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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is first deputy governor of the Deutsche Bundesbank
Energy markets have always been an important concern of central bankers and investors. Since the oil shocks of the 1970s and 1980s, oil and gas prices have been a recurring source of stagflationary pressure and financial instability.
The impact of the latest war in the Middle East is a reminder of why the energy transition is so crucial. The disruption in the Strait of Hormuz has demonstrated that dependence on oil and gas is not merely an environmental liability — it is also an economic and strategic vulnerability. The shock is being felt around the globe, particularly across Asia and developing economies. This needs to spur the much-needed global shift away from fossil fuels.
The good news is that the current pace of the transition is exceeding expectations despite a widespread political narrative over the past two years that “drill baby drill” is the best way to ensure affordable and reliable energy supply and to encourage growth in advanced and emerging economies.
There was an 8 per cent rise in global energy-transition investment last year, according to Bloomberg data. Investment in renewables and nuclear capacity outpaced the equivalent for fossil fuel by five to one while global sales of electric cars rose by more than 20 per cent, the IEA estimated.
This reflects structural transformation in energy production and use. Key technologies needed to displace fossil fuels are already mature, and costs have fallen dramatically. Since former president Jimmy Carter had solar panels installed on the White House roof in 1979 to advocate for alternative energy during an oil crisis, the cost of solar power has fallen by more than 99 per cent.
Governments, firms and households will need to continue to invest in alternative energy to cut dependency on imports and to reduce the costs of climate change.
Climate risks are no longer a distant threat. Storms, floods, fires, heatwaves and droughts are growing both more severe and more frequent. The implications for price stability, economic activity and a safe and sound financial system are increasingly hard to ignore.
One example of these financial risks is in the persistent gaps in insurance protection for private homes or factories against climate risk. This increases the cost of finance and strains public finances when governments act as insurers of last resort. This is not only a challenge for emerging markets and developing economies. Recent analysis by the European Insurance and Occupational Pensions Authority and the European Central Bank highlighted a significant insurance protection gap in Europe, while in Australia around one in seven households are estimated to be uninsured for their biggest asset — their home.
We have seen more and more evidence of higher demand for solar panels and electric cars globally since the start of the Middle East war, including in Africa. Further, words like “renewables” are being mentioned again at international policy meetings like the G20, at least by some countries.
But it is clear that more needs to be done, not least in Europe. Germany’s dependence on imports for its energy needs remained at 67 per cent in 2024. Spain is currently a role model for its rapid deployment of renewable energy, reducing the influence of gas on power prices. However, imports still accounted for 69 per cent of energy supply in 2024. And overall, the EU will still import over half of its energy by 2033, given historical annual rates of growth (2.7 per cent) in renewable energy supply.
From a policy perspective, the pace of the transition rests with governments, not central bankers. Governments can accelerate the shift by fostering a market environment in which demand and supply adjust to market price signals, correcting market failures and improving financing conditions for clean-energy investment.
Caution about intervening more decisively often reflects genuine trade-offs, notably around industry competitiveness. Those concerns deserve a serious response. They should not, however, become a pretext for obstructing faster progress across the rest of the economy.
It is in the interest of governments, industries and households but also central banks that the transition away from fossil fuels proceeds as smoothly and predictably as possible: disorderly adjustment and persistent policy uncertainty carry their own economic costs and financial risks.
Pretending otherwise is a choice — but an increasingly expensive one. The forces moving the world off fossil fuels need more policy certainty.
