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What's Behind the Energy Crisis Set to Push Up Fuel Costs This Winter

The global energy crisis is about to hit home in the U.S. this winter as high energy prices and expectations of a colder winter than last year put pressure on common heating fuels. 
In a short-term forecast released this week, the federal Energy Information Administration (EIA) predicted that propane expenditures will rise by 54 percent, heating oil by 43 percent, natural gas by 30 percent, and electricity by 6 percent compared to last year. 
Among these, high natural gas prices have garnered most of the attention in recent weeks, given the global dependence on the fossil fuel for a range of energy needs. 
Nearly half of U.S. households use natural gas to heat their homes, according to the EIA, while the agency predicts that the price of the fuel will hit $5.67 per million British thermal units (MMBtu) between October and March, which is the highest winter price since 2007–2008.
Much of Europe is scrambling to secure more natural gas for the winter, as the long-term contracts that power companies had with suppliers proved woefully inadequate. 
This has left countries at the mercy of a volatile spot market and the whims of Russia's state-owned gas company Gazprom, which many have accused of politicizing Europe's dependency to push forward the construction of the controversial Nord Stream 2 pipeline.
In China, meanwhile, manufacturers are rationing electricity amid soaring coal prices. The tighter supply has forced the country to look beyond its borders for energy, putting further pressure on the international market for liquefied natural gas (LNG) that can be loaded onto tankers and shipped, unlike regular natural gas, which must be transported through pipelines. 
In just the past week, a major Chinese energy company inked a 13-year contract with an American LNG supplier, a clear example of China trying to insure itself against future shortages. 
The increased demand from Asia for LNG has only exacerbated the problem in the United Kingdom, where domestic energy providers were banking on LNG imports from the U.S. and other exporters to meet their energy needs amid higher prices in Europe. 
Taken together, this paints a pretty complicated picture. Like so much during the pandemic, one economic effect cascades into another. It's a bit like a game of dominos where no one knows where it started or where it's going to end, and the pieces are the size of shipping containers. 
But unlike other supply-constrained commodities, such as lumber, semiconductors, or aluminum, to name just a few, a tight market for natural gas and fuels is likely to have a much more widespread and immediate impact, touching everything from manufacturers to households. 
What caused this mess? Cheddar put together a breakdown of the most commonly cited reasons. 
Just keep in mind that this situation is playing out in real-time, and there are heated debates underway about why this is happening and what should happen next. 

The COVID Story 

One widely held explanation for the energy crisis should be familiar at this point, as it's been cited as the reason for any number of supply and demand problems: COVID-19.
The story goes something like this: When demand dropped off early in the pandemic, suppliers were forced to adjust accordingly, 
Then, when demand roared back more quickly than anticipated, multiple industries were caught flat-footed, and have been catching up ever since. 
Natural gas saw a version of this scenario play out to a tee. 
Global demand for gas fell 2.5 percent in 2020, according to the International Energy Agency (IEA), which is the largest ever recorded drop in consumption, and many expected it would haunt the industry for some time. 
“Global gas demand is expected to gradually recover in the next two years, but this does not mean it will quickly go back to business as usual,” said Dr. Fatih Birol, the IEA’s executive director, in a press release in June 2020. “The Covid-19 crisis will have a lasting impact on future market developments, dampening growth rates and increasing uncertainties.”
Indeed, the low demand encouraged many suppliers to cut spending and postpone investment decisions to make up for the shortfall in revenue. 
This led some experts to predict that long-term demand for natural gas was in question. 
Ira Joseph, head of Global Gas and Power at S&P Global Platts Analytics, wrote in a research brief last year that "the issue with gas is neither availability nor price, but demand."
The energy expert anticipated that demand might fall off in such a way that would hinder the status of natural gas as a bridge fuel in the transition between fossil fuels and renewables.  
In retrospect, this may be hard to believe, but to understand how many got it so wrong, the next place to look is the changing global market for natural gas. 

Global Competition 

In some key respects, the natural gas market has changed in several fundamental ways over the last decade, and one major shift is the emergence of LNG. 
As industry players boasted prior to the pandemic, LNG — which again is easier to export — helped make the industry much more flexible when demand dropped earlier in the pandemic. 
When demand fell, they were able to adjust their supply in real-time, and thus control prices. 
In effect, this makes the natural gas industry behave more like the oil market, which relies less on long-term contracts and more on the short-term spot market. 
"Buyers value more flexibility so they can cope with uncertainty," said an August 2020 brief from the consulting firm McKinsey. "This can be achieved via increasing reliance on spot and short-term volumes as well as incorporating additional flexibility into long-term contracts." 
McKinsey also said buyers expected this trend to accelerate in the future, with more and more of their portfolios moving over to the spot market rather than long-term contracts.
The problem with the spot market is that prices are much more volatile. One of the biggest issues in Europe right now is that buyers underestimated their needs, signing onto long-term contacts that ended up leaving them without enough inventory for any fluctuation in supply.  
Now buyers are piling into spot markets to meet their needs, and prices are rising accordingly. Imagine a Black Friday rush, but instead of PlayStation 5s it's tankers sloshing with liquefied gas.  
While Europe, which is deeply dependent on foreign suppliers, has taken perhaps the biggest hit, even major supplier countries, like the U.S., are facing consequences. 
Due to record demand for LNG from U.S. producers, there is actually less available for domestic use. 
"Because U.S. LNG exports have grown faster than domestic natural gas production, inventories are lower than average," EIA said in a recent brief. 
The agency estimated that at the end of September inventories were down 5.5 percent from the five-year average. 
"Lower U.S. inventories could contribute to more natural gas price volatility, particularly if any area in the United States experiences a severe cold snap, which makes the price outlook for this winter very uncertain," it said. 
This kind of zero-sum situation is a nightmare for those who have long called for free and open energy markets, which were supposed to account for these kinds of fluctuations. 
Perhaps predictably, the fossil fuel industry is pointing a finger at the federal government for overregulating oil and gas producers and limiting their access to federal lands. 
"The situation in Europe should serve as a huge warning to the Biden Administration and Members of Congress calling for punitive taxes, fees, and onerous new regulatory requirements on our industry," said Anne Bradbury, CEO of the American Exploration & Production Council, in a statement. "By pursuing policies that restrict supply and make it harder to produce oil and natural gas here in America, Americans will have to pay more for their energy." 
But according to the EIA, there's plenty of natural gas in the U.S. It's just that international demand is drawing more and more of it out of the country. 
Again, if last year's miscalculations are any gauge, current projections should be taken with a grain of salt as well. 
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