Energy prices have soared, with benchmark European natural gas prices jumping almost 400%. Even prices for coal – which is being shunned by many countries have almost doubled. That means in almost every corner of the world, the energy needed to heat our homes, or fuel cars, or power our businesses has become drastically more expensive.
This has been described as the first energy crisis of the green transition. And it’s true that looming behind every aspect of this energy shortage is climate change.
The simplest answer for this year’s energy crisis is the pandemic. The first months of the COVID-19 pandemic led many economies to shut down. Demand for energy plunged as businesses closed, people stayed home, and planes were grounded around the world.
And so fossil fuel producers responded: They stopped drilling for oil, cut back on natural gas production, and even closed coal mines. This year, economies have roared back to life. The speed of that recovery caught pretty much the entire world off guard. And we are not just talking about energy suppliers.
You probably have heard of the global supply chain crisis or the semiconductor shortage? All of these have a common cause: the unexpected bounce back in demand.
The first place where we really started to see energy shortages unfold this year was in China. China’s economy was the first to bounce back from the pandemic thanks to demand for its goods from abroad. Its factories went into overdrive, requiring huge amounts of fuel. For China, that largely means coal, which still accounts for 70% of its electricity generation.
But a number of factors – from a de facto ban on Australia coal to strict electricity pricing meant that supply didn’t keep up. By September, China was in the throes of an energy crisis. The government ordered factories to close and told coal mines to increase production.
The blackouts and power cuts’ to key industries have had a serious impact on China’s economy. This has basically led Beijing to double down on coal. Many fear that will jeopardize China’s climate goals. With a coal shortage at home, China turned to international natural gas markets to help keep the lights on and factories running. The huge amount of demand coming from China rippled across global energy markets, including to those in Europe.
China is becoming a major force in the natural gas market as it works to wean its economy off of even more polluting coal. Each year, millions of households swap coal power for gas. China’s demand for natural gas both throughout this year’s crisis and in recent years, has put the squeeze on Europe.
The European Union gets most of its natural gas from Russia, but Norway, Algeria, and Qatar are also big suppliers. Brussels has made diversifying its supply of natural gas a priority. And it’s turned to liquified natural gas, or LNG.
In 2019, pre pandemic, LNG accounted for about 22% of the European Union’s natural gas consumption. That was a new record. Competition between China and Europe for LNG has been building for years. But this year’s energy shortages led to an all-out bidding war. And Europe has been losing.
Western Europe began importing natural gas from Russia or more accurately the Soviet Union in the 1960s. There are now several pipelines that connect the Siberian gas fields of Russia’s Gazprom to various storage sites across the European Union. The European Union’s dependence on Russian gas has long worried many within the bloc. And those concerns have become very real this year as the European Union faces a natural gas shortage.
While some countries like Belgium and France have gas storage levels around 80%, storage tanks in other countries like Austria are sitting almost half empty after last year’s cold winter depleted stockpiles.
Making matters worse, Russia has been slow to send additional gas to Europe this year despite the critical shortage of stocks. Some analysts believe the limited deliveries are no coincidence and accuse Moscow of exploiting Europe’s energy weakness.
If it gets cold for long across Northwest Europe or Northeast Asia, there’s a high risk of real power and heating outages. Some see green policies at fault for this current crisis. They say that overly ambitious targets to reduce emissions have made fossil fuels pariahs before renewables were fully ready to take up the load.
And indeed, investment in oil and gas has more than halved from its peak in 2014. The challenge is fossil fuel investment is falling quickly. But for the world to keep meeting rising energy demand, investment in renewables needs to go up by four times. We are talking about US$100 trillion. That money is just not there and it won’t be there. So, we are essentially talking about energy poverty versus green energy and countries like China and India will simply not choose energy poverty.
Many politicians are seizing this crisis as a chance to push for more investment in renewables. But building out that infrastructure could take years. So what about right now?
For now, governments seem to have decided: the answer is more fossil fuels. China as we stated earlier has renewed its commitment to coal. In the European Union, where many countries have pledged to give up coal in the coming decade, idled coal plants are being put back online.
In the United States, the White House has announced it will tap its strategic reserve of oil to help bring down gasoline prices for consumers. This, many analysts point out, is not the best way to get consumers to give up oil, or gas.
The reality is if supplies are coming down much faster and demand hasn’t moved, high prices is the only solution, because only then will you actually get consumers to move away. The fact is that if you put a price on fossil fuels, without there being a clean alternative that consumers can shift to, which is affordable, then behavior change is made more difficult and consumers are going to be left frustrated. And that’s where many people are finding themselves now. Frustrated, furious, at risk of not being able to cover their own energy needs.
For all the excitement around the green transition, fossil fuels still power our lives. And until that changes, fossil fuels and the countries that produce them will continue to determine how much it costs to keep the lights on.
