The Fuse

Making Sense of the Energy Crunch

by Gregory Brew | September 27, 2021

Across the globe, consumers are scrambling to maintain access to energy.

Shortages have sprung up in Europe, Latin America faces power outages, and demand is pushing Chinese energy infrastructure to the limit.

While the current high prices and surging demand stem from unique circumstances tied to the recovery from the COVID-19 pandemic, the current energy crisis also expresses broader trends, including the energy industry’s shift away from coal and oil, the growing importance of natural gas, and the uncertainty over future energy demand.

The crunch stems from the condition of the global economy as it emerges from COVID-19 lockdown. For over a year, energy demand was in the doldrums, as national economies went into quarantine to mitigate the spread of the virus. As economies reopened and demand recovered, the global supply chain struggled to keep up, creating bottlenecks and sending shipping costs soaring.

Demand on natural gas spiked owing to droughts in regions served by hydropower, particularly Latin America. In Europe, unseasonably low wind meant that wind turbines were unable to meet demand, while natural shipments from Russia, a major supplier of the European market, dipped during the summer as Russia replenished its natural gas reserves in anticipation of winter.

The result by September was a global energy crunch, driven specifically by surging demand for natural gas. In Europe spot prices for natural gas have risen 40 percent, while supplies are squeezed as Asian and Latin American buyers outbid their European competitors. Industries dependent on the fuel as a feedstock have shut down, while shortages in Great Britain have driven panic buying as gas stations close for want to supply.

It is unclear how long the crunch will last or if Europe will be left with insufficient fuel reserves this winter.

It is unclear how long the crunch will last or if Europe will be left with insufficient fuel reserves this winter. While conditions that produced the squeeze are unlikely to continue for more than a few weeks—wind power has recovered and natural gas prices have begun to slowly fall as competition over available supply eases—the knock-on effects of the squeeze may be felt this winter, as lower inventories leave markets unsupplied during the cold months.

In a crucial sense, this crisis is born of short-term circumstances tied to the unique historical context of the COVID-19 pandemic. Yet the current shortages are an expression of trends that go back before 2020, and stem from the broader transformations taking place within the energy industry linked to the uncertain future demand for oil and the likely higher demand for natural gas.

The necessary starting point is the oil price crash of 2014-2016. With prices falling and future demand uncertain, the largest integrated oil companies began to slash spending on future production. Capex (capital expenditure) by the five largest companies, which had risen steadily since 2000, fell from $165.9 billion in 2013 to $88.7 billion in 2019. The onset of COVID-19 in 2020 caused even greater cuts, with capex slashed across the industry by as much as $100 billion, according to a study from Rystad Energy. This brought total industry spending to a 14-year low.

Even when prices began to recover in 2021, with economies re-opening and demand increasing, the large integrated firms have kept their spending in check. While industry spending will grow by 4 percent in 2021, climbing from $334.7 billion to $348 billion, this still represents a 25 percent decline from the 2019 level of $461.7 billion, according to RBC Capital.

The upshot is that analysts have begun to worry that the world will face an oil crunch along with a general energy crisis in the latter half of 2021 and 2022, as supplies struggle to keep up with returning demand due to past investment shortfalls.

Analysts have begun to worry that the world will face an oil crunch along with a general energy crisis in the latter half of 2021 and 2022.

What is keeping spending down? Uncertainty over the likelihood of future demand would be the main culprit, linked to the historically low price of oil since the 2014-2016 crash, the persistent glut of supply that has forced producers in OPEC to maintain production cuts that are set to end in September 2022, and concerns that the energy transition away from fossil fuels toward clean energy will render future investments uneconomic. Pressure from governments eager to cut emissions has changed the way energy company executives perceive future strategies. A poll in 2021 found that 66 percent of senior executives anticipate actively adapting to a low-carbon energy mix, up from 44 percent in 2018.

And while oil demand may have peaked, demand for natural gas is likely to rise. With China’s recent announcement that it will cut all investment in offshore coal projects and the ongoing and precipitous fall in coal consumption in the United States, natural gas—a fossil fuel which emits fewer emissions when burned—is rapidly filling the gap left by coal’s departure. The EIA predicts that natural gas demand in the United States will continue to rise in 2022, while Shell has estimated LNG will need $200 billion in new investment to meet demand by 2030.

All of this is to say that the current energy crunch, while seemingly short-term and tied to the evolving state of the global economy, may very well augur a longer period of instability and uncertainty, as investment shifts to new energy sources. While the result might be lower emissions, it could produce volatility and shortage in the near-term, unless greater care is taken to build up stocks, improve resilience, and ensure backstops are in place.

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