We are witnessing unprecedented times in which we are exposed to astronomical energy prices and market volatility. According to the head of the International Energy Agency (IEA), the world is in the middle of “the first truly global energy crisis”.
A perfect storm of events and circumstances has led us here. In this post we will delve deeper into the causes of the crisis and the measures that can be taken to tackle it.
What is the Global Energy Crisis?
In the 1970s, there was the oil crisis. Today, we have an oil crisis, a natural gas crisis, and a coal crisis all at once. The price of natural gas is at a record high, and as a result so is electricity in some markets. Oil prices have also reached their highest level since 2008.
The skyrocketing energy prices have contributed to painfully high inflation, which pushed many vulnerable households into poverty, even in advanced economies. Many factories were forced to reduce output or even shut down. This has slowed economic growth to the point that some countries are heading towards severe recession.
The global economy is more interlinked than ever before and no part of the world is spared. Europe’s gas supply is particularly vulnerable because of its historic reliance on Russia and, as a result, the continent may face gas rationing this winter. On the other hand, many emerging economies are seeing a sharp increase in energy import bills and fuel shortages.
The energy crisis is a broad and complex topic. Yet, in order to find the solution, it is crucial to understand the causes.
Russian Invasion of Ukraine
Just as the energy markets were starting to recover following the COVID-19 pandemic, the situation escalated dramatically into a full-blown global crisis due to Russia’s invasion of Ukraine in February 2022.
Russia, the world’s largest exporter of fossil fuels, started withholding gas supplies to Europe in 2021, months before its invasion of Ukraine. However, the attack set off a series of events and exacerbated the situation.
In response to the invasion, the United States and the EU imposed a series of sanctions on Russia, and many European countries declared their plan to end their reliance on Russian fossil fuels. Meanwhile, Russia has increasingly reduced or even shut off its gas supply to Europe.
Seeking to replace Russian gas, Europe bid for US, Australian and Qatari ship-borne liquefied natural gas (LNG), raising prices and diverting supply away from traditional LNG customers in Asia. Since the price of electricity is frequently linked to gas, power prices soared as well.
Changing Trade Routes
As the United States, many European countries, and some of their Asian allies said they would no longer buy Russian oil, international trade routes were reconfigured, causing a further increase in oil prices.
Sanctions and insurance risks caused many shippers to decline to carry Russian oil. Also, due to a lack of investment in recent years, many large oil producers were unable to boost supply to meet rising demand – even with the incentive of sky-high prices.
Unexplored Renewable Energy Options
For most countries around the world, energy still comes from fossil fuels, while renewable energy still remains largely unused. This is bad for the environment, but it also contributes to the current economic problems.
Without a secure and reliable means of generating energy, economies remain at the mercy of whoever is supplying the gas they need. This is not the way to solve the global energy crisis. Renewable energy sources such as solar and wind power can provide for everyone, ending our reliance on fossil fuels, and freeing us from energy anxiety.
Ways to Tackle the Crisis
Governments worldwide have started to implement a range of policy responses to cushion the blow for customers and businesses.
One of the things European countries can do is to diversify their sources of natural gas and turn to American and Middle Eastern liquefied natural gas (LNG). Although this is more expensive than natural gas via pipeline, Europe’s LNG imports have risen by 70% since the outbreak of the war in Ukraine.
Another avenue to pursue is nuclear energy. Smaller nuclear plants can provide reliable power supply throughout the year. Although they are expensive and politically challenging to build, Britain, France and Germany, in particular, should halt planned closures of nuclear plants and maintain those that are safe and functioning.
Finally, the EU should continue to increase its renewable energy generation, but with a realistic view to the current abilities of the technologies and not as a replacement for stable, reliable sources of clean energy.
Coordinated Demand Reduction
In July, the European Commission adopted a demand reduction plan for this winter. Member states agreed to reduce their gas demand by 15% compared to their average consumption in the past five years. The purpose of this regulation is to make savings in order to prepare for possible disruptions of gas supplies from Russia.
There is a need and potential for further demand reduction, but it will require cross-societal efforts and possibly rationing and ‘pandemic-style’ measures, such as mandatory teleworking. Industries, as well as public and corporate institutions and private housing, would have to reduce their energy consumption too, through improved insulation and energy efficiency, and other consumption reduction measures.
The first quarter of 2023 is likely to be one of uncertainty and political discontent in Europe. No measure alone can reduce electricity prices and secure the EU’s energy supply. The only way for Europeans to endure the winter is to work jointly and simultaneously on energy substitution, savings and solidarity.
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