How did we get here? Today’s energy crisis explained
Gas prices are skyrocketing and oil has hit a three-year high. Winter is around the corner. Will we be able to pay our electricity bills? And above all, how did we suddenly get to this point? How are all countries running out of power together?
Credits to Behrendt
The entire world is struggling to keep the lights on. Different regions, different policies but the same result: a shortage of energy. In Britain, soldiers are driving oil tankers to deliver fuel to gas stations. In Europe, there is a natural gas crunch. In China, factories are shutting down. And in South America, there's talk of blackouts.
How did we get here? How are all countries running out of power together? There are a couple of common factors.
The post pandemic recovery. In 2020 the global economy came to a standstill. Factories closed, international transport collapsed, people stayed home: the economic activity slowed and so did the demand for energy. The world's big oil producers slashed output by producing less oil and coal. Then the vaccine came. Countries came out of lockdowns, they reopened factories, and air travel resumed suddenly. The demand for energy shot up but the supply did not, it remained at 2020 levels. So, from here it is basic economics: more demand, less supply, which means shortages and higher prices.
A difficult transition to green energy. Our world leaders have invested huge sums in solar panels and wind plants, but have not prepared a roadmap for the transition itself. It’s like when you want to reach a summit but have no map wit you. China is a perfect example of this: Xi Jinping has set his goal (cut off coal supply) but he has no plan to get there. So, what does he do when there is an energy crisis and coal would be the solution? He mandates a rationing of electricity to half of China’s provincial jurisdictions, and leaves his countrymen in the dark. Not exactly sustainable in the long run.
These two factors are common across the world but there are some regional factors as well. Here, we focus on the UK and Europe.
The British perspective
Due to its resilience on gas, the UK is particularly vulnerable to price increases. More than 22 million households are connected to the British gas grid. Now, gas prices in UK are six times higher than this time last year. Business secretary Kwasi Kwarteng has assured that individuals and companies are safe from this rise in prices thanks to the government’s energy price cap. But a secure gas supply is meaningless if you cannot afford to pay your bills!
Interestingly enough, this energy shock doesn’t come as a surprise to the UK government. First, the fact that a commodity price (e.g. gas) would rise sharply is a foreseeable event. Second, in 2017 the UK government commissioned a study to Professor Dieter Helm. The Cost of Energy Review focused on how to achieve security of energy supply and decarbonization simultaneously. The recommendations spelt out what needed to be done and what should have been done. Four years later, ministers and officials cannot claim that they were flying blind.
On top of this, the UK is facing a shortage of truck drivers to transport fuel to gas stations. Literally, soldiers are driving oil tankers to deliver the little fuel available to these stations. Why? Because of a botched-up Brexit. Don’t you agree this is a self-inflicted crisis?
An eye on Europe
Simply betting on clean energy has proved to be backfiring. Europe produces renewable energy from two main sources: one is the sea winds and the other is Norway's water reservoirs. Now, both these sources are drying up: the sea winds have blown very little this years, and Norway's water levels are dropping.
As a result, natural gas prices in Europe have risen 450% this year. Oil has hit a three-year high, with brent crude trading at more than 82 USD per barrel. It is crazy if you think that only few months ago you could buy a brent barrel for as little as a pizza in Italy! Not only this is crazy, but also worrying because ultimately this price rise affects the consumers, meaning you and me.
Winter is around the corner and people will need fuel to heat their homes. So, what can Europe do? Is the die cast or can we still solve this crisis before the coldest months arrive? We could by producing more fuel. But Europe has very low stocks of natural gas and its biggest supplier, Russia, is not willing to export more. President Vladimir Putin's logic is simple: you rush the green transition, now you pay the price.
Who else? Oil cartels can help but they're not on board yet. Investment in fossil energy production has sunk over the past months, mainly because investors were concerned about future regulatory action against oil and gas firms. So, they have put their money elsewhere. Because of this, OPEC wants to increase its output gradually, not in one go.
What about the green alternatives? Well, that is another lesson from this energy crisis. The world economy is at an inflection point: it is transitioning from fossil fuels to green energy, but it is not a seamless transition. Experts say there will be more shortages and power outages in the decades to come. Why? Because our leaders failed, as they did not plan for this transition.
Crossing fingers and hoping for the best isn’t going to help anyone get through the winter. The end result may be clean energy, but the journey to get there could be painful, ugly, and cold.
