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The energy crisis wreaking havoc across the globe

The UK’s chaotic fuel crisis has a number of home-grown elements but underlying them is an increasingly global energy crunch.

In the UK there are dire shortages of petrol and diesel. Major industries are closing after drastic disruptions to transport deliveries. Petrol stations are being shut down. Energy retailers are collapsing. Energy costs are soaring. The public is panicking.

While some of the issues are UK-specific – a shortage of drivers being blamed on Brexit and the dearth of access to European workers; an industry structure where energy retailers buy in the spot market and sell to customers on long-term contracts; the closure of coal mines and nuclear power plants – those factors don’t explain why Europe and, increasingly, Asia, are confronting similar problems.

European governments are subsidising energy bills and imposing price caps. Industries are reducing production. There is talk of reopening mothballed gas fields and coal plants.

In China, the crackdown on emissions as it tries to reduce power consumption and carbon emissions is forcing factories to close or to curtail production, coal mines are being shut in and power stations and street lights are being turned off.

While, as in the UK and Europe, some of China’s energy issues are the result of deliberate policy decisions, the common theme in the UK, Europe and China is a shortage of gas amid soaring prices for gas and, indeed, energy coal.

There is a complicated confluence of factors behind the surge in energy prices, with slightly different ingredients in each of the economies, but the common one is that energy costs have soared.

Oil prices, for instance, started the year around $US50 a barrel but are now touching $US80 a barrel.

Oil-linked contract LNG prices were around $US2.60 per million British thermal units (mmBtu) but have since doubled and spot prices for LNG into Europe and Asia have spiked to around $US25 per mmBtu.

Henry Hub gas prices in the US have more than doubled. Australian energy coal was trading at $US86 a tonne at the start of the year but is now being sold at more than $US180.

Some of the issues in the UK and Europe relate to their energy policies – the phasing out of coal and nuclear power and increased reliance on renewables and gas.

That wasn’t an obvious issue during the pandemic but, as their economies bounced back sharply from last year’s nadirs, energy demand rose in tandem.

Unfortunately, unusually weak winds in the North Sea have reduced supply to the UK and Europe from the offshore wind farms.

The lowest storage levels in a decade after last year’s chilly northern winter, an inability/unwillingness of Russia – which supplies more than 60 per cent of Europe’s gas – to increase supply and strong demand for LNG in Asia have combined to create a shortage of energy as Europe heads into winter.

The Europeans are suspicious of Russia, suspecting it of using their plight to underscore the value of its controversial Nord Stream 2 gas pipeline into Europe. Russia, however, has its own problem with unusually low storage levels and is desperately trying to rebuild its domestic reserves ahead of winter.

The pandemic has exacerbated the supply-demand issues because, as demand fell away last year, so did the investment in US onshore oil and gas. The US had emerged as a major LNG exporter but producers reduced investment, drilling and exploration in response to the pandemic.

The severe winter storms that generated the Texas’s energy crisis, the hurricanes that have shut in about a quarter of the Gulf of Mexico’s oil and gas production and the longer term reality that the most productive shale resources in the US have probably passed their peak are contributing influences on the global supply and demand imbalance.

China has pledged to cut its energy intensity three per cent this year as part of its goal of achieving carbon neutrality by 2060, with peak carbon achieved by 2030. About two-thirds of its electricity is now generated from coal.

“The experience of Europe and the UK says the transition away from fossil fuels is going to have to be carefully managed if the kind of destructive crises now being experienced isn’t to become an engrained feature of a low-carbon world.”

The resurgence in the global economy and the soaring demand for consumer goods has dramatically increased its demand for power even as its ban on Australian coal has had the unintended consequence of driving up its energy costs.

It has greatly increased its imports of LNG – according to S&P Global Platts they are up nearly 20 per cent – which in turn is adding to the supply issues and the cost of gas into the UK and Europe. The supply-side issues aren’t going to be resolved quickly.

Qatar does have massive LNG expansion projects in the pipeline but they won’t come online until the second half of this decade. Australia has new projects underway too, but they won’t materially change the near-term supply shortfalls.

OPEC, having stabilised the oil market with production cuts, won’t be in a hurry to significantly lift production beyond the relatively modest increases its members recently agreed, despite pressure from the US and EU.

Longer term, global commitments on climate change will see less investment in fossil fuels and less oil, gas and coal production.

The experience of Europe and the UK – the economies most advanced in displacing fossil fuels with renewables even though they still have a heavy reliance on them – says the transition away from fossil fuels is going to have to be carefully managed if the kind of destructive crises now being experienced isn’t to become an engrained feature of a low-carbon world.

Turning the power and lights off isn’t a sustainable strategy in the 21st century.

Source: Sydney Morning Herald