By Mark DeCambre
Prices of fossil fuels around the globe are surging, leading some commodity pros to refer to the current condition as an “energy crisis” that could have far-reaching implications for American consumers.
It also carries implications for energy policy as the U.S. — and the rest of the world — attempts to wean itself off crude oil and its byproducts and transition to renewable sources of power.
Energy assets from natural-gas futures /zigman2/quotes/210189548/delayed NG00 +7.51% to crude-oil /zigman2/quotes/211629951/delayed CL.1 -13.04% have been trading at or around multiyear highs, with the ascent notable for its pace and severity.
“It’s almost like everything that could go wrong, did go wrong,” Helima Croft, global head of commodity strategy at RBC, told MarketWatch in a phone interview. “It’s a multifaceted story,” said the energy specialist and former senior economic analyst at the Central Intelligence Agency.
What is an energy crisis?
So what is an energy crisis and how did we get here?
Some define it as a bottleneck in the supply of energy resources, with the potential to hamstring economies. Goldman Sachs head of commodity research Jeffrey Currie told MarketWatch that, put simply, an “energy crisis” is the phenomenon of “not enough [energy] supply to go around to meet demand.”
In the early 1970s, an energy crisis gripped the U.S., caused partly by an oil embargo led by major Middle Eastern oil producers, as consumption surged and America was dependent on imported crude.
All of the action in energy is happening against the backdrop of growing concerns about sticky inflation, which is being reinforced by the surge in energy prices.
The stock market has been unsettled, amid the concerns about pricing pressures and its ability to hamstring global economies. The Dow Jones Industrial Average DJIA , the S&P 500 index SPX and the Nasdaq Composite Index COMP have been seeing turbulent trade, and has underperformed the performance of energy assets.
How did we get here?
This time around, rising prices are being blamed on a confluence of events. Those include the reopening of economies from pandemic shutdowns; decisions by China, one of the world’s largest importers of energy products; worries about major energy producers not ramping up output; and a fitful shift to renewable energy sources, while investment in fossil fuels has waned.
Indeed, the COVID-19 pandemic may have exacerbated a trend of decreasing investments in fossil fuels, with global lockdowns in 2020 to help limit the spread of the deadly virus delivering a notable gut punch to crude-oil production, data from the Paris-based International Energy Agency show.
China is the world’s biggest importer of energy products. Reports and data indicate that the country has been caught flat-footed by the post-COVID snapback in demand for energy, forcing it to turn to dirtier coal, even as it had been attempting to comply with standards to lower its carbon emissions.
The Financial Times noted that coal-fired power plants account for about 70% of China’s electricity, but it is severely lacking in the fuel, as it has closed coal plants and mines, partly for environmental reasons.
On top of everything, China banned imports from coal-producing Australia a year ago, due to rising tensions between the countries, which is now limiting Beijing’s ability to outsource the commodity.
That said, Reuters reported last week that China was releasing Australian coal from bonded storage. Some speculate that the country could ultimately end the Australia ban altogether if problems intensify.
China has been ratcheting up its imports of coal, with Beijing purchasing 32.88 million tons of coal in September, a 76% increase from a year earlier, Reuters reported on Wednesday , citing the country’s General Administration of Customs.
Russia, a major producer of oil and natural gas, has been blamed for amplifying the energy crisis by limiting its global exports to drive prices further higher. Russian leader Vladimir Putin, speaking at a Moscow energy forum on Wednesday, denied these claims and said that Russia’s gas producer Gazprom isn’t holding back output and is adhering to existing contracts to feed gas to Europe.
Putin laid the blame for the continent’s energy woes on European leaders. “The European gas market does not look to be well-balanced and predictable,” he said .
A Kremlin spokesman told reporters on Wednesday that Russia has increased its Europe natural gas supplies as much as possible, and any further increases will need to be negotiated with Gazprom.
Russia has been accused of using its leverage to win approval of Nord Stream 2 , a controversial, underwater natural-gas pipeline running from Russia to Germany, which is intended to deliver fuel to the European Union and bypass Ukraine. The pipeline would double Russia’s existing gas pipeline export capacity across the Baltic Sea to 110 billion cubic meters, equating to more than a half of Russia’s total pipeline gas supplies to Europe, Reuters reported .
RBC’s Croft speculated that Russia may still not have sufficient capacity to meet European current demand.
“Even if Nord Stream 2 were magically greenlit, Russia does not have surge capacity to meet the current demand,” the analyst said.
The chain reaction
China’s purchases of coal have sent coal prices soaring. On Wednesday, an important futures contract for coal rose to a record high of 1,640 yuan ($254.44) per ton, according to reports.