Roxana Asadimanesh
Opex Research Department
Energy markets began to tighten in 2021 because
of a variety of factors, including the extraordinarily rapid
economic rebound following the pandemic. But the situation escalated
dramatically into a full-blown global energy crisis following Russia’s invasion
of Ukraine in February 2022. The price of natural gas reached record highs, and
as a result so did electricity in some markets. Oil prices hit their highest
level since 2008.
Higher
energy prices have contributed to painfully high inflation, pushed families
into poverty, forced some factories to curtail output or even shut down, and
slowed economic growth to the point that some countries are heading towards
severe recession. Europe, whose gas supply is uniquely vulnerable because of
its historic reliance on Russia, could face gas rationing this winter, while
many emerging economies are seeing sharply higher energy import bills and fuel
shortages.
While today’s energy crisis shares some parallels with the oil shocks of the
1970s, there are important differences. Today’s crisis involves all fossil
fuels, while the 1970s price shocks were largely limited to oil at a time when
the global economy was much more dependent on oil, and less dependent on gas.
The entire word economy is much more interlinked than it was 50 years ago,
magnifying the impact. That’s why we can refer to this as the first truly
global energy crisis.
Some
gas-intensive manufacturing plants in Europe have curtailed output because they
can’t afford to keep operating, while in China some have simply had their power
supply cut. In emerging and developing economies, where the share of household
budgets spent on energy and food is already large, higher energy bills have
increased extreme poverty and set back progress towards achieving universal and
affordable energy access. Even in advanced economies, rising prices have
impacted vulnerable households and caused significant economic, social and
political strains.
Climate policies have been blamed in some
quarters for contributing to the recent run-up in energy prices, but there is
no evidence. In fact, a greater supply of clean energy sources and technologies
would have protected consumers and mitigated some of the upward pressure on
fuel prices.
Energy prices have
been rising since 2021 because of the rapid economic recovery, weather
conditions in various parts of the world, maintenance work that had been
delayed by the pandemic, and earlier decisions by oil and gas companies and
exporting countries to reduce investments. Russia began withholding gas
supplies to Europe in 2021, months ahead of its invasion of Ukraine. All that
led to already tight supplies.
Russia’s attack on
Ukraine greatly exacerbated the situation. The United States and the EU imposed a series of sanctions
on Russia and many European countries declared their intention to phase out
Russian gas imports completely. Meanwhile, Russia has increasingly curtailed or
even turned off its export pipelines. Russia is by far the world’s largest
exporter of fossil fuels, and a particularly important supplier to Europe. In
2021, a quarter of all energy consumed in the EU came from Russia.
As Europe sought to replace Russian gas, it bid
up prices of US, Australian and Qatari ship-borne liquefied natural gas (LNG),
raising prices and diverting supply away from traditional LNG customers in
Asia. Because gas frequently sets the price at which electricity is sold, power
prices soared as well. Both LNG producers and importers are rushing to build new
infrastructure to increase how much LNG can be traded internationally, but
these costly projects take years to come online.
Oil prices also initially soared as
international trade routes were reconfigured after the United States, many
European countries and some of their Asian allies said they would no longer buy
Russian oil. Some shippers have declined to carry Russian oil because of
sanctions and insurance risk. Many large oil producers were unable to boost
supply to meet rising demand – even with the incentive of sky-high prices –
because of a lack of investment in recent years. While prices have come down
from their peaks, the outlook is uncertain with new rounds of European
sanctions on Russia kicking in later this year.
Some
governments are looking to cushion the blow for customers and businesses,
either through direct assistance, or by limiting prices for consumers and then
paying energy providers the difference. But with inflation in many countries
well above target and budget deficits already large because of emergency
spending during the Covid-19 pandemic, the scope for cushioning the impact is
more limited than in early 2020. Rising inflation has triggered increases in
short-term interest rates in many countries, slowing down economic growth.
Europeans have rushed to increase gas imports from alternative producers such
as Algeria, Norway and Azerbaijan. Several countries have resumed or expanded
the use of coal for power generation, and some are extending the lives of
nuclear plants slated for de-commissioning. EU members have also introduced gas storage
obligations, and agreed on voluntary targets to cut gas and electricity demand
by 15% this winter through efficiency measures, greater use of renewables,
and support for efficiency improvements.
To ensure adequate oil supplies, the IEA and its members responded with the
two largest ever releases of
emergency oil stocks. With two decisions – on 1 March 2022 and 1 April – the
IEA coordinated the release of some 182 million barrels of emergency oil from
public stocks or obligated stocks held by industry. Some IEA member countries
independently released additional public stocks, resulting in a total of over
240 million barrels being released between March and November 2022.
The IEA
has also published action plans to cut oil use with
immediate impact, as well as plans for how Europe can reduce its reliance on
Russian gas and how common citizens can reduce
their energy consumption.
The invasion has sparked a reappraisal of energy policies and priorities,
calling into question the viability of decades of infrastructure and investment
decisions, and profoundly reorientating international energy trade. Gas had
been expected to play a key role in many countries as a lower-emitting
"bridge" between dirtier fossil fuels and renewable energies. But
today’s crisis has called into question natural gas’ reliability.
The current crisis could accelerate the rollout
of cleaner, sustainable renewable energy such as wind and solar, just as the
1970s oil shocks spurred major advances in energy efficiency, as well as in
nuclear, solar and wind power. The crisis has also underscored the importance
of investing in robust gas and power network infrastructure to better integrate
regional markets. The EU’s RePowerEU, presented in May 2022 and the United
States’ Inflation Reduction Act, passed in August 2022, both
contain major initiatives to develop energy efficiency and promote renewable
energies.