Increased geopolitical fragmentation

Main economic channels through which increasing levels of geopolitical fragmentation might impact the energy system

A pronounced and sustained increase in geopolitical fragmentation in which countries become increasing self-reliant, would be likely to both slow the growth of international trade and increase countries’ focus on their energy security, with implications for the level and mix of energy demand.

Weaker international trade leading to lower GDP

 

Increased geopolitical tensions and conflicts might dampen the growth of international trade as supply chains are moved onshore or are restricted to countries and regions seen as most politically stable or aligned. 

Reduced growth in international trade would be likely to weigh on global economic growth by limiting the scope for increased specialization and competition and by slowing the rate at which new technologies and best practices are diffused globally. This drag on economic growth is likely to be concentrated in economies which are most dependent on international trade.

Increased energy security

 

In a similar vein, increased geopolitical fragmentation may also cause countries to increase the importance they attach to their energy security as they seek to reduce their dependency on imported energy and energy technologies.

This might cause countries and regions to react in three main ways:

• Placing an additional cost premium or penalty on imported energy relative to domestically produced energy.
• Developing their own supply chains or aiming for greater diversification of supply for key energy technologies, including for green technologies such as photovoltaic cells and batteries, rather than relying on international or geographically highly concentrated supply chains.
• Increasing the weight placed on improving energy efficiency, as this reduces the need for all types of energy and so further bolsters energy security.

 

Less weight on climate and sustainability

 

Increased geopolitical fragmentation might also lead some countries to place less weight on climate and sustainability goals. This partly reflects the nature of the so-called energy trilemma, as countries seek to balance the competing needs for their energy systems to provide secure, affordable, and sustainable energies. If countries placed greater priority on energy security, that must be counter-balanced by placing less combined weight on the other two dimensions.

The potential for reduced emphasis on sustainability and climate goals may be exacerbated by slower economic growth stemming from weaker net trade. That would mean countries have less wealth and resources to devote to decarbonization, and especially to higher-cost, low carbon energies and technologies such as low carbon hydrogen, SAF, and CCUS.

 

Level and mix effects

 

The impact of weaker growth in international trade and GDP is likely to affect primarily the overall level of energy demand, whereas the other channels, stemming largely from increasing energy security concerns, would mostly impact the mix of different types of energy within overall demand.