Could an Energy Crisis Drive Corporate Leaders to Clean Technology?

(SeaPRwire) –   When does an energy crisis begin to alter corporate spending and investment in clean technologies and more efficient operations? This issue has become more pressing in recent weeks as the conflict in Iran continues with no clear end in sight.

As noted in my recent writing, the crisis has brought this question to the attention of some chief executives. However, the prevailing uncertainty has mostly caused firms to reduce expenditures instead of pursuing ambitious strategies or major commitments.

This topic has been central to my discussions with leaders and analysts lately, and I have examined the relevant academic research. While a definitive answer is elusive, certain patterns are apparent.

Firstly, the more extended the crisis continues—or is expected to continue—the greater the probability that companies will start altering their investment decisions. Currently, the duration of the crisis is unclear. Based on the tangible situation, energy analysts anticipate a drawn-out crisis even under optimistic assumptions. Reserves are low, tanker logistics are disrupted, and infrastructure is impaired, with potential for further deterioration. Surprisingly to many observers, however, financial markets do not appear to be accounting for a lengthy crisis. The forward price for crude oil delivered this summer stays below $100 per barrel, while the current price is around $112.

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For executives to make major strategic investments, they typically need confidence that elevated prices will persist. Yet, even in a worst-case scenario lacking a geopolitical resolution, sustained high prices would likely trigger an economic downturn and reduced demand—a climate not conducive to significant capital investments. “A genuine, lasting shift of capital toward renewables and alternatives requires a sustained price surge,” states Bob McNally, president of Rapidan Energy Group, an energy market analysis firm. “We might see record highs… but then prices will recede again.”

Nevertheless, even in the absence of large-scale bets, the crisis could still influence corporate conduct. Insights from academic studies suggest what form this might take. An OECD review of economic literature indicates that energy shocks usually cause a short-term drop in productivity as businesses scale back activity and preserve liquidity. The medium-term outcomes, however, vary.

Companies often recover from minor energy shocks with improved productivity and energy efficiency, following investments in new technologies and methods. Major shocks, however, yield different effects: difficult market conditions constrain the resources available for investing in new solutions. This presents a difficult paradox: the more severe the energy disruption, the more challenging it becomes to secure the capital needed to tackle it.

The energy shock in Europe following Russia’s invasion of Ukraine demonstrated a similar pattern. Government policies successfully encouraged renewable energy and efficiency. Corporations entered into more power purchase agreements to secure fixed prices for renewable power. However, European Central Bank research revealed that many highly energy-intensive companies, even more efficient ones, were forced to delay investments due to the crisis.

Despite this, numerous studies confirm that energy shocks do influence long-term corporate investment patterns. When companies upgrade their facilities, these shocks highlight the importance of efficiency for new projects. One study spanning thirty years of U.S. manufacturing found that a 10% rise in energy prices resulted in new plants using 1% less energy.

In the context of global efforts to reduce carbon emissions, a 1% improvement is not revolutionary. However, the technologies available today are vastly superior to those in previous crises. Renewable energy can be implemented rapidly and at comparatively low expense. Technology-driven efficiency measures can reduce energy consumption more significantly and swiftly than ever. Furthermore, years of R&D have commercialized several transformative solutions, such as sustainable aviation fuel and advanced battery technologies, even if adoption is not yet widespread.

The overall scenario is complex. Expecting a swift, policy-free shift in corporate strategy is unrealistic. Yet, the current high cost and instability of energy add further weight to the argument for adopting new methods.

Even with these obstacles, companies that adopt a long-term view can secure a strong position. Nearly ten years ago, then-IKEA CEO Jesper Brodin initiated what grew into a $5 billion renewable energy investment program. It was a courageous move at the time; now, it protects the company from volatile energy prices. “If you wait for all the answers,” he remarks, “you could miss the opportunity entirely.”

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