The world may be close to a serious energy crisis

New York (CNN Business) – The world is grappling with gravity-defying energy price increases, from gasoline and natural gas to coal. Some fear this is just the beginning.

Current and former energy officials told CNN they are concerned that the Russian invasion of Ukraine, after years of underinvestment in the energy sector, has plunged the world into a crisis that would rival or even exceed the global oil shocks of the 1970s and early 1980s.

Unlike those infamous episodes, this isn’t limited to oil.

“Now we have an oil and gas crisis and an electricity crisis at the same time,” Fatih Birol, head of the International Energy Agency’s monitoring committee, said in a statement published this week in Der Spiegel. “This energy crisis is much bigger than the oil crises of the 1970s and 1980s. And it will probably last much longer.”

They warn of a serious energy crisis over Russian oil 0:50

The global economy has largely been able to withstand higher energy prices so far. But prices may continue to rise to unsustainable levels as Europe tries to strip itself of Russian oil and possibly gas. Lack of supplies could lead to some tough decisions in Europe, including rationing.

Joe McMonigle, Secretary-General of the International Energy Forum, said he agreed with these bleak forecasts from the Energy Information Administration.

McMonigle, whose group acts as an intermediary between energy-producing and consuming countries, said in a phone interview with CNN.

The scale of that perfect storm — underinvestment, strong demand and supply disruption due to the war — will have far-reaching consequences, potentially threatening the economic recovery from the coronavirus, exacerbating inflation, fueling unrest and undermining efforts to save the planet from global warming. .

Birol warned of delays in the supply of gasoline and diesel, especially in Europe, as well as the rationing of natural gas next winter in Europe.

“This is a crisis the world is unfortunately not prepared for,” said Robert McNally, a top energy adviser to former President George W. Bush.

Not only are energy prices extremely high, but the reliability of the power grid is threatened by extreme temperatures and severe drought. A US power grid regulator warned last month that parts of the country could suffer power shortages and even blackouts this summer.

‘Our fears have been confirmed’

Former Obama energy adviser Jason Bordoff and Harvard professor Megan O’Sullivan wrote an article for The Economist in late March warning that the world was on the cusp of “what could become the worst energy crisis since the 1970s.

“Since we wrote it, our concerns have been confirmed,” Bordoff, the founding dean of the Columbia School of Climate, told CNN.

Of course, there are fundamental differences between today and the 1970s, when prices did not rise as dramatically as they did back then, and lawmakers did not resort to extreme measures such as price-fixing.

“If we resort to setting prices and setting price limits, we may have a shortage,” McNally said.

When the war began, the West tried to avoid directly attacking Russia’s energy supplies because they were so important to world markets. Russia is not only the largest exporter of oil in the world, but also the largest exporter of natural gas and a major supplier of coal.

But when the brutality of the war became apparent to the world, this laissez-faire approach did not last, and the United States and other countries banned Russian energy imports.

Russia has responded to Western sanctions by restricting or even halting its shipment of natural gas to multiple European countries.

The European Union this week announced its plans to eliminate 90% of Russian oil imports by the end of the year. This action raised the expectation of further retaliation by Russia.
This transitional situation has exacerbated supply shortages in already tight energy markets.

“We have not yet seen how far this energy crisis will reach,” Bordov said.

Gasoline prices in the United States rose 52% last year to record highs, angering the public and contributing to the country’s inflation crisis.

Prices for natural gas, a biofuel for heating homes and powering the electricity grid, nearly tripled in the past year in the United States. Natural gas prices rose further in Europe, although they are far from their worst levels.

“Putin got us there faster.”

The current energy turmoil is not just a consequence of the war in Ukraine. It is also a byproduct of investing in oil and natural gas that is running out and requires huge amounts of money just to maintain production, let alone increase it.

Investment in the oil and gas sector reached just $341 billion in 2021, 23% below the pre-Covid-19 level of $525 billion, and well below the 2014 cap of $700 billion, according to the International Energy Forum. .

This lack of investment is due to a number of factors, including investors and governments’ drive to turn to clean energy, the uncertain future of fossil fuels, and years of weak and volatile oil prices.

said Francisco Blanche, head of global raw materials at Bank of America.

Europe was already dealing with an energy crisis last year and prices for natural gas, coal and oil were high long before the first Russian tanks began to roll in Ukraine.

“We were headed for a crisis anyway,” said McNally, who is now president of consultancy Rapidan Energy Group. “Putin got us there faster and all of a sudden.”

Scarcity and lines for gasoline?

The 1973 oil crisis was marked by long queues at gas stations, fuel shortages and panic.

Experts say they are now concerned about the fuel shortage, although they see it as a greater risk in Europe than in the United States.

“Fuel shortages are a global problem. They will be noticed very soon, although it may not be in the US,” said Bank of America’s Blanche.

Blanche believes that this risk is lower in the United States because the country remains one of the largest oil producers on the planet and a major source of energy. By contrast, Europe is more dependent on foreign oil and natural gas, especially from Russia.

And the director of the Energy Information Administration warned against regulating natural gas in Europe, which is largely dependent on Russia to obtain it.

Blanche noted that rising natural gas prices had already led to factory closures in Europe.

“Europe is already in a position to ration natural gas,” he said.

‘We must proceed with caution’

Energy experts told CNN they worry that policymakers are mismanaging the climate crisis, focusing too much on reducing supply and not enough on reducing global appetite for fossil fuels.

“We are not doing enough to reduce hydrocarbon demand in line with our climate goals,” Bordoff said.

If we focus on only one side of the equation, we risk not only price hikes, but also social unrest and public disengagement from pro-environmental measures.

“We have to be careful because if we allow the public to equate higher energy prices with the energy transition, we are doomed to fail,” McMonigle said. “We will fundamentally lose public support, perhaps permanently.”

McMonigle urged governments to send signals to investors that it is not only acceptable to continue investing in fossil fuels, but that it is “essential” to the global economy and progress in the energy transition.

But even if lawmakers persuade investors to increase their investment, it will take a long time for a bigger show to happen.

What can end the energy crisis?

Of course, no one can say for sure how all these things will turn out. And there may be surprises to ease the supply crunch.

For example, a diplomatic breakthrough that ends the war in Ukraine and allows sanctions against Russia to be lifted would be a watershed.

Birol said other surprises that could ease the energy crisis are a nuclear deal with Iran, an additional economic slowdown in China, or an agreement between Saudi Arabia and other OPEC producers to increase oil production.

He also confirmed that governments are ready to release more emergency oil reserves. However, even the release of US emergency stocks, which reached a record level, had a modest and fleeting impact on gasoline prices.

In March, the EIA also urged governments around the world to consider taking drastic measures to reduce oil demand, such as lowering speed limits on highways, working from home up to three days a week where possible, and car-free Sundays. in cities.

And there is at least one other event that has come to the fore recently that should ease the energy crisis: an economic recession, or at least one deep enough to cause a collapse in demand.

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