Is the global energy crisis temporary?

The global energy market is currently one of the red hot subjects within the global media’s attention. Even though the matter is of crucial importance, it is not fully appreciated neither comprehended at the moment by the general public. Yet its impact could leave a scare on the global economy if not dealt with deep consideration. This report aims to overview and explain some of the main challenges currently affecting the energy market and the dangers currently surrounding the global economy.

In the past week we observed Natural Gas prices climbing abruptly to new yearly high levels following a similar course that WTI had been in the previous months. Nat Gas prices have been on the rise progressively in the past months as increased demand from Asia and Europe keeps traders under pressure not allowing for supply to catch up. As per Bloomberg, Natural Gas supply has been down with the past winter being colder and longer than usual which may have been a reason for increased usage. On the other hand field investments were down while working restrictions imposed by governments over the pandemic had also impacted the market’s supply aspect. Even though Natural Gas prices eventually retreated in the past week the momentum remains upwards in the current week, which implies the main drivers behind the matter still remain intact.  Norway and Russia some of the main suppliers of Natural Gas in Europe have not been able to push energy through pipelines for different reasons. Despite the completion of the Nord Stream 2 pipeline which directly connects Russia and Germany through the Baltic Sea, supply has not been provided yet. According to various reports by Reuters, Germany’s energy regulators has yet to sign a documentation that would clear the process to commence. Despite prices being on the rise at the moment, once supply starts flowing, we could see an immediate response from traders that could stabilize price action, probably with a notable selloff. Yet the document can take several months to be singed putting the European block in a rather risky position. This is a rather demanding time of the year as we are already into the fall season getting closer to winter. Without having to start heating just yet, energy prices are running substantially high and are expected to rise even more. Norway and other European fuel suppliers had not been able to produce at satisfactory levels recently as they depend on nature for supply. Wind power which is among the most common sources used, could not produce as the wind simply didn’t blow enough in recent weeks to power turbines that make up a growing portion of the Continent’s power supply. On the other hand energy sources like coal can be the most effective substitute for various economies, especially in the case of China. For Europe however this is not the case as carbon emissions can overturn the current effort that the block has setup for a cleaner environment. Higher emissions also equal higher costs by the way. The most important however is that Coal prices are also on the rise, thus even though supply is available, the purchasers are most likely to pay more to receive.

Oil prices have also risen to multiyear high levels increasing at the same time a range of other products or services. In the US Oil producers do not have the financial strength to produce at levels seen pre pandemic, while the dominant OPEC plus group was not willing to add extra supply to the market so far. OPEC’s meeting this week could be a good event to start with however. Remarkably, a report by the Financial Times, states that Goldman Sachs, one of the most influential banks in commodity markets, said it expected the rally to continue and forecasts Brent to hit $90 a barrel by the end of the year, up from a previous estimate of $80.

The dark side of the story becomes evident when fuel prices rise and governments, industries, companies become fearful of not being able to cover their normal operations. If their activities are reduced in the short term, fears of worsening circumstances could force them to become desperate. The reason behind this desperation is that masses of people can be affected by energy prices being on the rise. If energy become unaffordable then some operations may be halted by power cuts. If power cuts are imposed as was the case in the previous week in China, then people working in factories or plants or warehouses may not be required to go to work. If they are not needed at work then their paycheck may be reduced which can then destabilize household income and since energy prices are on the rise then, they may not be able to pay for their monthly bills including rent , education, food, clothing etc. In this case the government will have to find a way to provide for its citizens otherwise they will be dealing with very undesirable circumstances. Possibly even rage and violence. For example energy providers in the UK which provided power to millions of people have gone bust leaving their bills for the consumer to be covered. The situation in the UK with fuel demand and supply falling out of balance seems to concern Britain’s regulators. According to the Financial Times, the Office of Gas and Electricity Markets (Ofgem) stated that it will turn to the police if it finds out energy companies are intentionally trying to worsen a supplier’s financial position. This warning was sent to energy suppliers which are providing services as energy prices are running at yearly high levels currently. If these firms are to go bust then costs could be spread across all consumer energy bills putting further economic pressure on consumers. Yet the UK is dealing with a lorry driver scarcity rather than a fuel one. No matter the case, the issue remains that higher prices are becoming a considerable stress to everyone.  Moreover, a rather interesting yet very concerning mater is how the Chinese will deal with the issue. It is very interesting because in our opinion the strategies that the Chinese will use can teach us a whole lot from different perspectives. First the large population the Government is obligated to serve is very challenging and could force them into new tactics they have not used before. The Chinese economy’s performance greatly depends on the next steps the government will take in terms of energy supply, as costs are on the rise possibly countering the growth/recovery carried out in parallel. The danger of economic contraction is also imminent due to energy prices seeming to subside anytime soon. China is a global production house for automobiles, electronic products, clothes etc. If these manufacturers are not able to produce due to energy limitations, what will be the effect on the global economy? How will companies operate on lower stock? How will lower good supplies affect consumer sentiment and spending as we are heading towards a holiday season? With all this, we are considering the impact on the global economy which is greatly dependent on China as the second largest economy internationally. China is now prompting its state owned energy companies to secure fuel supply no matter the case. Money is of course a great motivator for fuel suppliers to prefer the Chinese over any other country. Yet the effects can be even worse than the ones currently faced. Severe competition can lead to countries not being able to secure any fuels which can leave millions of people in developing economies without electricity. Not only that but also blocks like Europe and China could be crossing swords to lock in supply. Let not focus on the dark side however and let’s think of this as a matter that is manageable if cooperation is to prevail. Fuel is not in scarcity. We have enough fuel to cover for the world. By getting to the root of the matter we realize that the means to keep fuel flowing must be unconfined to satisfy demand.

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