Gas and other energy prices have spiked in Greece, Europe and globally in the past two weeks. Experts have been researching whether this could lead to a new global energy crisis, like the one in the 1970s.
Analysts believe gas prices are the main driver behind surging energy costs in Europe. The cost of permits in Europe’s carbon market has contributed up to a fifth of the increase. Russian Gazprom’s draconian supply cuts have also played a significant part.
The cost is now six times higher than what it was last year in Europe and is continuing to increase, with the energy crisis unlikely to abate before the spring. Governments are scrambling to issue subsidies and cut taxes in an effort to protect consumers.
No energy hike key trigger
There is no one key trigger causing this energy price mess. It is rather a “perfect storm” of steadily declining European gas supply, further impaired by supply shocks around the globe.
Add a post-Covid-related boom in gas demand particularly in Asia, while European gas storage levels, which could normally provide a buffer, being at record lows after a cold previous winter, and you have the current energy crisis in a nutshell.
The implications are manifold: Consumers facing high energy prices, suppliers going bust (particularly in the UK), and calls for policy actions to protect customers, to rescue suppliers, and implement measures to guarantee supply security.
Some countries are already responding: France is freezing consumer energy prices and Spain is taxing “windfall profits” to release consumers. The EU maintains that its plans to tackle climate change will cut bills by reducing their exposure to volatile fossil fuel prices.
Brussels claims that if countries fail to quickly cut emissions they could face far greater costs in the form of deadly floods, heatwaves and wildfires. But there are reactions to this official EU response to the energy crisis.
The Netherlands cautioned against interfering in Europe’s power and CO2 markets, while Belgium said it was “not convinced” joint gas buying would help fend off soaring energy prices.
In Greece, the government has laid out its plans for tackling the gas price hikes, based on state energy subsidies to monthly electricity bills. It has widened its criteria, so that the subsidies can be offered to both poorer and middle class citizens.
Naturally it’s impossible to know whether energy prices will spike again as violently as they have in recent months. But that’s the point — all commodity markets are inherently volatile, to an extent unpredictable and imperfect.
Global energy crisis, 1970s style?
Now, could the energy prices lead to an international energy crisis, like the one in the mid-1970s? Analysts think it is possible, but not very probable.
The 1970s energy crisis occurred when the Western world, particularly the US, Canada, Western Europe, Australia, and New Zealand, faced substantial petroleum shortages, real and perceived, which led to elevated prices.
The two worst crises of this period were the 1973 oil crisis and the 1979 energy crisis, when the Yom Kippur War and the Iranian Revolution triggered interruptions in Middle Eastern oil exports.
In 2021, though, the world’s dependence on oil is less substantial. What’s causing the current energy price crisis is the hike of gas prices in our globalized economy.
“There are concerns that rising gas prices will put Europe’s post-pandemic economic recovery at risk,” says Henning Gloystein, director of the energy, climate and resource team at consultancy Eurasia Group.
The massive jump in recent energy price costs, which shows no signs of abating, is fanning inflation fears, says Gloystein. Those fears have been forcing policymakers to carefully consider their next steps.
Transition to cleaner energy effects
Further complicating the picture is mounting pressure on governments to accelerate the transition to cleaner energy, as world leaders prepare for a critical climate summit in November.
Governments that have committed to reducing emissions are preemptively trying to send a firm message: This bolsters, not undermines, the case for investing in a broader mix of energy sources.
“The best case scenario is that a winter with average temperatures allows energy price pressure to lift in the second quarter of 2022,” says Jim Burkhard, who leads IHS Markit’s research on crude oil, energy and mobility.
The energy price crisis is rooted in soaring demand for energy as the economic recovery from the pandemic takes hold. The carefully calibrated system that is in place is easily disrupted by weather events or mechanical problems.
There’s also anxiety that energy price volatility could feed public skepticism about funding for the energy transition, according to Gloystein, should consumers demand more investment in oil and gas to limit future fluctuations.
In a globalized economy such as the world has in 2021, a new global energy crisis will probably be less severe, and dealt with more swiftly than the 1970s one. Institutions like the EU have the power to take measures in stabilizing energy prices and preventing a long term energy-economic collapse.
Regulation may be a “forbidden” word in our current market-orientated economy, but even free market advocates understand that it’s better than an out of control energy crisis.