The fuel security and climate policy nexus

This study investigates the interaction between fuel security and climate policy in Sweden, a small economy with no domestic oil production and one of the highest shares of fossil-free alternative fuels in the transport sector within Europe accounting for approximately 20% (by energy content) of total transportation fuel demand in 2019, excluding electricity. Using a Structural Vector Autoregression (SVAR) model estimated on monthly data from 2010 to 2023, the analysis quantifies the elasticity of Swedish GDP to global oil supply shocks and computes the associated fuel security premium. Results indicate that Sweden’s short-run GDP response to oil shocks is modest—approximately one-third the magnitude of the U.S.—but the longer-run response is comparatively stronger, reflecting the importance of international economic spillovers. The estimated fuel security premium reaches up to 0.065 EURO/liter diesel equivalent (or USD 12.6 USD/barrel of oil), underscoring persistent macroeconomic exposure despite high adoption of alternative fuels. A qualitative assessment of Sweden’s fuel market shows that while biodiesels are widely used, their reliance on imported feedstocks, exportability, and high cost limits their contribution to fuel security. Electricity and biomethane offer more promising pathways for enhancing fuel security due to their domestic production potential, barriers to international trade, and price competitiveness. The findings help define the scope to which unilateral fuel security policies can reinforce climate policy goals in small economies, emphasizing the importance of diversified energy systems and international coordination. These insights provide guidance for the strategic planning and implementation of energy policy in small, oil-import-dependent countries seeking to balance energy security and climate objectives in a globally integrated fuel market.