By: Pratham Arya and Emile Martel
Overview
Just as the world's countries are beginning to recover from the devastation inflicted by COVID-19, they face yet another major hurdle. The global supply of natural gas and coal has declined sharply, causing an acute rise in energy prices. Although the shortage is a global phenomenon, Europeans seem to be hit the hardest. UK and European natural gas prices shot higher in mid-September to trade at nearly 10 times their level at the beginning of the year. Hence it is no surprise that there is widespread panic among not only consumers but also major governments of Europe and the rest of the world. The United States, Russia, and China have all become involved, with significant implications for legislation and the global economy.
Natural gas represents a fifth of Europe's electricity usage and is used for critical activities such as heating and cooking. In 2018, roughly 45 percent of the energy used in the bloc was used to heat dwellings. Adding to the distress, 6.9% of people in EU member states are unable to keep their houses warm enough.
Causes
A variety of factors have contributed to this energy crunch, including Russian supply bottlenecks as well as the after-effects of the pandemic. A prolonged northern-hemisphere winter meant that European countries tapped into their reserves, leaving their stocks 25% below the historic average.
Russia was the largest exporter of natural gas to the European Union in 2019 and 2020, representing more than 40% of EU imports. The International Energy Agency (IEA) has reported that the Russian exports to the EU have decreased to below the 2019 levels and it is not exactly clear as to why that is. Ukraine and other eastern European countries have accused the Kremlin of attempting to “weaponize” natural gas supplies to secure quick approval to start up its Nord Stream 2 pipeline, which would carry Russian natural gas to Germany through the Baltic Sea, bypassing Ukraine. This pipeline would go against major European climate goals but this situation has shown the importance it could play in stabilizing prices for the region.
Industrial recovery from the pandemic in Asia has also resulted in a surge in demand for natural gas. China and India are both facing their own energy crunch due to shortages of coal used for power generation, leading them to accelerate purchases of natural gas at an even faster rate than traders in Europe had been anticipating. Buyers in Asia have been prepared to keep paying a premium to lock in cargoes which has raised the chances of a bidding war between the two regions and drastically increased overall prices.
Moreover, wind turbines, which generate about 10% of Europe’s power, slowed during an unusually still summer. This lack of contribution has resulted in further reduced supply for natural gas and has only contributed to the energy crunch.
This year, Europe will have no option but to rely on external sources to get its natural gas;, Europe’s largest gas field, Groningen, in the Netherlands, was designed to be a significant supplier, with production boosted or suppressed to help balance supply with demand, allowing other gas fields to produce freely all year round. But Groningen has become a liability for the Dutch government. As Groningen’s huge natural gas supplies slowly deplete, small earthquakes were triggered in the surrounding area, causing damage to homes and businesses. As political pressure mounted, the decision was taken to phase out production, with the field now pumping three-quarters less than in 2018.
Government Reactions
The UK government intervened to support a fertilizer company that was one of the country’s main sources of CO2, which is essential for food packaging, medical treatment, and nuclear power stations. On Oct 6th, the European Union issued said it would outline measures including tax cuts and state aid that governments can use to help.
Russia, the largest supplier of natural gas to Europe, has restricted pipeline exports to long-term contracts, despite clear signs traders want more spot market sales to help fill storage facilities. Russian president Vladimir Putin described the situation in Europe as one of “hysteria and confusion,” blaming tight supplies on under-investment in fossil fuels as economies try to pivot towards renewable energy.
In the US, allies of the oil and coal industry have seized on energy crises overseas and rising gasoline prices to counter President Joe Biden’s plans to combat climate change and force a rapid shift to renewable power. They’re warning that the dilemma now facing Europe is a sign of what could happen inside the U.S. under proposals to swiftly curtail the use of fossil fuels.
Confronted by opposition from moderate Democrats, the White House is now negotiating how to scale back a major social-spending bill that was to include a raft of climate provisions, including hundreds of billions of dollars in renewable energy tax incentives and a utility clean energy program.
In the short-term, no one stands to benefit from this large price increase as governments look to stabilize prices before the winter. Everyone is quick to dismiss non-renewable sources of energy but maybe we should not immediately forget these critical sources as future infrastructure gets built.