Soaring Energy Prices: Reasons and Road Ahead | RationalStat
Soaring Energy Prices RationalStat

Russia-Ukraine War Disrupting the Energy Trade?

The recent upsurge in energy prices across the globe reflects the after-effects of the Russia-Ukraine War rising the cost to their highest prices in decades. Russia is responsible for about 40% of Europe’s natural gas imports, which may lead to the latter’s downfall.

Europe remains the most affected region, mainly Germany, being Europe’s leading economy witnesses a hike in the imported energy cost offsetting the high-value exports of cars, machinery, etc. 

Already, the energy-intensive German industry is making transformational shifts from gas to oil or coal.  Moreover, in the key market, including the US, Europe, and Asia, there has been a prominent shift in the use of coal instead of natural gas to generate electricity, which simultaneously is responsible for the rising global CO2 emissions from electricity generation. The escalating gas & coal prices and rising European carbon prices are expected to result in higher electricity prices.

  • Plastics maker, Covestro is expecting its fuel bill to reach an all-time high of US$ 2.2 Billion in 2022, almost four times its costs in 2020, the year before Russia started choking off gas supplies to Europe.
  • In countries like Spain, where gas-fired power generation plays a significant role in setting up electricity prices, prices were tremendous. Resulting in the European and Asian benchmark prices hitting a record ­­­­­­­­­– being ten times higher than their level a year ago.
  • Whereas in the US, natural gas prices have tripled since October 2020 and touched the highest level since 2008.

Hold-ups in the supply of energy after a year of lockdowns in 2020 coupled with simultaneous economic recovery in Asia, diverted the Russian pipeline deliveries going to Europe, reducing the average level of the country’s gas storage.

Businesses and consumers – are both Feeling the Pinch

A crunch from both the demand and supply sides has significantly weakened marketplaces over the years. Additionally, unplanned and unforeseen outages at LNG liquefaction plants, issues in supply, project delays, and unexpected repair work, all further tensed the global gas market.

The global gas and energy market is expected to witness a continuously escalating demand owing to harsh winter in the Northern Hemisphere, droughts that restrict hydropower output in Brazil and other places, and less wind generation in Europe than usual. Thanks to Covid-19 lockdowns in Europe which pushed maintenance and repair work to 2021, pondering on the supply at the time escalating demand.

Countries like India and China, which account for being among the largest coal consumers, have continuously reduced coal stocks, right before the winter season owing to the International coal prices being five times their level a year ago.

Natural Gas and Coal Prices RationalStat
Source: World Bank

Moreover, the coal power producer in China does not have sufficient coal resulting in blackouts across two-thirds of Chinese states. The Chinese government has directed energy-intensive industries like cement, steel, etc. to cut production. Not only that, households in some provinces are even facing power cuts.

Regarding India, the country’s 80% of the coal mining output doesn’t walk hand in hand with the upsurging demand. And the country’s imports are becoming uneconomical owing to the skyrocketing international energy prices. Although the Indian government is taking the required measures, several states still have suffered serious power shortages, disturbing both residential and industrial customers.

Road Ahead

Globally, the key drivers influencing the dynamics of the energy industry during the upcoming months will be the severity of the price hikes and unplanned supply outages. Moreover, the rising unending price rise is expected to intensify pressure on household electricity and gas bills and present higher risks to economic activities, like electricity production and other industries directly affected by the soaring prices.

Many businesses in Europe and the Middle East are likely to experience the twin effects of rising energy prices and a potential drop in consumer expenditure due to consumers' increased energy-related costs. Rising power rates are already impacting the operations of electricity-intensive industries. Additionally, several businesses have temporarily reduced their ammonia and fertilizer production due to declining profits brought on by the rapid rise in gas costs.

It’s not about shutdowns. It’s pricing, it’s the cost

Currency Fluctuation

The continuous decline of the pound against the dollar has been driven by the failure of the Bank of England to keep up with the American Federal Reserve's efforts to curb inflation. According to the bank of England, a recession resulted from two consecutive quarters of economic loss, and it was predicted that Britain may already be in one. However, the UK has the greatest inflation among large developed countries.                 

Ukraine-Russia War

Furthermore, the most significant factors for the market outlook are the longevity of the Russia-Ukraine conflict and how much it will hamper trade in coal and natural gas. The already reduced natural gas exports from Russia to Europe could further cause prices to become vulnerable.  Besides, weather-related factors and import policies, which can alter trade patterns, continue to threaten prices. The meager global spare natural gas production capacity will further fuel the skyrocketing prices.

Weather Situation

The European countries are already witnessing low inventory levels but more broadly when weather patterns change and the climate warms, more energy will be needed to cool or heat homes because of the extreme temperature swings, which increase the demand for these commodities. Weather-related natural events have an impact on both the production of fossil fuels and renewable energy, respectively.

In such conditions, it is legitimate for countries to take up emergency measures in the upcoming years, including tax reliefs, easing the burden on end-users. Regional governments are proposing national-level policies to shield consumers from rising energy prices. RationalStat expects that the electricity, natural gas, and other energy prices to remain at elevated levels and volatile till 2023.

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