A faster energy transition prevents global economic damage from oil and gas price shocks

New analysis by Cambridge Econometrics explores the link between energy prices and inflation, highlighting how a faster energy transition can contribute to maintaining price stability.

In light of the 2022/23 energy crisis, which significantly impacted global price levels, Cambridge Econometrics revisited the inflationary effects of an energy price shock, comparable to the one that occurred in the 1970s.

This report analyses the potential impact of the energy transition, examining its role in mitigating the effects on economy-wide inflation in the event of another oil and gas price shock in the coming decades.

Using global macroeconomic model E3ME, we simulate a potential future oil and gas prices shock, similar to those witnessed in the 1970s. This simulation compares macroeconomic outcomes between a business-as-usual scenario and a 1.5°C scenario for the years 2024 to 2040.

Our analysis shows that faster decarbonisation and increased energy efficiency within the energy system could make an important contribution to maintaining price stability, should another oil and gas price shock occur.

Key findings:

• A 1970s-scale price shock would lead to permanently higher price levels for consumers, for both energy and non-energy consumption.
• The shock has negative impacts on GDP and employment, which are more severe in the business-as-usual scenario than in the 1.5°C scenario, due to lower dependence on fossil fuels in the latter.
• A faster decarbonisation of the energy system can limit potential general price increases from oil and gas price shocks by close to half on average, at the global level.
• This also means that any permanent increases in price levels following the shock would be smaller when renewables are a greater share of energy.

Investing in renewables and energy efficiency today will help limit negative effects of oil and gas price shocks in both the short and long run and make the global economy more resilient to such shocks.