ANALYSIS. The global economy has, in part, been able to withstand rising energy prices. But prices could continue to rise to unsustainable levels under Russian sanctions. Supply shortages could lead to hard choices, including rationing.
The world is grappling with gravity-defying energy price spikes in everything from gasoline and natural gas to coal. Some fear this is just the beginning.
Current and former energy sector officials told CNN they fear the Russian invasion of Ukraine, after years of lack of investment in the energy sector, has sent the world into a crisis that will rival or even surpass the oil crises of the 1970s and early 1980s.
And unlike those infamous episodes, this one isn’t just about oil.
“We now have an oil crisis, a gas crisis and an electricity crisis at the same time,” Fatih Birol, head of the International Energy Agency (IEA) monitoring group, said in an interview. published this week in the newspaper Der Spiegel. “This energy crisis is much bigger than the oil crises of the 70s and 80s. And it will probably last longer.”
So far, the global economy has been largely successful in resisting rising energy prices. But prices could continue to rise to unsustainable levels as Europe tries to wean itself off Russian oil and, potentially, gas. Supply shortages could lead to hard choices in Europe, including rationing.
Joe McMonigle, secretary general of the International Energy Forum, said he agreed with the IEA’s depressing prediction.
“We have a serious problem in the world that I think policymakers are only just beginning to realize. It’s kind of a perfect storm,” said McMonigle, whose group mediates between producing and consuming countries. of energy, during a telephone interview. .to CNN.
The scale of this perfect storm – underinvestment, high demand and supply disruptions caused by war – will have far-reaching consequences, potentially threatening post-Covid-19 economic recovery, exacerbating inflation, fueling social unrest and undermining efforts to save the planet. of global warming.
Birol warned of bottlenecks in the supply of gasoline and diesel, especially in Europe, as well as the rationing of natural gas next winter in Europe.
“This is a crisis the world is woefully unprepared for,” said Robert McNally, who served as a top energy adviser to former US President George W. Bush.
Not only are energy prices soaring, but the reliability of the power grid is compromised by extreme temperatures and severe drought. Last month, a US power grid regulator warned that parts of the country could face electricity shortages and even blackouts this summer.
“Our fears have been confirmed.
Former Obama energy adviser Jason Bordoff and Harvard University professor Meghan O’Sullivan wrote an article in The Economist in late March warning that the world was at the height of “what could become the worst energy crisis since the 1970s”.
“Since writing this, our fears have been confirmed,” Bordoff, co-founder of the Columbia Climate School, told CNN.
Of course, there are fundamental differences between the present and the 1970s. Prices have not risen as much as then and policy makers have not resorted to extreme measures such as price controls. “If we used price controls and price caps, we could have revenue shortfalls,” McNally said.
When war broke out, the West sought to avoid directly targeting Russia’s energy supply because it was simply too critical for world markets. Russia is not only one of the largest oil exporters in the world, but it is also the largest exporter of natural gas and a major supplier of coal.
But as the brutality of the war became clear to the world, the “hands-off” approach did not last long, with the United States and other countries banning imports of Russian energy. Russia has responded to Western sanctions by restricting or even suspending natural gas shipments to several European countries.
The European Union announced this week its intention to eliminate 90% of Russian oil imports by the end of the year. This measure raised the specter of further retaliation from Russia.
This situation has only exacerbated the supply shortfall in already tight energy markets.
“We still haven’t seen how this energy crisis is going to get worse,” Bordoff said.
Gasoline prices in the United States have already soared 52% last year to record highs, infuriating the public and contributing to the country’s inflation crisis. Prices for natural gas, a vital fuel for heating homes and powering the power grid, have nearly tripled over the past year in the United States. Natural gas prices have soared again in Europe, although they are far from their worst levels.
“Putin just got us there faster”
The current energy turmoil is not simply the result of the war in Ukraine. It is also the by-product of investing in oil and gas exploration, which depletes resources and requires huge sums of money just to maintain their production, let alone increase it.
Upstream investment in the oil and gas sector was just US$341 billion in 2021, 23% below the pre-Covid level of US$525 billion and well below the recent peak of US$700 billion Americans in 2014, according to the IEF.
This investment shortfall has been driven by a number of factors, including a push by investors and governments to bet on clean energy, the uncertain future of fossil fuels, and years of low and volatile oil prices.
“Because of the desire to reduce carbon emissions, we have a lot less appetite to invest in hydrocarbons. And this exacerbates price volatility and makes it more difficult to manage supply,” said Francisco Blanch, director Global Commodities at Bank of America. .
Europe was already in the grip of an energy crisis last year and the prices of natural gas, coal and oil were high long before the first Russian tanks started arriving in Ukraine.
“Anyway, we were headed for a crisis. Putin just got us there faster and harder,” said McNally, who is now chairman of consultancy firm Rapidan Energy Group.
Shortage and gas lines?
The 1973 oil crisis was marked by long queues at gas stations, fuel shortages and panic. Experts said they are again worried about fuel shortages, although they see it as a greater risk in Europe than in the United States.
“Fuel shortages are a global problem. You will see it very soon, but maybe not in the United States,” said Francisco Blanch of Bank of America.
Blanch said he thinks that risk is lower in the United States because the country remains one of the world’s largest oil producers and is a major energy exporter. Europe, on the other hand, is more dependent on foreign oil and natural gas – especially from Russia.
The IEA chief warned against natural gas rationing in Europe, which relies heavily on Russia for gas.
Blanch noted that soaring natural gas prices have already closed factories in Europe. “Europe is already in natural gas rationing mode,” he said.
“You have to be careful with that”
Energy experts told CNN they fear global policymakers are mismanaging the climate crisis by focusing too much on reducing supply and not enough on curbing the world’s appetite for fossil fuels.
“We are not doing enough to reduce demand for hydrocarbons in line with our climate goals,” Bordoff said.
Focusing on just one side of the equation risks not only causing price spikes, but also social unrest and alienating the public from climate action.
“We have to be careful with this because if we allow the public to link high energy prices to the energy transition, we are doomed,” McMonigle said. “You will essentially lose public support, probably permanently.”
McMonigle urged governments to send signals to investors that not only is it right to continue investing in fossil fuels, but that it is “necessary” for the global economy and progress on the energy transition.
But even if policymakers convinced investors to increase their investments, it would take a considerable time for supply to increase.
What could end the energy crisis
Of course, no one can say for sure how this will all play out. And there may be surprises that make resolving the supply disruption easier.
For example, a diplomatic breakthrough that would end the war in Ukraine and allow Russia’s sanctions to be lifted would be a game-changer.
Birol said other surprises that would ease the energy crisis include an Iranian nuclear deal, a deeper economic slowdown in China or a deal between Saudi Arabia and other OPEC producers to boost production of oil.
He also reiterated that governments are ready to release more emergency oil reserves. However, even the record release of US emergency reserves had only a modest and transient impact on fuel prices.
In March, the IEA also urged governments around the world to consider drastic measures to reduce demand for oil, including lowering speed limits on highways, working from home up to three days a week in the possible and on car-free Sundays in the cities.
There is at least one other development that has recently come to the fore in mitigating the energy crisis: an economic recession, or at least one deep enough to cause a collapse in demand…