Transitions can be painful. The journey towards carbon neutral or 'net zero' is now coming to bite economies across the globe — both developed and emerging.

Vladimir Putin’s offensive against Volodymyr Zelenskyy fired up crude prices to a 14-year high of $130 per barrel, even as global oil demand passed the 100-million barrels per day-mark in 2021.

The industry’s worst fear — which analysts and producers kept talking about at industry events and forums — has come true.

While the world has enough proven reserves — 47 times its annual consumption — investments in exploration have been falling. Energy producers slashed capex worth $2.2 trillion over 2014-2020 across oil, gas, coal, and metals as the ESG brigade won over both Wall Street and politicians, according to independent market analyst Lawrence McDonald.

At the FT Commodities Global Summit held last June, Christyan Malek, head of oil and gas research at JP Morgan, warned of a $600-billion shortfall in upstream investment between 2021 and 2030. At the same event, trading house Trafigura's co-head of oil trading, Ben Luckock, pointed out that over the past seven years, the world had lost two-thirds of its exploration and production budget.

A December 2021 report by the International Energy Forum (IEF) and IHS Markit concurred with the view — upstream investment in the oil and gas sector fell for a second consecutive year in 2021 to $341 billion, 23% below the pre-pandemic level of $525 billion. In 2020, investments had slumped by 30%.

Rosneft CEO Igor Sechin had said at the Eurasian Economic Forum last October that that many OPEC+ countries were unable to increase output owing to sanctions and insufficient investment, driven by growing climate concerns. "A number of OPEC+ countries cannot increase production due to unilateral sanctions, and some countries do not have sufficient investment," Sechin had warned.

The irony is that the Russian energy producer today finds itself at the receiving end of sanctions owing to the Ukranian crisis. The sanction has not only crippled the company but also delivered a body blow to BP, which has pulled the plug on its alliance with Rosneft, costing the British major $25 billion in impairment charges. That’s massive considering that Rosneft accounts for nearly half of BP's oil and gas reserves and a third of its production.

Post sanctions, both the companies will grapple with under-investment in exploration, keeping crude oil prices on the boil.

Though, for now, Brent crude oil has eased to $111 levels, following the UAE’s move to step up supplies, the days of cheap oil are not coming back anytime soon. Russia is the top exporter of crude and fuel — making up for 7% of daily global supply of 7 million barrels per day.

More importantly, the world first has to replenish what it had stored as the International Energy Agency — a club of 29 industrialised countries under the Organisation for Economic Development and Cooperation — announced that it would release 60 million barrels of oil from strategic reserves even as the U.S. Strategic Petroleum Reserve levels fell to their lowest since 2002. Though lifting of sanctions on Iran, following a deal to limit its nuclear program, will aid supply, problems at other oil producing nations, Libya and Iraq, will offset the Iranian supply.

Libya, home to one of Africa’s biggest oil reserves, is bearing the brunt of an internal conflict that has severely dented its production. Iraq is facing challenges of its own. According to Platts Analytics, by June, around 96% of the world's remaining 1.8 million barrels per day spare capacity would reside in Saudi Arabia and the U.A.E. "A thinning market buffer increases the importance of Iran nuclear talks, as well as supply risks from Russia, Libya and elsewhere," Paul Sheldon, chief geopolitical adviser, Platts Analytics, was quoted as saying.

According to the IEF-Markit report, the next two years will be critical for sanctioning and allocating capital toward new projects to ensure adequate supply over the next 5-6 years. But there is growing risk of demand-supply mismatch, added the reports, as operators are expected to favour projects with access to existing infrastructure as these require less capital, have shorter payback periods, and are more insulated from long-term demand risks.

Looks like the journey to a green future will, indeed, be a crude affair.

Follow us on Facebook, Twitter, YouTube & Instagram to never miss an update from Fortune India. To buy a copy, visit Amazon.