korea – account for 75 per cent of oil and 59 per cent of LNG flows through the Strait of Hormuz.
Japan and South Korea are the most vulnerable to supply shocks, as 87 per cent and 81 per cent of their energy supplies, respectively, are sourced from fossil fuel imports.
“Solar is already cheaper than new gas-fired generation in much of Southeast Asia. If conflict in the Middle East pushes gas prices higher, that gap will only increase further,” said Murray Worthy, head of energy transition at the international non-profit.
The region will likely not need to resort to large-scale storage – which remains expensive compared to short-duration storage – either, as many countries are “working from a relatively low baseline of renewable deployment” and their grids are still capable of integrating more renewable energy to displace new gas-fired generation, said Worthy.
“Through the fallout from Russia’s attack on Ukraine to the current Israel-Iran crisis, gas markets have proven to be extremely volatile, with Asian countries often losing out to European buyers when prices rise. Therefore growing Southeast Asian nations’ renewables capacity offers lower costs and far greater stability.”
