Energy Crisis Explained

The Energy Crisis 2022 Explained: What’s Next to Come?

By Nikola Pelnena

Europe’s energy crisis has put an unprecedented toll on people all around the world. With record-setting prices, slowing economies and rising cost of living, the outbreak has impacted households all over the globe. The natural gas prices in Europe have been surging as demand increases globally. Whilst the crisis can be discerned across continents, Europe has been hit particularly hard by several aggravating factors that have made the situation even more acute in the last couple of months. This article provides information on the background of the crisis, the factors that lead to it and an analysis of what could happen in the months of winter 2022.

The background of the global energy crisis can first be traced to the aftermath of the COVID-19 pandemic. The epidemic caused a rapid drop in energy demand and a reduction in oil prices, thus multinational companies started making cuts in oil production. In the European Union, companies not only had a declining demand for energy, but also a higher pressure from governments for adopting renewable sources of energy. Thus, the shift in focus for more renewable sources caused firms to move away from fossils, thus slowing down the supply. According to data by John Wiley & Sons, LTD, the demand for fuels in transportation and aviation sectors had dropped by a record number of 75%. According to a survey conducted by Marsh JLT Specialty client results, only 31% of energy and power companies experienced no threat since the emergence of the pandemic. The results of the research also highlighted that companies in Western Europe started encountering disruptions in the global supply chains as early as January 2020. Moreover, almost half of the respondents (41%) admitted that they had been severely impacted by the drop in customer demand. One of the main conclusions that the research had found is that the large majority of companies (>85%) had admitted they were now shifting focus on crisis management by investing in the repositioning of equipment and supply hubs in order to minimize unprecedented disruptions in the future.

Additionally, aside from the negative, the pandemic positively impacted the need to reestablish safe climatic balances and the need for the global expansion of renewable energy, as noted before. Ever since the pandemic, governments have adopted plans to mitigate the carbon footprint and the fulfillment of net-zero emissions by 2050. A study conducted by Gondwana Research has found that green energy investments have nearly doubled since the pre-Covid era. Following the post-COVID-19 era, many governments started introducing stimulus packages with additional focus placed on green finance. Furthermore, the recovery of GDPs and increased employment established a path for a swift recovery from the crisis.

Although the COVID-19 crisis caused the process of shifting focus for companies to become more efficient and more prepared for industry losses, no business was truly ready for what was to come next.

Shortly after the large wave of the pandemic, the energy industry started facing more disruptions between the supply and demand as people returned back to work and traveling. The overall global demand for gas increased by 5% as pandemic restrictions were lifted. Although the increase in demand was not as large as predicted, companies still struggled to maintain their supply chains to pre-pandemic levels. Consequently, prices began to skyrocket as the demand chased the fuel supply which had not yet recovered from the pandemic drop.

The growing and more flexible liquified gas (LNG) market enabled the intense competition for gas supply, prompting Europe and Asia to push up prices in the market. As LNG is more expensive than piped gas, the EU began to experience fierce competition between its Asian counterparts. However, LNG began to experience limited availability due to unplanned outages, such as in Nigeria, which put further restrictions on the already limited global supply in Europe. As the demand for natural gas after the COVID-19 began to skyrocket, gas demand became less elastic and the prices more volatile.

In the winter of 2021, Europe had particularly low levels of gas in its storage (30% below average) at the beginning of the heating season. This can be explained by the fact that starting from January 2021 Russia had begun to reduce export levels to Europe which evidently led to a decrease in stock. What also led to the driving up of the prices for natural gas was the drop in wind production due to natural factors, as well as less capital investment and maintenance work on oil and gas fields during the COVID-19 crisis. Lastly, Europe also witnessed halting levels of production of natural gas, with the Netherlands phasing out their main gas field in Groningen in order to limit seismic risks in the region. According to data gathered by Gas Infrastructure Europe, the working gas in storage was at 74% compared to the previous year when the number was 94% during winter 2021.

After Russia’s invasion in Ukraine in February 2022, the grave situation has accelerated even further. With Russia suspending supplies of natural gas, the European Union has pledged more than 550 billion Euros in order to protect its citizens and businesses - roughly the same cost it borrowed to sustain COVID-19 policy measures for the previous two years.

According to data gathered by Reuters, Russia supplied about 40% of the European Union’s gas consumption before the invasion. Referring to the European Union Agency for the Cooperation of Energy Regulators (ACER), the European Union imports 80% of its total gas - making it the largest importer of natural gas in the world. What is even more worrying is the fact that domestic gas production has halved in the past 10 years. Moreover, the investigation has found that the exports have been cut by almost 75%. As of October 2022, as Europe is getting closer to the cold winter months, Europe is facing an escalating energy crisis with no clear signs of recovery. Not only have gas prices reached record highs, but supplies are running low as well. In order to find solutions for the energy crisis, European governments have adapted by buying more LNG, as well as introduced more energy-saving measures. Despite the fact that the European Union pledged to introduce more green measures after the COVID-19 crisis, the goals have been put on pause as countries have been struggling to meet their demand.

The impact of the energy crisis has drastically changed the lives of European citizens. Many energy-intensive industries have capped their output in order to save on bills. Many CEOs in these industries have admitted that the crisis is putting a toll on their market share and is making companies and even whole industries move out of Europe to more affordable parts of the world. According to Alexander de Croo, Belgium’s prime minister, the energy crisis is causing deindustrialization of the European Union. Besides, the high prices have made the European Union less competitive internationally, therefore having the risk of permanently losing market share.

Data by the European Commission calls attention to the fact that dairy prices have increased drastically, whilst cheese and beef prices were up by 43% and 27%, respectively. As people are already spending record numbers on utilities, it is difficult to imagine what is to come next in the winter months. To some extent, governments around Europe have also been aiding residents in order to help them manage their utility bills. As the cost of living crisis goes hand-in-hand together with the energy crisis, governments are expecting an economic slowdown. Nonetheless, the European Union has successfully managed to refill its storage facilities and has met the set target of 80% by November, according to recent data.

Although Europe is expected to have enough power-generation fuel in the next coming months, politicians are still looking for backup plans if the winter temperatures are lower than expected, prompting the need for more gas supplies. Additionally, the European Union is focused on looking for alternative ways to source energy, such as more shipments of LNG and pipeline gas from other countries. Although the European Union has found temporary solutions for the upcoming winter, the problems are far from being solved. With the European Union importing most of its gas and not having Russia as a supplier, emergency measures are only a temporary mechanism. Thus, in order for Europe to reach a safe recovery and avoid a deepening energy crisis in the future, politicians around the EU are bidding for LNG import facilities, the building of nuclear reactors and more pipelines.

28-10-2022

 

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