Episode Transcript
Paul: Welcome to Index Ideas from FTSE Russell. I'm Paul Amery, your podcast host. In this podcast, we look into how FTSE Russell indices are built and why. We explore index ideas that can help you address real-world investment challenges. As a reminder to listeners, you can't invest in an index, and so the concepts that we explore in the podcast are not investment advice. Any reference to potential investment strategies is intended for informational and educational purposes only.
In this episode of the FTSE Russell Index Ideas podcast, I'm delighted to welcome back Lee Clements, who is director of applied sustainable investment research at FTSE Russell. Lee and his colleagues have recently authored a paper about the energy shock that hit global markets.
To put things into context, Brent oil futures rose from $60 a barrel in January to over $122 by end April. They then fell back to $70 at the beginning of July but have since risen to over $85 again. We're recording on July the 16th, 2026. So Lee, welcome back to Index Ideas.
Lee: Thank you very much, Paul.
Paul: Lee, from a historical perspective, how significant was the recent energy shock?
Lee: Well, I think you can really describe it as unprecedented. There have been a number of energy shocks in the past, but this one was unprecedented in terms of the percentage of global oil and gas capacity that it affected, around 20 % in both cases. The total amount of oil and gas, about 20 million barrels, and some of the responses such as the size of the releases in the hundreds of millions of barrels sizes from strategic oil reserves.
And then as you were saying, this is continued, just the complexity of it, the impact it's having on logistics, the impact it's having on economies, the impact it's having on the broader energy system.
Paul: What was the overall impact then on the global demand for oil, gas and other hydrocarbons?
Lee: So it impacted, as I said, about 20% of global energy. Some of that was adjusted by rewiring the flows within the Gulf region, finding ways through Saudi Arabia, finding ways through the UAE. But what it's done is have an overall impact in terms of, first of all, demand. There's been a lot of constraint of demand, be it voluntarily as prices have gone up (and they have risen quite dramatically, as you said and been quite volatile during that period) and through government-related policies, particularly in Asia, constraining energy-intensive industries and so on. It has also caused this effective rewiring of some of the system.
So we've seen the cargoes of LNG that were bound for Europe going to Asia. We've seen coal-fired power stations restarting in some regions of Asia and the coal prices going up. And we've seen the US in particular increasing its output of oil and gas, supplying the global market.
Paul: Lee, you've mentioned rewiring of supply chains as a result of the energy shock, but is it possible to say in general terms which global regions have suffered most and which have suffered least?
Lee: Yes, so in terms of, I think suffering is an interesting word there. Certainly impacted, because in some of these regions, even within them, some have coped better. But certainly the most impacted has been Asia. The destination of both the oil and the gas from the Gulf was primarily, about 80% of it was going to the Asian region.
And they have been really impacted by it because some countries such as Pakistan get all of their oil and gas from the Gulf region, so that's had a significant impact. Countries like India have had an impact, slightly less in places like Japan but there's been a significant impact there. That's where we've seen these policies to try to dramatically reduce demand, where we've seen them turning to you know, in some cases very old coal-fired power stations to meet some of that demand there.
However, it hasn't exclusively been in Asia. This has also impacted Europe. If you look at gas prices, European gas prices have also risen dramatically. There's some other macro reasons for that. But some of the gas that was supposed to be going to Europe is going now to Asia. So that's affecting Europe.
But the caveat I would say with that is that China, which is the biggest importer of energy, biggest importer of oil from the Gulf region, has coped very well. It's seen quite a dramatic, a kind of four to five million barrels a day reduction in its oil imports. But it has coped quite well, albeit the GDP was somewhat slower in Q2. It is coping quite well. It had already wired in lot of resilience in its energy market. It doesn't use much gas for electricity generation. It has significant renewables. It's cut about two million barrels per day, or almost two million barrels per day from its transport system because of electric vehicles. So within Asia, China came out quite strongly from this.
Paul: Okay, thanks for some very interesting detail there. Lee, you mentioned the reopening of some coal-fired power stations to keep electricity grids working. Are we seeing a global short-term shift towards more oil and gas exploration and more fossil fuel usage?
Lee: Well, we've certainly seen a short-term move towards more fossil fuel usage. The question about exploration is a slightly different question and where you start to look into the longer term. But in the shorter term, in the direct reaction to the energy shock, we've seen the reintroduction of some mothballed or increasing output of existing coal-fired power stations, in places like Korea, Southeast Asia and Japan. And you can see that with the price of particularly Asian coal rising as the demand increases. And it's not just fossil fuels. You've seen things like nuclear being expanded, the output expanded, as they're trying to fill the gap in electricity generation left by gas-fired power stations that are struggling to get fuel and in places like Japan that's being helped by the gradual switch-on of nuclear power stations that have been switched off since Fukushima.
So you are seeing the short-term drive towards more fossil fuels or fossil fuels coming from a different place, for instance, getting fossil fuels going from the US to Asia, which wasn't happening so much previously. But you're also seeing a maximisation and an increase of some clean energy products as well.
So there's been quite a dramatic increase in the purchases of things like solar and electric vehicles in the short term as well. And we've started to see some of the electric vehicle manufacturers surprising on the upside in Q2 from a sudden surge in demand from sales in places like Europe and Asia.
Paul: So obviously it's important to look beyond the short-term impact of the war. What's the best way to think about longer-term effects?
Lee: Longer term, we expect there to be a movement towards more energy transition. In the short term, what we've been seeing are really stop-gap measures to provide power to the economies that are really being hit by the energy shock. But they're also those economies are seeing the issues that this energy security creates and even with some of those stop-gap, more fossil fuel measures it's significantly affecting their economies as they're trying to reduce the energy demand and cope with that. And they're also seeing somewhere like China or Spain which have made the efforts to move further along the transition they're seeing that resilience paying back for those countries and they're wanting to follow that.
And that's why we're seeing this increasing demand for energy transition products like solar, like electric vehicles. And there is strong kind of momentum in the energy transition anyway. In 2025, all of the additional electricity generation came from renewable sources and actually fossil fuel generation slightly fell.
So this is building on existing momentum. And as it becomes more of an energy security imperative, it also becomes more of an economic imperative. Fossil fuel importers pay about $2 trillion for all of the fossil fuel energy that they bring in. And that bill only increases as fossil fuel prices go up.
So they are seeing not only is this a security imperative, but if they can use things like renewable energy, things like electric vehicles, things like heat pumps, to reduce that foreign exposure and foreign risk. They can also reduce that import bill, which is particularly important given stretched government balance sheets and stretched government spending at the moment.
Paul: Lee, could you take us back briefly to the 1970s? I know you wrote about this in the paper. How did the oil price shocks of that decade affect the way we produce and use energy? And more broadly, how did the oil price shocks affect the way economies were structured at the time?
Lee: The exact reactions may be different, but this move towards transitioning and changing things in the energy system, I think, is what we are going to see. And probably the most notable first one, was that the growth in energy production, energy demand from fossil fuels, oil and gas, notably plateaued after the 1970s crisis, was growing quite strongly before but then went through a number of decades of pretty much flat demand with very little growth. And in contrast, electricity demand continued to rise quite sharply in that period.
As did technologies like nuclear see increasing demand in that period. So you could argue it's the start of that real electrification that we're seeing growing quite sharply today. One of the other things that you don't see so much in the broader energy statistics is it really created a big drive to increase energy efficiency in a number of economies. And Japan is probably the best example of that country with significant energy security issues. The 1970s led them to launch a big drive to improve energy efficiency. And over the following decade, that improved by about 40%, which is quite significant. And that not only improved their energy security, they didn't need to import as much energy to keep their economy going. It also led the economy to become more productive and more competitive as a broader economy.
And we're seeing them trying to do the same thing today with some of their energy transformation efforts. You then saw other things happening disrupting a specific industry. So the global oil and gas industry saw the start of probably one of the most disruptive things, which the US fracking industry happened in the 1970s as US oil and gas tried to move itself away from foreign dependence.
And you also saw in France the 1970s being the start of that real drive towards nuclear power generation which dominates French electricity production today. And then other industries such as autos were significantly influenced. The US CAFE standards, which really drove the improvement of automotive energy efficiency in the US, came into place in the 70s.
And also it was the start of the trend towards the importation of small Japanese automobiles into the US, which had significant effects on the Detroit auto industry over the following decade. We expect to see, similar to that, a lot of changes in energy systems, transition of energy systems, and follow-on disruptions across a broad range of industries.
Paul: Thank you, so we can expect to see some pretty substantial changes in the way the global economy works as a result of the latest oil price shocks?
Lee: Well, the immediate effect was you saw at the start of the conflict, where you saw some big differences on the national level in terms of the performance. You saw, whilst some of it was energy importers versus exporters, you saw quite a big impact in terms of, and this is specific to March 26, because you saw some other trends take over after that.
You saw a big impact in terms of which countries were most actively transitioning their energy system and built up resilience. So you saw examples such as Spain falling a lot less than Germany because Spain had built up a lot of renewable energy and its electricity system was less influenced by gas. Or probably the classic one, we've talked about this before, China versus countries like India or Japan or Korea, where that resilience that China's built up meant it fell a lot less than some of those other Asian countries despite the fact that it was a bigger energy importer than them.
In terms of looking at some of the specific SI trends that are coming on at the moment, I think the biggest one we're seeing is very strong performance from our environmental opportunities indices, which focus on the green economy, which focus on the companies that are making renewable energy, energy efficiency, electric vehicle type products.
And that has been performing very strongly. And over a 12-month basis, it was at 11% ahead as of the end of June, ahead of the broader market. So that is showing very strong performance.
Paul: Obviously, we can't give investment advice on the podcast, but are there any ways that investors should maybe rethink the positioning of portfolios or how to better incorporate this kind of energy sensitivity into their portfolios? Any advice you can give?
Lee: Yeah, there's a number of ways that you could look at this, both from the top-down and from the bottom-up point of view. We've already talked about the impact at the national level that the actively transitioning, building up resilience, improving energy security had on some of those short-term returns in March.
And that's something you can do, investors can do in terms of looking at things from a macro point of view, and indeed we do that in some of our SI sovereign bond strategies there. Then you can look at, you know, which companies are able to deal with some of this transition, which ones are actually building up that resilience and conversely, and this is country and company which ones could be negatively impacted from it.
So for instance, at a country level, countries that rely solely or significantly from fossil fuel exports may be impacted negatively by that. And then finally, looking at companies that are countries that would benefit from the transition. So we talked about environmental opportunities, those companies, those countries where there is a significant opportunity for producing the products and services for transitioning energy systems.
Paul: Thank you very much for explaining that. And finally, where can podcast listeners go to find out more about this topic?
Lee: Well, there's a lot of research on this topic and other sustainability trends on the FTSE Russell Insights page and specifically a paper that we published recently called “After the Energy Shock”.
Paul: Great. Thank you very much Lee. Thank you for joining me for this very interesting conversation on the energy supply shock.
Lee: Thanks very much.
