In 2022, an energy crisis hit Europe, causing fuel shortages, business closures and economic slowdowns. The impacted countries were prompted to adjust domestic energy policy, and the world is feeling the spillover.
Energy uncertainty will remain into 2023, given ongoing geopolitical conflicts, global warming and exchange rate volatility. Moreover, the international energy landscape could be profoundly reshaped.
“The world is in the midst of its first global energy crisis — a shock of unprecedented breadth and complexity,” the International Energy Agency (IEA) said in its World Energy Outlook 2022 published in October. Due to tightened supplies, international energy prices have been highly volatile since last year.
As the Ukrainian crisis escalated last year, the West imposed harsh sanctions on Russia, a major energy producer and exporter, disrupting energy supplies and pushing up prices.
In European countries, wholesale prices for electricity and gas have risen five to 15-fold since early 2021, the Brussels-based economic think tank Bruegel said in a report, noting that if governments were to fully cover the cost of price increases for electricity and gas before markets find a new equilibrium at lower prices, it would cost about 1 trillion euros (1.07 trillion U.S. dollars).
“The capacity of government budgets to soften the impact on consumers is limited by the magnitude of existing debt and the volume of the price increases,” said the report published in September.
The crisis has spotlit fragile global supply chains. Due to the sharp decline in gas via pipelines from Russia, European countries have increased liquefied natural gas (LNG) imports but do not have sufficient LNG storage facilities.
Europe’s dependence on Russian energy will likely remain for a while. In 2021, the European Union imported more than 40 percent of its total gas consumption from Russia, 27 percent of its oil and 46 percent of its coal.
Beyond Europe, a worldwide chain reaction is underway. Coal imports into India hit a record high. Economies such as Japan and South Korea are considering a return to nuclear power. Emerging and less developed economies relying on imported energy have had to compete with developed economies for energy at high prices. Meanwhile, U.S. energy exporters have gained huge profits, and regions with high natural gas reserves, such as North Africa, are trying to increase exports.
Also a result of the crisis, commodity price volatility increased, with many countries experiencing high inflation.
ENERGY PRICES TO STAY HIGH
Unless geopolitics and global supply and demand fundamentally change, energy prices will remain high in the short run with tightened supply.
In 2023, the EU’s potential gas supply-demand gap could reach 27 billion cubic meters, Fatih Birol, executive director of the IEA, said in December when presenting a report titled “How to avoid gas shortages in the European Union in 2023.” The shortfall represents about 6.8 per cent of the EU’s 2023 natural gas baseline demand.
In its Oil Market Report in December, the IEA forecasted that the third quarter of 2023 would see a sharp deficit in crude oil. “As we move through the winter months and towards a tighter oil balance” in the third quarter of 2023, “another price rally cannot be ruled out,” it said.
Energy prices are projected to decline 11 per cent in 2023 and a further 12 per cent in 2024 but will remain more than 50 percent above their five-year average through 2024, the World Bank said in its Commodity Markets Outlook in October.
“Persistently high energy prices will continue to have inflationary implications, particularly through second-round effects such as higher transport and electricity costs for businesses,” it said.
Though natural gas, coal and crude oil prices are expected to lower in 2023 on average, European gas and power markets may be even tighter in 2023, S&P Global Commodity Insights said in its 2023 energy outlook.
“With natural gas prices expected to remain elevated, structural reform of Europe’s electricity markets to weaken the link between gas and power prices is high on the agenda for 2023, although there will be significant challenges to achieving such measures,” it said.
In the coming years, global energy supplies will be more unstable, with frequent mild shortages, possibly restricted Russian oil and gas production and exports, a rising share of renewables and a low willingness to invest in fossil fuels due to carbon peaking and carbon neutrality.
High energy costs may drive energy-intensive businesses in many European countries to cut, shut down or shift production. “If energy prices remain as high as they are at present in the long term, this could lead to some industries leaving Germany,” said Oliver Falck, director of the ifo Center for Industrial Organization and New Technologies in Germany.
UNCERTAIN ENERGY TRANSITION
Experts said surging prices would force Europe to speed up its energy transition and turn to more green energy, which may not remedy the pressing crisis.
As part of its REPowerEU plan launched in March, the EU announced in May an additional investment of 210 billion euros before 2027 toward its green transition, including diversification of energy supplies and an accelerated roll-out of renewable energy to replace fossil fuels.
It also proposed increasing its binding energy efficiency target from 9 percent to 13 percent and its targeted percentage of renewable energy sources in the EU’s overall energy mix from 40 percent to 45 percent by 2030.
The global energy crisis is driving “a sharp acceleration” in installations of renewable power, with total capacity growth worldwide set to almost double in 2022-2027 and wind and solar to account for over 90 percent of the renewable power capacity added over the next five years.
“This is a clear example of how the current energy crisis can be a historic turning point towards a cleaner and more secure energy system,” said Birol, IEA executive director.
Although hikes in energy prices may speed up the transition to renewables to some degree, some experts worry that the current crisis might prompt certain countries to rely more on traditional energy instead of less.
In 2023, most countries will develop both traditional and new energy to tackle the energy shock, The Economist said in November. “In the short term they will embrace investment in polluting fossil fuels in return for security,” it said. “In the long term they will adopt state-led industrial policy in an attempt to accelerate a renewables build-out.” -Xinhua
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