Europe’s Energy Crisis Is Coming for the Rest of the World, Too
(Bloomberg Businessweek) -- This winter, the world will be fighting over something that’s invisible, yet rarely so vital—and in alarmingly shorter supply.
Nations are more reliant than ever on natural gas to heat homes and power industries amid efforts to quit coal and increase the use of cleaner energy sources. But there isn’t enough gas to fuel the post-pandemic recovery and refill depleted stocks before the cold months. Countries are trying to outbid one another for supplies as exporters such as Russia move to keep more natural gas home. The crunch will get a lot worse when temperatures drop.
The crisis in Europe presages trouble for the rest of the planet as the continent’s energy shortage has governments warning of blackouts and factories being forced to shut.
Inventories at European storage facilities are at historically low levels for this time of year. Pipeline flows from Russia and Norway have been limited. That’s worrying as calmer weather has reduced output from wind turbines while Europe’s aging nuclear plants are being phased out or are more prone to outages—making gas even more necessary. No wonder European gas prices surged by almost 500% in the past year and are trading near record.
The spike has forced some fertilizer producers in Europe to reduce output, with more expected to follow, threatening to increase costs for farmers and potentially adding to global food inflation. In the U.K., high energy prices have forced several suppliers out of business.
Even a normally cold winter in the Northern Hemisphere is expected to drive up natural gas prices further across much of the world. In China, industrial users including makers of ceramics, glass, and cement may respond by raising prices; households in Brazil will face expensive power bills. Economies that can’t afford the fuel—such as Pakistan or Bangladesh—could simply grind to a halt.
Utilities and policymakers are praying for mild temperatures because it’s already too late to boost supplies. The prospect of accelerating energy costs, in conjunction with squeezed supply chains and food prices at decade highs, could make more central bankers question whether the jump in inflation is as transitory as they’d hoped. Traders will be carefully dissecting every weather forecast published from now to December.
“If the winter is actually cold, my concern is we will not have enough gas for use for heating in parts of Europe,” Amos Hochstein, the U.S. State Department’s senior adviser for energy security, told Bloomberg Television on Sept. 20. For some countries, “it won’t only be a recessionary value, it will affect the ability to actually provide gas for heating. It touches everybody’s lives.”
In Asia, importers of liquefied natural gas are paying record prices for this time of year to secure supplies, with some starting to snap up dirtier fuels such as coal and heating oil in case they don’t obtain enough. This may undermine efforts by governments to hit ambitious green goals: Gas emits about half as much carbon dioxide as coal when burned.
China, the world’s biggest buyer of natural gas, hasn’t filled stockpiles fast enough, even though imports are almost double what they were last year, according to customs data. Several Chinese provinces are already rationing electricity to industries to meet President Xi Jinping’s targets for energy efficiency and pollution reduction. A power crisis could exacerbate shutdowns if authorities divert gas to light and heat households.
If Chinese factories have to contend with widespread power shortages, global prices for steel and aluminum will jump. To make matters worse, the country is also grappling with a coal shortage.
Utilities in Japan and South Korea are largely protected by long-term LNG contracts that are indexed to oil. Still, Korea Electric Power Co. said on Sept. 23 that it will increase electricity prices for the first time in almost eight years. A sudden cold snap could force more power companies to dive into the spot market to buy emergency gas supplies at record-high rates. That’s what happened last winter.
The cost of securing LNG supplies has sparked a political controversy in strapped Pakistan, with opposition politicians demanding an inquiry into purchases by the state-owned importer.
In Brazil, the lowest flows to the Parana River Basin in almost a century have slashed hydropower output and forced utilities to rely more heavily on gas. The country boosted gas imports to an all-time high in July, and power bills are rising. With inflation already ballooning, that could hurt President Jair Bolsonaro’s chances in next year’s election.
The stage is set for an all-out scramble among Asia, Europe, the Middle East, and South America for shipments of LNG from exporters such as the Qatar, Trinidad and Tobago, and the U.S. “We have huge demand from all our customers and unfortunately, we can’t cater for everyone,” warned Saad Al-Kaabi, Qatar’s energy minister, at an industry conference this month.
American exporters are poised to ship more LNG than ever as new projects come online toward the end of the year. But as more gas goes abroad, less will be available at home. Even though gas prices have been notably lower in the U.S. than in Europe and Asia, they are trading near the highest level since 2014. Gas inventories are running below their five-year seasonal average, yet U.S. shale drillers are reluctant to boost production out of concern that would crimp their profitability and put off investors.
The Industrial Energy Consumers of America has requested that the Department of Energy reduce U.S. exports until storage levels get back to normal, a move that might exacerbate shortages abroad.
It used to be that the average person paid little attention to the market price of natural gas. It isn’t like oil, where a snap decision from OPEC will almost immediately affect how much they pay at the pump. This winter, the world is likely to learn how much the global economy depends on natural gas. —With Lynn Doan and Anna Shiryaevskaya
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