A global energy crisis is approaching.There is no quick solution

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The global energy squeeze caused by the weather and the rebound in demand is becoming more and more serious. The alarm is issued before the onset of winter, when more energy is needed to light and heat the home. Governments around the world are trying to limit the impact on consumers, but admit that they may not be able to prevent bills from skyrocketing.

As world leaders prepare for the key climate summit to be held in November, governments are facing increasing pressure to accelerate the transition to clean energy, which further complicates the situation.

“This price shock is an unexpected crisis that occurred at a critical moment,” EU energy chief Kadri Simson said on Wednesday, confirming that the EU will outline its longer-term policy response next week. “The top priority should be to reduce the social impact and protect disadvantaged families.”

According to data from the Independent Commodity Intelligence Corporation, in Europe, the transaction price of natural gas in terms of oil is currently equivalent to 230 US dollars per barrel—a rise of more than 130% since the beginning of September, which is more than eight times the service price of the same period last year.

In East Asia, the cost of natural gas has risen by 85% since the beginning of September, to about US$204 per barrel in oil. Prices in the United States, a net exporter of natural gas, are still much lower, but still soaring to their highest level in 13 years.

Nikos Tsafos, an energy and geopolitical expert at the Center for Strategic and International Studies in Washington, said: “Many of them are because of fear of what winter will look like.” He believes that anxiety causes the market to deviate from the fundamentals of supply and demand. .

Steam billowing from the cooling tower of a coal-fired power plant in Nanjing, China.
The enthusiasm for natural gas has also pushed up the prices of coal and oil. Coal and oil can be used as substitutes in some cases, but they are more harmful to the climate. India, which is still extremely dependent on coal, said this week that as many as 63 of its 135 coal-fired power plants have two days or less supply.

This situation worries the central bank and investors. Rising energy prices are fueling inflation, and as the global economy tries to get rid of the lingering effects of Covid-19, inflation has become a major problem. The dynamics of winter may make the situation worse.

There is no easy solution

The root cause of this crisis is that as the economy recovers from the pandemic, energy demand soars, and a carefully calibrated system is vulnerable to weather events or mechanical problems.

An unusually long and cold winter earlier this year depleted European gas stocks. The soaring demand for energy hinders the replenishment process, which usually occurs in spring and summer.

Europe’s natural gas crisis is also a renewable energy crisis, but there are ready-made solutions

China’s growing demand for LNG means that the LNG market cannot fill this gap. The decline in Russian natural gas exports and the unusually calm wind have exacerbated the problem.

“The current surge in energy and electricity prices in Europe is truly unique,” an energy analyst at Societe Generale told clients this week. “So far, electricity prices have never risen so quickly. And we are only a few days away from autumn-the temperature is still mild.”

This dynamic is causing repercussions on a global scale. In the United States, natural gas prices have risen by 47% since the beginning of August. The competition for coal has also triggered a spike in the price that many European companies must pay for carbon credits so that they can burn fossil fuels.

In addition, the energy squeeze is supporting oil prices, which this week hit a seven-year high in the United States. Bank of America recently predicted that the cold winter may push the price of the global benchmark Brent crude oil above $100 per barrel. Since 2014, the price has not been so high.

Jim Burkhard, who is in charge of IHS Markit’s crude oil, energy and liquidity research, said that “there are no signs of immediate relief.”

“There is no natural gas in Saudi Arabia,” he said, referring to a single supplier that can quickly increase natural gas production. “It looks like it will continue for the winter in the northern hemisphere.”

Russia can theoretically be strengthened. Société Générale pointed out that the German authorities will approve the politically sensitive Nord Stream 2 pipeline sooner, which will transport natural gas directly from Russia to Europe and will relieve significant pressure.

On Wednesday, Russian President Vladimir Putin hinted that Russia could increase production, saying that state-owned natural gas giant Gazprom has never “refused to increase its supply to consumers if they submit appropriate offers.”

But Neil Chapman, senior vice president Exxon Mobil (XOM), Emphasized short-term restrictions at the industry conference this week.

“Of course there are big concerns,” Chapman said on the Virtual Energy Intelligence Forum. “In our industry, because it is capital intensive​​, you can’t just open up supply.”

Costly crisis

According to Berkhard, the best-case scenario is that winters with average temperatures can increase the pressure in the second quarter of 2022.

But the severe weather in the coming months will cause tremendous pressure-especially in countries that rely heavily on natural gas for energy production, such as Italy and the United Kingdom. The UK is in a particularly difficult situation because it lacks storage capacity and is dealing with the impact of the power line disconnected from France.

Liquefied natural gas (LNG) storage tanks can be seen in the southeast of England.

“The UK is arguably the country with the highest risk of winter supply shortages in major European economies,” Henning Gloystein, head of the energy, climate and resources team at the consulting firm Eurasia Group, said in a report to clients this week. “If this happens, the government may require factories to reduce production and natural gas consumption to ensure household supply.”

The sharp rise in energy costs shows no signs of abating and is increasing inflation concerns, which has forced policymakers to carefully consider their next actions.

According to data released by the Organization for Economic Cooperation and Development on Tuesday, energy prices in developed countries rose by 18% in August, the fastest growth rate since 2008. That was before the situation deteriorated significantly in recent weeks.

Higher energy bills may curb consumer spending on activities such as clothing or dining out, thereby undermining the recovery of the pandemic. If companies are required to reduce their activities to save electricity, it may also harm the economy.

“There are concerns that rising oil prices will put the economic recovery in Europe at risk after the pandemic,” said Gloystein.

Gloystein said that if consumers demand more investment in oil and gas to limit future volatility, then price volatility may trigger public suspicion about energy transition funding.

Governments that have pledged to reduce emissions are preemptively trying to send a firm message: this will support rather than weaken the reason to invest in a broader energy mix.

European Commission President Ursula von der Lein said on Wednesday: “It is clear that investing in renewable energy is important in the long run.” “This gives us stable prices and more independence, because 90% Of natural gas is imported into the European Union.”

— James Frater, Laura He, Katharina Krebs and Diksha Madhok reported.

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