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A variety of unprecedented factors are simultaneously disturbing the global energy market. This reminds people of the energy crisis of the 1970s and complicates the already uncertain inflation and global economic outlook.
The spot price of natural gas in Europe and Asia has more than tripled, reaching a record level, and it is unprecedented in terms of its duration and the scope of its global influence. Generally speaking, energy price changes are seasonal and local. For example, there was a similar jump in energy prices in Asia last year, but it did not spread to Europe and did not lead to a similar increase in Europe.
We predict that energy prices will return to a more normal level when heating demand drops early next year and the supply is adjusted. However, if prices remain high, they may become a drag on global economic growth.
At the same time, the chain reaction of soaring natural gas prices is also affecting the coal and oil markets. The Brent oil price, which is the benchmark for global crude oil prices, has recently reached a 7-year high, higher than US$85 per barrel. This is because more buyers are looking for various types of natural gas for heating and power generation when the supply is already tight. Alternative Energy. Coal is the closest alternative energy source. As power plants use more coal to generate electricity, the demand for coal has become very large. As a result, coal prices have been pushed to the highest level since 2001, prompting an increase in the cost of carbon emission rights in Europe.
Depression, prosperity and undersupply
In this context, it is helpful to review the situation at the beginning of the new crown epidemic, when the epidemic prevention measures implemented by countries at that time caused many economic activities around the world to stagnate. This triggered a sharp drop in energy consumption, leading energy companies to cut investment. However, driven by industrial production (approximately 20% of the final consumption of natural gas), natural gas consumption rebounded rapidly, which boosted demand when natural gas supply was relatively weak.
In fact, due to labor shortages, backlogs of maintenance projects, and extended delivery cycles for new projects, coupled with sluggish investor interest in fossil fuel energy companies, energy supply has slowed down in response to price signals. For example, natural gas production in the United States is still below pre-crisis levels. Production in the Netherlands and Norway also declined. Russia, Europe's largest energy supplier, has recently slowed its energy delivery to the European continent.
Weather factors have also exacerbated the imbalances in the natural gas market. In the northern hemisphere, severe cold in winter and scorching heat in summer have stimulated the demand for heating and cooling. At the same time, the amount of electricity generated by renewable energy sources has fallen. Drought weather has led to lower storage capacity of hydropower stations in the United States and Brazil, and a decline in hydropower generation; while in Northern Europe, wind power generation in summer and autumn this year was lower than the average level of previous years.
Coal supply and inventory
Although coal can help alleviate the shortage of natural gas, some of its supply has also been disrupted. In many countries from Australia to South Africa, logistics and weather factors have affected coal production. As the world’s largest coal producer and consumer, China’s coal production has also declined because its emission reduction targets discourage use and production. Coal instead supports the use and production of renewable energy or natural gas.
In fact, China’s coal inventories are at historically low levels, which exacerbates the threat of fuel shortages for power plants in winter. In Europe, before the arrival of winter, the storage of natural gas was already lower than the average level of previous years, and public utility companies will compete for scarce resources before the arrival of the cold winter, which increases the risk of further price increases.
Energy prices and inflation
Compared with oil prices, coal and natural gas prices have a smaller impact on consumer prices. This is because household electricity and gas are usually regulated and prices are more rigid. Even so, in the industrial sector, rising natural gas prices will make producers who rely on natural gas to make chemicals or fertilizers face difficulties. These situations are particularly worrying, as supply chain disturbances, rising food prices and stabilizing demand have affected the already uncertain inflation outlook.
If energy prices can be maintained at current levels, the output of global fossil fuels this year will increase from 4.1% of global GDP (data we forecast in July) to 4.7%. For next year, this proportion may be as high as 4.8%, up from 3.75% predicted in July. Assuming that half of the increase in the cost of oil, natural gas, and coal is due to reduced supply, this means that the global economic growth rate will drop by 0.3% this year and about 0.5% next year.
Energy prices will return to normal next year
The world is struggling to cope with the uneven economic recovery after the epidemic, and supply disturbances and price pressures have brought unprecedented challenges to countries. But policymakers still have a silver lining, because the current situation is not the same as the energy crisis of the early 1970s.
At that time, oil prices more than tripled, directly hitting the purchasing power of households and businesses, and ultimately leading to a global economic recession. Nearly half a century later, the dominance of coal and natural gas in the global economy is no longer what it used to be. Therefore, energy prices need to rise more significantly to cause such a severe impact.
In addition, we expect that natural gas prices will return to normal in the second quarter due to the relief of seasonal pressures after the winter in Europe and Asia, and the futures market also shows this. Coal and crude oil prices are also likely to fall. But uncertainty remains high, and a small demand shock may trigger a new round of price surges.
Difficult policy choices
This means that the central bank should not be constrained by the price pressure brought about by short-term energy supply shocks, and should be prepared to take action in advance (especially those central banks with weak monetary policy frameworks) to deal with the risk of unanchored inflation expectations Become reality.
If utilities reduce power generation because they are unprofitable, the government should take action to prevent power outages. Power outages (especially in China) will affect chemical, steel, and manufacturing activities, leading to severe global supply chain disturbances during peak consumer product sales seasons. Finally, because the rise in utility bills is regressive, supporting low-income households can help mitigate the impact of energy shocks on the most vulnerable groups.
Authors Andrea Pescatori, Martin Stuermer and Nico Valckx
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