The war in Iran has disrupted one of the world’s most important oil-producing regions and trade routes, sending fuel prices sharply higher. But Paasha Mahdavi, associate professor of political science at UC Santa Barbara and affiliated faculty at the Bren School, argues that the crisis also presents a rare opportunity to accelerate the transition away from fossil fuels and towards renewable energy.

Previous oil shocks created similar opportunities but failed to produce lasting change. From the 1973 oil embargo to the disruption caused by Russia’s 2022 invasion of Ukraine, governments repeatedly responded to energy crises without fundamentally reducing their dependence on fossil fuels. Mahdavi believes the current situation is different because the global economy is now less reliant on fossil fuels for economic growth. At the same time, renewable technologies have become cheaper and easier to deploy.

Solar and wind power, battery storage, and the electrification of transportation, heating and industry have all advanced significantly. These technologies can also provide countries with greater long-term energy independence. Mahdavi notes that this changing energy landscape has helped limit the impact of the enormous disruption in oil supplies through the Strait of Hormuz, despite millions of barrels per day being removed from global markets.

Yet governments may be undermining this opportunity. Mahdavi and a colleague recently reported in Science that nearly half of the world’s governments have introduced emergency measures in response to the Iran war that effectively subsidise fossil fuel consumption. These measures include temporary fuel-tax reductions and expanded consumer subsidies for gasoline, diesel and kerosene. By artificially lowering fossil fuel prices, such policies can weaken incentives to switch to cleaner alternatives.

Fuel subsidies can also create lasting economic and environmental problems. They consume government resources while supporting highly polluting forms of energy and discouraging investment in renewable alternatives. Research conducted by Mahdavi and colleagues over the past decade suggests that these subsidies can be exceptionally difficult to reverse because removing them often carries substantial political costs. Governments may therefore remain committed to expensive subsidies long after the immediate crisis has passed.

The political sensitivity surrounding fuel prices helps explain this reluctance. Gasoline prices are unusually visible to consumers, appearing prominently at filling stations and serving as an everyday reminder of changing living costs. Fuel prices also affect transportation and shipping expenses, influencing the cost of many other goods. As a result, the public often sees gasoline and diesel prices as important indicators of inflation and economic well-being, putting governments under intense pressure when prices rise.

Mahdavi argues that governments have better options for protecting households from energy shocks. Rather than broadly subsidising fossil fuels, countries can make sustained investments in renewable energy, public transportation and better urban and rural planning. Longer-term measures could include expanding electric-vehicle charging networks, bicycle infrastructure and intercity rail. In contrast, immediate assistance could include targeted cash transfers for lower-income households and subsidies for public transportation. Similar approaches are already appearing in countries including Pakistan, Indonesia, Egypt and the Philippines.

Reducing demand for fossil fuels could ultimately make it politically easier for governments to phase out costly subsidies while strengthening energy security. Mahdavi points to the enormous scale of existing support for fossil fuels, with government subsidies for fossil fuel consumption reaching record levels globally in recent years. Against that backdrop, arguments that renewable energy should compete without government assistance overlook how heavily fossil fuels themselves have historically been supported. The Iran war therefore represents not only an energy crisis, but an opportunity to reconsider how governments use public money and to accelerate the transition towards a cleaner and more resilient energy system.

More information: Paasha Mahdavi et al, The worst energy policy in the world, Science. DOI: 10.1126/science.aej2018

Journal information: Science Provided by University of California – Santa Barbara