Why the energy crisis will get worse

Usually, with rising energy prices, a country like Russia will increase its natural gas sales to its main customer, Europe, above the minimum contract volume. Instead, it sticks to its contract, even though it could make a lot more. At the time, it seemed that Russia was trying to force prices up. But, on the other hand, the Kremlin may have been preparing for war.

Since Europe depends on Russia for 35-40 percent of its oil and natural gas, Russian President Vladimir Putin assumed that the Europeans would protest the invasion but backed out in the end. Fixated on his self-appointed mission to restore what he sees as Russia’s historic empire, he doesn’t anticipate how they will respond to the unwarranted war next door.

Going forward, five factors could exacerbate the current energy crisis.

1. Putin has cut down on natural gas

Putin has opened a second front in the conflict by reducing the volume of natural gas contracts Russia supplies to Europe.

The aim was to prevent Europeans from stockpiling sufficient supplies for the following winter, and to push prices higher, creating economic hardship and political strife.

In his June speech at the St Petersburg International Economic Forum, Putin explained why: “Social and economic problems are worsening in Europe [will] divide their society [and] inevitably leads to populism … and elite change in the short term.”

As such, Germany now anticipates the need for gas rationing, and its Minister for Economic Affairs, Robert Habeck, warns of “Lehman-style contagion” (referring to the 2008 financial crisis) if Europe cannot manage its current energy-driven economy. disturbance.

2. Iran will not help

A new or revived nuclear deal with Iran is unlikely. As such, sanctions against the country won’t be lifted – and that means Iranian oil won’t be pouring into world markets any time soon.

3. Neither does Saudi Arabia

While Saudi Arabia could increase its oil production to help stabilize oil markets in light of the upcoming visit of US President Joe Biden, no bursts are likely to follow as there does not appear to be a significant amount of additional oil in Saudi Arabia (or in Saudi Arabia). United Arab Emirates) which can be produced in a short time.

Meanwhile, many other oil-exporting countries have not even been able to return to their previous production levels, due to a lack of investment and maintenance since the pandemic.

4. China request can return

China’s oil demand has been significantly reduced by the zero-COVID lockdown, which has sharply curtailed economic activity.

But if many restrictions are lifted, huge increases in oil consumption and demand will follow.

5. The refinery is at capacity

However tight the crude market is, there is even more tightening in the refining sector that produces the gasoline, diesel, and jet fuel that people actually use.

This sector has developed into a complex and highly interconnected world system. Russia refines products shipped to Europe, while Europe sends unnecessary gasoline to the US East Coast, and so on.

In some places, the system will run out of steam, with US refineries already operating at around 95 percent capacity. But the system as a whole is still unable to meet the demand. Russian refineries are only partially functioning, depriving Europe of oil products; and not enough European gasoline reaches North America.

Chinese refineries are operating at less than 70 percent capacity. About four million barrels per day of refining capacity has been shut down worldwide, due to the pandemic, new regulations and a challenging economy.

Add to that the risk of accidents, poor policy decisions, and hurricanes destroying oil refineries on the US Gulf Coast, and the situation could get worse.

That said, some countries can still boost production. Canada – the world’s fourth-largest oil producer after the US, Saudi Arabia and Russia – could provide the extra barrels in cooperation with its main market, the US. And US shale oil production is back on track and could add 800,000 to a million barrels per day of new production this year – far more additional production than the rest of the world combined.

Other factors that could mitigate a crisis include changes in prices and how consumers respond. In May, US gasoline demand fell 7 percent compared to May 2019, before the pandemic. Some of this, however, may be the result of more people working from home.

An economic slowdown could also dampen prices. S&The latest global purchasing managers’ index P shows weak economic growth, with US manufacturing activity “dropping to levels that have only more than doubled” – at the height of the pandemic lockdown and during the 2008 financial crisis.

Likewise, European growth has slowed sharply to a 16-month low. Such a slowdown could reduce demand and lower energy prices. But, of course, they will also burden the Western alliance and the unity of the people.

The next six months will be crucial, testing whether Europe can maneuver through the coming winter. In what Habeck calls a bitter but necessary decision, Europe needs to burn more coal. In the difficult months ahead, there needs to be more informed collaboration between government and industry that manages the energy flows on which modern economies depend.

Daniel Yergin is the Vice Chairman of S&P Global and author New Map: Energy, Climate and Clash of Nations (Penguins, 2021) and Present (Free Press, 2008), for which he won the Pulitzer Prize. He received the first James R. Schlesinger Medal for Energy Security from the US Department of Energy.

#energy #crisis #worse