The world is facing its gravest energy shock since the 1970s oil crisis. Four decades ago, only the petroleum market was involved; this time, oil, natural gas, electricity and thermal coal — the world’s top sources of energy — are being hit simultaneously.
Price spikes in crude alone don’t hurt as much as they once did. That’s because, since the 1970s oil crisis, the share of petroleum in the world’s energy mix decreased: It’s fallen to 30% today from 45% in 1973. Today, however, the crisis affects nearly every fuel source with the exception of renewables. Oil, natural gas, and coal together account for more than 75% of the world’s primary energy consumption. Add biofuels — which are made of increasingly expensive corn and vegetable oils — and it’s the energy equivalent of a punch in the face.
Flying Sparks
Short-term electricity prices have surged 1,000% in many countries in Europe, including in France, where they hit a record high of 560 euros per MWh
While oil generates the biggest headlines, gas and electricity are deeply worrisome concerns for Europe, which is the epicenter of the current energy shock. The price of power in the continent is set by the most expensive source — and right now that would be power stations fueled by gas imported from Russia. Short-term power prices on Monday surged above 550 euros ($597.46) per megawatt hour in some countries, or 1,000% higher than pre-crisis levels. At those levels, large chunks of the continent’s manufacturing industry, particularly energy intensive companies like aluminum smelters or paper mills, simply aren’t viable. The cost of natural gas in the wholesale market rose to a record of 345 euros per megawatt hour. A year ago, the same gas sold for as little as 15 euros.
The cost of coal, measured by the API4 benchmark in South Africa, is almost $450 per metric ton. A year ago, it changed hands for less than $100 a ton.
All Rise
The 1970s oil crisis largely affected the world’s transportation system: Driving, trucking and flying became prohibitively expensive. But this time the shock moves beyond transportation to heating, cooking and electrification.
Since Russia invaded Ukraine, Western leaders have tried to carve out energy and commodities from the sanctions they imposed on the Kremlin. The policy has failed spectacularly. The flow of natural resources has been disrupted; some markets, like wheat, have completely seized up. Politically, the commodity loopholes are becoming untenable: The West is today paying more money to the Russia of Vladimir Putin than before the invasion, probably more than $1 billion a day.
Western leaders were facing an ugly choice. They could impose official bans on Russian oil and other commodities, and witness even higher prices, or allow the trade, disrupted as it is, to continue, thereby financing the Kremlin. They have chosen an impossible third-way: Talk openly about embargos, without actually implementing them. The result is higher prices for Western consumers and higher revenues for Putin.
The recalcitrant approach reflects the difficulties of unplugging Russia from global energy markets. Europe alone buys roughly 25% of its oil from Moscow; and another 50% of its coal, plus nearly 40% of its gas. Gas and coal go toward generating electricity, which therefore comes indirectly, from Russia.
A ban on Russian energy exports would require rationing in Europe. Policy makers would have to convince the public to lower demand along the lines of 1970s-style conservation; or else, soaring prices would destroy energy demand, forcing the poorest families to buy less energy and tip the economy into recession. But rather than implement energy savings, they are letting market forces act. That will lead to the same thing that Europe suffered 40 years ago with the oil crisis: stagflation — the terrible combination of high inflation and reduced economic growth plus unemployment. Only in France are politicians making serious efforts to ask citizens to reduce demand. Demand needs to come down. Now. A ban on Russian energy flows cannot be offset through higher supply from elsewhere. U.S. shale and increased production from Saudi Arabia and others may lead to more oil flowing into the markets. But that’s not enough to replace Russian petroleum. There are even fewer offsets for gas and coal.
There are simple measures to take: Reduce speed limits on highways; ask consumers to turn down their thermostats a touch; encourage the use of public transportation by reducing the cost of tickets, or letting people ride on weekends for free. The International Energy Agency has been preparing for a crisis like this for 40-plus years and has a 78-page handbook, “Saving Oil in a Hurry,” ready for use. Decisiveness is key. If politicians can’t figure on the way forward, market forces will. And they are unforgiving.
Source: Bloomberg