A global energy crisis is coming. There is no miracle solution

In Europe, natural gas is now trading at the equivalent of $ 230 per barrel, in oil terms, up more than 130% since early September and more than eight times the same point last year, according to the reports. data from Independent Commodity Intelligence. Services.

In East Asia, the cost of natural gas has increased 85% since early September, reaching about $ 204 per barrel in terms of oil. Prices remain much lower in the United States, a net exporter of natural gas, but still hit their highest levels in 13 years.

“Much of this feeds off the fear of what winter will look like,” said Nikos Tsafos, energy and geopolitics expert at the Center for Strategic and International Studies, a Washington-based think tank. He believes anxiety has caused the market to break away from the fundamentals of supply and demand.

The circumstances worry central banks and investors. Rising energy prices are contributing to inflation, which was already a major concern as the global economy tries to shake off the lingering effects of Covid-19. The dynamics of winter could make matters worse.

No easy fix

The crisis is rooted in soaring demand for energy as economic recovery from the pandemic takes hold, and in a carefully calibrated system that is easily disrupted by weather events or mechanical problems.

An unusually long and cold winter earlier this year depleted natural gas stocks in Europe. The high demand for energy has hampered the replenishment process, which usually occurs in spring and summer.

China’s growing appetite for liquefied natural gas means LNG markets cannot fill the void. A drop in Russian gas exports and unusually calm winds compounded the problem.

“The current surge in electricity prices in Europe is truly unique,” Societe Generale bank energy analysts told customers this week. “Never before have electricity prices risen so quickly, so quickly. And we are only a few days into the fall – the temperatures are still mild.”

The dynamics are reflected globally. In the United States, natural gas prices have risen 47% since the start of August. The coal rush is also triggering a surge in the price many European companies have to pay for carbon credits in order to be able to burn fossil fuels.

In addition, the energy crisis is supporting oil prices, which have reached seven-year highs in the United States this week. Bank of America recently predicted that a cold winter could push the price of Brent crude, the global benchmark, beyond $ 100 a barrel. Prices haven’t been this high since 2014.

Jim Burkhard, who heads IHS Markit’s research on crude oil, energy and mobility, said there was “no immediate relief in sight”.

“There is no Saudi Arabia for gas,” he said, referring to a single supplier who can quickly increase natural gas production. “Looks like it’s going to last through the winter in the northern hemisphere.”

Russia could theoretically intervene. Société Générale noted that faster approval by German authorities of the politically sensitive Nord Stream 2 pipeline, which would transport gas directly from Russia to Europe, would alleviate significant stress.

Russian President Vladimir Putin on Wednesday suggested that Russia could increase production, saying state-gas giant Gazprom has never “refused to increase supplies to its consumers if they submit appropriate bids.”

“Of course, there is great concern,” Chapman told the Virtual Energy Intelligence Forum. “In our industry, because it’s capital intensive, you can’t just activate the supply.”

Crisis with a cost

The best-case scenario, according to Burkhard, is that a winter with average temperatures will allow the pressure to ease in the second quarter of 2022.

But extreme weather conditions in the coming months would create enormous pressure – especially in countries that rely heavily on natural gas for energy production, like Italy and the UK. Great Britain is in a particularly difficult situation because it lacks storage capacity and faces the fallout from a power line break with France.

“The UK is arguably the most at risk of a winter supply shortage to major European economies,” said Henning Gloystein, head of the energy, climate and resources team at consultancy Eurasia Group, in a statement. note to customers this week. “If that happened, the government would likely require factories to reduce their production and consumption of gas in order to ensure household supplies.”

The massive rise in energy costs, which shows no signs of slowing, is stoking inflationary fears, which were already forcing policymakers to think carefully about their next steps.

Energy prices in developed countries rose 18% in August, the fastest pace since 2008, according to data released Tuesday by the Organization for Economic Co-operation and Development. And that was before the situation deteriorated significantly in recent weeks.

Higher energy bills could reduce consumer spending on clothing or on activities like dining out, hampering the return of the pandemic. If companies are urged to cut back on activities to save energy, it could hurt the economy as well.

“There are fears that rising gas prices could endanger Europe’s post-pandemic economic recovery,” Gloystein said.

According to Gloystein, price volatility could fuel public skepticism about financing the energy transition, if consumers demand more investment in oil and gas to limit future fluctuations.

Governments that have pledged to cut emissions are preemptively trying to send a strong message: it strengthens, not undermines, the case for investing in a wider range of energy sources.

“It is very clear that with long-term energy it is important to invest in renewable energies,” European Commission President Ursula von der Leyen said on Wednesday. “This gives us stable prices and more independence, because 90% of gas is imported into the European Union.”

– James Frater, Laura He, Katharina Krebs and Diksha Madhok contributed reporting.