While global leaders convened in Glasgow to achieve a low-carbon future, we can reflect on a very different picture in current energy markets.
Whilst the recent economic reflation has exerted upward pressure on commodity prices generally, it is spiralling energy prices (up around +60% year to date according to the S&P GSCI). All primary energy prices have soared, not only oil and gas, but also coal and electricity, even though there has been some easing over recent weeks. Brent oil price has soared by close to +60% YTD. But the price run-up in other fossil energy sources has been more impressive still.
The price of gas has skyrocketed (+250% YTD), due to a combination of supply and demand factors (massive increase of Asian countries’ imports, reduction of Russian exports to European countries, etc.) as China is switching away from heavy polluting coal. The situation has been more critical in Europe than in the US or Asia.
Yet, coal price has also surged (+117% YTD). For power generation, coal is a quick alternative to natural gas, particularly in China where coal accounts for 57% of the energy mix. Despite its own decarbonisation targets (and aiming for clear skies for the 2022 Winter Olympics in Beijing), China has finally, in the last few weeks, resolved to require its coal producers to increase production and has also turned to Australian imports again in order to secure economic activity and social stability (following massive power cuts affecting over 50% of Chinese provinces).
Oil has also been affected in its turn. It was already experiencing upward pressure from elsewhere (impact of Hurricane Ida on US production, low global inventories, low non-OPEC production, no increased supply from OPEC+ beyond what had previously been agreed, etc.). Note in particular that oil drilling equipment in the US has only marginally increased (and is almost 50% lower than in 2018) even though the oil price exceeds the breakeven point for most oil fields. All this points to some reluctance to produce more shale oil for the time being. This might be driven by a reduction in available capital for fossil fuels due to action around climate change. Indeed, global oil investments have been low for about 7 years, i.e. since the oil price peaked in June 2014 at just over USD 110/bbl.
Nor should we forget that inventories (in days of consumption) have fallen significantly, not only in the US (20% of global consumption) but also in all OECD countries (40% of global consumption).
As we know, fossil fuels are major sources of power production (much more than nuclear, hydroelectric and renewables combined), which is why electricity prices have surged as well.
All things considered, the combination of persistently robust demand thanks to the waning effects of the pandemic and relatively sticky supply augurs for the maintenance of high energy prices in the near future. As pressures and commitments to reduce the production and use of fossil fuel increase, we may see these inflated prices sustained as alternative energy supply struggles to catch up with rising energy demand. We may also expect volatile energy prices since renewable energy sources are for the most part (solar/wind) not dispatchable and intermittent. The COP26 has shed light on the widening gap between commitment and actions plans to reduce carbon emissions in line with climate Paris objectives. The final declaration includes a commitment to “accelerating efforts towards the phase-down of unabated coal power and inefficient fossil fuel subsidies”. But means and financing remain sketchy at the global level and rely heavily on massive investments in carbon-free or renewable energy.