The central tendency of oil and gas prices shifts upward, and the logic of energy substitution unfolds.

Ask AI · How Can Coal Substitution Ensure Energy Security and Cost-Effectiveness?

(The author Gao Zhengyang is a guest research fellow at the Bank of SuShang)

In recent times, the geopolitical situation in the Middle East has continued to intensify. Expectations that transportation through the Strait of Hormuz will remain obstructed have been strengthening, becoming a core variable affecting global energy markets. Against this backdrop, uncertainty in energy supply has increased significantly. Fluctuations in crude oil and natural gas prices may show characteristics of moving higher in phases, and, through the transmission of inflation and liquidity expectations, they may curb global capital market risk appetite in phases. The market is shifting from “short-term shocks” to “mid-term disruptions” in its repricing.

In terms of price performance, because the duration of the conflict has substantially exceeded earlier market expectations, uncertainty on the supply side has gradually transformed into a risk premium, driving international oil and gas prices to rise rapidly. According to data from the International Energy Agency (IEA), Brent crude oil futures have climbed from about $70 per barrel before the conflict to about $100 per barrel today (as of March 25, 2026); UK natural gas futures have also surged from 70 pence/therm quickly to around 130 pence/therm (data source: Goldman Sachs report). Overall, energy prices show clear characteristics of a sustained upward trend.

From a macro perspective, the core impact of continued volatility in oil and gas prices is to raise the global inflation center through the imported inflation channel. As energy is a fundamental factor of production, its price fluctuations will transmit step by step along industrial value chains—extending from transportation costs to manufacturing costs—ultimately transmitting to end-consumer prices, creating broad upward price pressure. In this process, inflation expectations are warming again, which creates clear constraints on monetary policy in major European and U.S. economies.

More specifically, market expectations for the pace of rate cuts are changing at the margin. Liquidity-loosening expectations formed earlier amid falling inflation are being revised. Rising energy prices exacerbate inflation persistence, so the Federal Reserve’s policy choices may become more cautious, further weakening market expectations for rapid rate cuts. In an environment where liquidity is tightening at the margin, the overall valuation framework in equity markets faces pressure, and technology growth sectors—more sensitive to interest rates—are affected particularly significantly. At the same time, high energy costs will also erode corporate profits, further suppressing market risk appetite.

However, from the perspective of industrial development, volatility in oil and gas prices objectively strengthens the economic foundation for energy substitution, making the logic of the global energy structure transition clearer.

From the standpoint of global energy trade patterns, the Strait of Hormuz has an irreplaceable strategic position. The strait connects the Persian Gulf and international markets, accounting for about 20% of global seaborne crude oil volume and about 25% of global seaborne liquefied natural gas trade volume (data source: IEA). It is the core hub of the global energy supply system. Once the strait experiences sustained disruptions, it directly hits global energy supply security. In extreme cases, if the strait faces a long-term and substantive blockade, the global energy market will face a significant supply gap. According to Goldman Sachs estimates, if a blockade continues, the global crude oil market may see a daily supply shortfall of about 16 million barrels; if the duration of supply-chain disruption reaches about 120 days, oil prices could rise to $140 per barrel.

During this process, the market may ease supply-side pressure through a “market self-adjustment mechanism,” relying on price increases to suppress demand. But regardless of whether the market’s adjustment path is mild or not, energy price volatility may show a trend of shifting higher in phases. Against this backdrop, the logic of energy substitution is expected to continue unfolding and become one of the most core development trends at the industrial level.

First, within the traditional energy system itself, the phased substitution value of coal is gradually becoming more visible. China’s energy endowment features “coal-rich, oil-poor, and gas-scarce.” In an environment where uncertainty in external oil and gas supply is rising, coal, as the “stabilizing ballast” for ensuring energy security, may see a phase-based improvement in strategic position under certain conditions. As one of the fossil energy sources with a deep scale foundation, coal has strong substitution capacity in coal-to-chemicals and power generation fields. Coal-to-chemicals processes conduct deep processing of coal, converting it into oil products, natural gas, and various chemical feedstocks. Its product system covers multiple areas such as coal-to-oil, coal-to-gas, and coal-to-olefins. When the energy price system changes, coal-to-chemicals can demonstrate relatively good economic adaptability while ensuring energy security.

With crude oil prices continuing to fluctuate, coal’s unit heat value cost advantage versus crude oil keeps expanding. The current coal-oil price spread has widened significantly compared with the beginning of the year, and the ratio of unit heat value prices between thermal coal and crude oil is also at a low range in recent years (data source: National Bureau of Statistics), meaning coal’s cost advantage is even more pronounced under the same energy output premise.

From historical data, the differences in unit heat value prices among crude oil, natural gas, and thermal coal themselves experience cyclical fluctuations. And currently, ongoing improvement in oil price volatility is enhancing coal’s relative price performance. Under this trend, substitution space for coal-to-chemicals products in certain application scenarios is expected to gradually open up. By using coal-based pathways to substitute for parts of petroleum chemical products, companies can effectively reduce costs and improve profitability. At the same time, amid heightened volatility in energy prices, downstream companies’ demand for cost stability is increasing significantly, which may further drive the release of demand across the coal-to-chemicals industrial chain.

Second, at the level of power systems, the substitution relationship between coal and natural gas is also worth focusing on. According to IEA data, coal-fired power accounts for about 35% globally (2025 data), while natural gas-fired power accounts for about 22% (2025 data), together forming an important pillar of power systems. In the European and U.S. markets, the share of natural gas-fired power is relatively higher and is especially sensitive to gas price fluctuations. When natural gas prices rise rapidly, its power generation cost will increase significantly, thereby weakening the marginal economics of natural gas power generation.

In this situation, coal power’s relative cost advantage will gradually emerge, and some regions may see a trend of switching from gas-fired power to coal-fired power. This substitution trend will drive marginal growth in coal demand, providing strong support for coal prices. With improvements in supply-demand relationships, coal companies’ profitability is expected to experience a phase-based recovery, and related industrial chains such as coal-to-chemicals will also benefit accordingly. Under the premise of ensuring energy security, coal can serve as the “stabilizing ballast” for energy security in the short term, and its strategic position may see a phase-based improvement.

Looking further ahead, another important impact brought by rising oil and gas prices is to reinforce the global energy security logic and accelerate the development process of clean energy. When traditional energy prices continue to run at high levels, countries will place noticeably greater emphasis on energy autonomy and controllability. Against this backdrop, renewable energy such as wind power and solar PV—benefiting from broad resource endowments and relatively low marginal costs—are expected to become key directions in national energy planning, which is also consistent with the long-term goals of China’s energy transition under the “dual carbon” strategy.

From a cost perspective, solar PV power generation has already demonstrated strong market competitiveness in most regions. Its cost per kilowatt-hour, under certain irradiation conditions, is already lower than traditional fossil-fuel power generation methods (data source: China Photovoltaic Industry Association). Therefore, in an environment where oil and gas prices continue to fluctuate, the economics of clean energy will become even more prominent, accelerating its substitution process for traditional energy.

In terms of installed capacity structure, in recent years the share of new energy within the overall energy mix has continued to rise. In 2025, the share of China’s solar PV and wind power generation in total power generation reached about 22% (data source: National Energy Administration), and it has maintained a rapid growth trend. Globally, this proportion is only about 15% (2025 data), leaving broad room for further increase. Driven by upward energy prices and policy support, the global wind and solar installed-capacity deployment pace is expected to continue accelerating, which in turn will lead to a systematic expansion of demand across related industrial chains.

Meanwhile, energy storage, as a key supporting link in the new energy system, is becoming increasingly important. As the share of new energy generation keeps rising, the power system’s demand for peak shaving and frequency regulation capabilities increases significantly, while energy storage systems can effectively smooth out fluctuations in new energy output and improve grid operational stability. Therefore, energy storage installed-capacity demand will grow in parallel with the development of the new energy industry.

From the competitive landscape across industrial chains, China has already formed clear global competitive advantages in solar PV, wind power, and energy storage. Domestic companies have strong competitiveness in manufacturing costs, technology levels, industrial scale, and more. Taking the energy storage sector as an example, leveraging technology and scale advantages, in 2024 Chinese companies’ share of global energy storage battery shipments reached 93.5% (data source: GCLP Lithium Battery), placing them in a core position within the global supply chain. With the continued growth in global new energy installed-capacity demand, related Chinese companies are expected to continue benefiting from the global wave of energy transition.

In summary, against the backdrop of ongoing geopolitical disturbances in the Middle East, fluctuations in oil and gas prices may show characteristics of rising in phases. While they may curb markets through the transmission channels of inflation and liquidity, they may also, at the industrial level, promote changes in the global energy structure. In the short term, under the premise of ensuring energy security, coal can serve as a phase-based substitution option, supporting industry demand and corporate profitability in the coal-to-chemicals and power generation sectors. In the medium to long term, clean energies such as solar PV, wind power, and energy storage will become core directions for implementing the country’s “dual carbon” strategy and achieving the transition of the energy system, driven by costs and policies. During this process, China’s related industrial chains, relying on cost and technology advantages, are expected to continue benefiting from the global wave of energy transition.

Caixin First Finance’s Caixin account exclusive first release; this article only represents the author’s views and does not constitute investment advice.

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(This article comes from First Finance)