Winter is coming and with it comes a storm in the global energy market.
In the past few months, both the UK and China have struggled with energy shortages. Globally, the prices of gas, oil and natural gas have been soaring as economies are opening up again after experiencing a slump because of the CoronaVirus pandemic. Oil prices have passed US$80 per barrel and natural gas prices rose by 20% around the end of September. This crisis is fueled by a wide array of reasons, from coal shortages, supply restrictions imposed by The Organization of the Petroleum Exporting Countries (OPEC) to a shortage in wind output for electricity generation.
Naturally, when fuel prices surge, the after-effects are bound to spill over to the rest of the world. Let’s take a look at the possible repercussions of this crisis.
Windfall gains for oil producers
As the energy crisis intensifies, OPEC countries have begun ringing alarm bells about the impending turbulence in the oil market. Iraq, one of OPEC’s member countries, expects a surge in demand for crude oil. Other oil producers, like Nigeria’s state oil firm Mele Kyari, predict a surge in petroleum demand to one million barrels a day, with prices increasing by US$10 a barrel in the next six months. Goldman Sachs warns that a cold winter could overwhelm the production capacity of oil-producing countries, which could further the price surge.
With China, the largest producer of coal in the world, seeking to reduce its carbon emissions and India, the second-largest coal producer, experiencing an inventory shortage, prices of coal are rising at an alarming rate as well.
However, this surge in prices could lead to windfall gains for OPEC countries and coal producers in Australia. As countries compete for energy supply, Australia’s liquefied natural gas exporters, who are gaining US$349 billion from this crisis, are expected to emerge as winners.
Shift to electric vehicles
As people struggle to foot the rising fuel bill, there might be a shift towards electric vehicles (EVs). EVs are expensive to buy but cost less in the long run. The average cost of driving an EV for 100 miles is US$5.50-US$8, as opposed to US$17.47-US$21.50 for a petrol or diesel car. Inquiries about EVs have been surging in the UK amidst the energy crisis.
While EVs might seem like the solution to a growing fuel shortage problem, you need to consider where the electricity powering these vehicles comes from. As the energy crisis deepens, the cost of electricity generation is also soaring. As of 2019, 64% of global electricity was generated from fossil fuels.
Risk of inflation
Oil prices and inflation have a cause-and-effect relationship. As oil prices move up, so do inflation rates. This is because oil prices determine the cost of logistics transportation, and in turn affect the prices of commodities. While this relationship has deteriorated over time, it is still evident in the current energy crisis that the two are correlated. The Bank of England has warned that a surge in energy prices will cause inflation to rise by 4% in winter this year.
In Europe, the energy crisis is threatening the fertilizer and meat industries, foreshadowing tighter food supplies and higher costs. Whereas in China, the crisis has led to a shutdown of production in many Apple factories in the country.
Laszlo Varro, a former chief economist at the International Energy Agency, says, “while the current market tightness is primarily due to a robust demand, it is a useful case study on how the economics of a supply restriction driven transition could unfold”. The true extent of the crisis will only be apparent, once winter rolls in and energy demands see a further increase.
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