How many impacts has the energy dilemma brought to the world?

In recent months, global energy prices have continued to rise sharply. By early October, the prices of natural gas, coal and electricity had risen to their highest levels in decades.

In the context of global liquidity still being flooded, soaring energy prices have further substantially pushed up inflationary pressures in major economies and increased the uncertainty of the recovery of the world economy. In the context of intensified inflationary pressures, the central banks of major economies may speed up the tightening of monetary policy beyond expectations. This may lead to increased volatility in global capital markets, the tail risk exposure of some emerging economies, and the increased risk of stagflation in some economies.

Multiple types of energy prices interact and rise together

Different from several energy crises in history, this round of global energy tensions presents the characteristics of interaction between the prices of primary energy sources such as natural gas and the prices of secondary energy sources such as electricity and rising together.

The price of natural gas rose first and increased the most. By early October, benchmark natural gas prices in Europe and Asia hit a record high, about 10 times their level a year ago. Since October 2020, the price of natural gas in the United States has more than tripled, reaching its highest level since 2008.

High natural gas prices have a knock-on effect on the electricity market, pushing up electricity prices. As of early October, German electricity prices have soared to the highest level on record, more than six times higher than a year ago. The Lithuanian Electric Power Company recently stated that Lithuania’s electricity price in September rose 41% from August to 124 euros per MWh, a record high in the country. U.S. electricity prices have also risen to record highs. In Japan, the four major power companies expect residential electricity prices in November to rise by an average of 13% compared to the beginning of this year.

In order to reduce power generation costs and ensure power supply, major markets such as the United States, Europe, and Asia have turned to coal or oil for power generation in large numbers, leading to higher coal and oil prices. The current international coal price is about five times that of a year ago, and the price of New York crude oil futures has also risen to a new high in the past seven years.

Multi-factor resonance exacerbates the energy dilemma

The current high energy prices are not due to unilateral imbalances on the demand or supply side, but due to the resonance of multiple factors.

First of all, as the world economy recovers from the epidemic, energy demand has grown substantially. In 2020, global coal demand will fall by 4%, the largest decline in more than 70 years. However, the growth of electricity demand and the rebound of industrial activity will lead to a rebound in coal demand in 2021, of which about 80% will come from Asia. In the first half of 2021, consumption in the main natural gas and coal markets increased by 8% and 11% year-on-year, respectively.

At present, global gasoline demand is only 2% lower than the level before the outbreak, and it was more than 10% at the beginning of this year. Given that international air travel has not yet fully recovered, oil demand is expected to experience rapid growth again in the future. The International Energy Agency predicts that the average daily global oil demand will increase by 5.5 million barrels this year, and the increase in demand will reach 3.3 million barrels in 2022. By then, global demand will reach or slightly exceed the pre-epidemic level.

Second, insufficient oil and gas production capacity. After the outbreak of the new crown epidemic in early 2020, the world economy has been severely impacted, and energy demand and prices have fallen sharply, forcing a large number of production capacity to shut down. Constrained by factors such as supply bottlenecks and recruitment difficulties, once these production capacities are shut down, it is difficult to restart and restore them to their original levels in a short period of time.

Take LNG as an example. The International Energy Agency pointed out in a recent report that global LNG production will lose nearly 50 billion cubic meters in 2020, a record high. The global shutdown capacity that year accounted for 8.2% of the total production capacity, a significant increase from the 6.7% in 2019 and the average of 6.6% in 2012-2019.

The problem of natural gas shortage in Europe this year is particularly serious. In addition to the above-mentioned reasons, it is also affected by geopolitical factors. Russia is the main supplier of natural gas in Europe, but the supply has declined this year. In addition to the increase in domestic demand, more than 70% of Russia-Europe onshore natural gas pipelines need to be transited through Ukraine, Belarus, Poland and other countries. The export of oil and gas by roads has to pay huge transit fees, coupled with the continuous geopolitical disputes between Russia and Ukraine, Poland and other countries, which intensified the tension of onshore pipeline transportation.

In terms of oil production, OPEC and non-OPEC oil-producing countries reached an agreement last year to cut production by nearly 10 million barrels per day, equivalent to 10% of global production. It was not until May this year that they began to gradually increase oil production, but all the cuts were restored. Production is expected to reach the third quarter of next year.

Third, extreme weather occurs frequently around the world. Hydropower-rich regions such as Brazil, the western United States, and Turkey have suffered severe droughts since the first half of this year, and hydropower generation has decreased significantly, leading to an increase in dependence on gas-fired power generation. A global wind shortage occurred in the second quarter of this year, and wind power generation decreased compared with the same period last year. Affected by the hurricane, a large number of offshore natural gas and oil production capacities in Pennsylvania, Texas and the Gulf of Mexico were shut down. The extreme cold weather in the northern hemisphere has also affected Russia's LNG exports.

Fourth, the energy transition cannot keep up with demand. Although in recent years, many countries have actively developed new energy industries and promoted energy transformation in response to climate change, in view of the current global energy supply and consumption composition, the proportion of new energy is still very low, which is far from enough to make up for the gap in traditional energy supply.

The current global primary energy consumption structure is still dominated by traditional fossil energy. Oil, coal and natural gas are three parts of the world. In 2020, the three will account for 34%, 30% and 24% respectively. It will take a long time for the world energy consumption structure to transform from traditional fossil energy to renewable energy. Even in Europe, which has vigorously developed renewable energy in recent years, the proportion of clean energy will surpass that of traditional fossil energy for the first time until 2020. However, renewable energy such as hydropower, wind and solar energy is greatly affected by factors such as seasons and climate. The energy system is relatively weak, and the frequency modulation and peak shaving functions are limited, so the proportion of European fossil fuel power generation is still as high as 37%.

The impact and response of the energy crisis

Institutions and experts believe that in the context of global liquidity, soaring energy prices have further boosted inflationary pressures in major economies, which not only affects people’s consumption, but also impacts business operations, which in turn increases the uncertainty of the world’s economic recovery. Certainty.

The International Energy Agency pointed out in the report that the shortage of natural gas and coal in large economies has led to a surge in energy market prices, which may trigger a faster-than-expected rebound in the oil market, which will greatly increase the cost of high-energy-consuming industries, leading to a reduction in industrial activities and a decline in the world economy. The speed of recovery during the epidemic has slowed.

In Europe, many companies may face the dual impact of rising energy costs and falling consumer spending. Rising electricity prices are already affecting the operations of power-intensive industries, and many companies have temporarily reduced the production of ammonia and fertilizers due to the sharp increase in natural gas prices that have led to lower profit margins.

The Office of Natural Gas and Electricity Markets, the British energy regulator, recently stated that the recent surge in global natural gas prices has put tremendous financial pressure on suppliers. Since the beginning of this year, more than a dozen small energy suppliers have closed down in the UK, including Clean Planet, which provides energy for 235,000 homes, and Colorado Energy, which provides natural gas and electricity for 15,000 homes. Clean Planet said the company was being squeezed by rising costs and the UK's energy price cap regulations, which made its business "unsustainable."

In India, economic recovery and increased demand for related energy have led to a shortage of coal. Domestic coal mining, which accounts for 80% of the country’s supply, has been unable to keep up with demand, and rising international prices have made imports uneconomical. Power plants that rely on imported coal have slowed down or even ceased production, and some power plants that rely on domestic coal have begun to experience power outages. Despite the efforts of the Indian government to solve the shortage problem, several states still suffer from severe power shortages, affecting residents' lives and industrial production.

The U.S. Energy Information Administration recently issued a report warning that "Americans may pay more this winter to stay warm, especially when the temperature drops sharply." According to the Wall Street Journal, economists at JPMorgan Chase believe that rising energy prices will push up the inflation rate by 0.4 percentage points in the next few months. According to data from the US Bureau of Labor Statistics, the consumer price index in September rose 0.4% month-on-month and 5.4% year-on-year, reaching a 13-year high. The year-on-year increase has exceeded 5% for five consecutive months.

Considering the global energy supply and demand tension, infrastructure construction cycle and seasonal factors, the rising trend of energy prices is difficult to change in the short term. The continued energy shortage has had a greater impact on the world economy. Many governments are or plan to adjust policies in currency, finance, trade, industry, etc. to respond to the crisis.

Some experts believe that in the context of intensified inflationary pressures, the central banks of major economies may speed up the tightening of monetary policy beyond expectations. This may lead to increased volatility in global capital markets, the tail risk exposure of some emerging economies, and the increased risk of stagflation in some countries.

The International Monetary Fund warned in its latest "World Economic Outlook Report" that the upside risks of global inflation have intensified, and there are huge uncertainties in the outlook for inflation. If inflation continues to remain high, the Fed and other central banks must prepare contingency plans to raise interest rates in advance to control price increases.