Global Energy Transition

CHINATOPIX VIA AP

Steam billows out of the cooling towers at a coal-fired power station in Nanjing in east China's Jiangsu province on Monday, Sept. 27, 2021. Global shoppers face possible shortages of smartphones and other goods ahead of Christmas after power cuts to meet government energy use targets forced Chinese factories to shut down and left some households in the dark. (

Volatility in the price of West Texas Intermediate (WTI) oil, which fluctuated in the range 0f US$80-85 per barrel during the past month, has raised the question: What has actually happened to the global energy market? World economic growth and inflation data show an improvement because of fatigue caused by the pandemic or euphoria that the pandemic will end faster than expected.

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Meanwhile, the supply side has just woken up from a long hibernation due to the pandemic. This optimism has resulted in the sharp increase in the WTI oil price, which surpassed the $80-mark on 11 Oct. 2021, the highest since 2015.

Unsmooth transition

The 26th UN Climate Change Conference (COP26) held in Glasgow, Scotland, early November 2021, confirmed the world's commitment to reach net zero emissions by implementing low-carbon policies such as further reducing the use of fossil fuels and increasing the use of renewable energy. However, there is a problem as the transition from fossil fuels to renewable energy is not running as smoothly as expected (SLAV, 2021).

This has resulted in the increase in world energy prices due to the gas crisis in Europe and coal supply shortages in China and India which also affect oil demand.

A company engaged in risk assessment, Det Norske Veritas (DNV), has estimated that the contribution of fossil fuels to global energy will decrease from 81 percent in 2020 to 54 percent in 2050. This trend has caused underinvestment in fossil fuels. At the same time, the energy demand in the world, which has so far been sluggish, has sharply increased due to the euphoria of the end of the pandemic. Consequently, there is an imbalance between demand and supply, while renewable energy has not fully prepared. This has resulted in the increase in world energy prices due to the gas crisis in Europe and coal supply shortages in China and India which also affect oil demand.

Policy implications

The impact of the world energy transition can be seen from the increase in retail prices of unsubsidized gasoline (BBM). For example, the price of RON92 gasoline has increased 11.31 percent , almost equal to the increase in WTI prices in the past nine weeks. However, the “willingness to pay” in the community remains high. The increase in mobility of people who want to find a new atmosphere outside the house is also getting higher with the relaxation of the multi-tiered public activity restrictions (PPKM). The increase in public mobility has occurred in activities related to leisure and daily activities.

SONNY TUMBELAKA/AFP

This picture taken on October 29, 2020 shows the Celukan Bawang 2 power plant in Singaraja on Indonesia's resort island of Bali. - China’s plan to fund dozens of foreign coal plants from Zimbabwe to Indonesia is set to produce more emissions than those of major developed nations, threatening global efforts to fight climate change, environmentalists have warned.

This increase in mobility has also contributed to an increase in production and consumer confidence. The manufacturing Purchasing Managers Index (PMI) sharply increased to a record high of 57.2 in October from 52.2 previously. The consumer confidence index (IKK) in September was recorded at 95.5 approaching the 100 threshold to enter the optimistic zone. However, it is not enough to compensate for the decline in the consumer confidence index during the implementation of PPKM Level 4. As a result, the growth of annual consumption in the third quarter of 2021 was only 1.03 percent, far lower than the 5.93 percent increase recorded in the past quarter. Household spending contributed 59 percent to gross domestic product (GDP) in the third quarter, which rose 3.51 percent.

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This positive growth is needed to maintain momentum in the upcoming quarters. The IKK also shows that demand for goods and services has become more balanced. The purchase index of durable goods for September was still below 100 but rose to 80.1 from 74.6, which showed a sign of economic recovery. This was reflected by the October inflation pattern in which the largest inflation contributor group was transportation, clothing and footwear, household equipment as well as eating and drinking in restaurants. Raw materials and semi-finished goods accounted for 74.2 percent of total imports. Although the overall inflation will be within the target, the impact of imported inflation from the world supply chain due to energy transitions will be more visible in the coming months.

KOMPAS/AGUS SUSANTO

Ari Kuncoro

The good news is that producers are still struggling to increase production capacity, which has been underutilized due to the pandemic, to meet the increase in demand, so that the increase in production will not immediately result in an increase in prices. Year-on-year inflation rose 1.66 percent, up slightly compared to 1.6 percent last month. The policy implication is to strengthen the domestic supply chain by maintaining the logistics and distribution system smoothly. In addition, the stability of the rupiah exchange rate at Rp 14,300 per US dollar had contributed to the low inflation. As the global situation is still uncertain, domestic macroeconomic stability is needed to maintain the country’s economic recovery.

Ari Kuncoro, Rector of the University of Indonesia

(This article was translated by Hendarsyah Tarmizi)