Asia Needs $1 Trillion a Year to Avoid the Next Energy Shock

Oil and gas may be flowing through the Strait of Hormuz again, but the impacts of its months-long closure will be felt for years to come. For Asia, in particular, regulating markets and shoring up energy security to avoid the next energy shock will require trillions of dollars in the coming years as energy demand projection rates continue to rise sharply across the region.When traffic through the Iranian-controlled Strait of Hormuz stopped overnight back in February in response to a military offensive by the United States and Israel, one-fifth of the world’s oil and gas trade flowed through the vital artery. While the Strait’s closure impacted energy markets worldwide, no region was harder hit than Asia. Of the roughly 20 million barrels of oil and oil products that passed through the waterway each day before the war broke out, about 80 percent of that oil and 90 percent of natural gas were destined for Asian markets.Asian nations have been left scrambling to fill that supply gap by any means possible. Southeast Asia, in particular, was caught out in an extremely vulnerable position due to the region’s relatively high dependence on energy imports and low capacity to absorb market shocks. The fallout was swift and significant: the Philippines declared a national energy emergency in March, and governments across the region turned to energy rationing, work-from-home mandates, and even four-day work weeks to manage the strain.One result of this shock has been a solar boom in Southeast Asia, where many nations have experienced a renewable energy renaissance practically overnight. However, the development of critical supportive grid and transmission infrastructure has not kept pace, threatening the feasibility of this approach to energy security. Already, a large number of planned renewable projects have been stalled and canceled across the region due to insufficient and unreliable grid capacity.According to a recent report from Climate Home News, “inadequate grid capacity and maintenance is already proving a major factor in the region’s stuttering rollout of new clean energy projects.” The report also highlights “issues ranging from unclear power purchase agreement (PPA) structures, a failure of power policies to keep up with investor needs, permitting and licensing approval delays, grid connection constraints, limits to private sector involvement in electricity markets, and policy and tariff uncertainty.”Fixing these issues is going to require a gargantuan amount of money. A new McKinsey report published Thursday estimates that Asian nations may need to invest $1 trillion annually in energy over the next 15 years to ensure energy security across the region, as its forecast for Asia’s energy demand ticks up to a whopping 370 million terajoules by 2040. This represents a 15 percent increase from last year’s forecasts. The energy demand growth coming out of the world’s most populous continent is hard to overstate – 70 percent of the world’s energy demand growth by 2040 is supposed to come from Asia alone. A large amount of this project demand is due to come from the data centers popping up to power the artificial intelligence boom. Another significant source of demand will be from industrial activities, as well as increased cooling needs as the climate grows warmer and the region continues its breakneck economic development.While renewable expansion will continue to develop rapidly across Asia, with about $300 billion to be invested in solar and wind each year through 2040 according to McKinsey’s projections, projections for coal consumption have also been expanded and extended. “Coal is expected to remain a part of Asia's energy mix for longer than previously anticipated, with regional demand seen staying broadly flat over the next ‌decade as declining consumption in China is offset by growth in India and Southeast Asia,” reports Reuters.By Haley Zaremba for Oilprice.comMore Top Reads From Oilprice.comIndia’s BPCL to Cut Russian Oil Imports Due to Higher PricesRussian Refiners Ramp Up Diesel Output to Supply Trump DealHouthis Claim Attacks on Saudi Arabia’s East-West Oil Pipeline