The world is now experiencing a severe and complicated energy crisis. Researchers call it the “perfect storm” to describe how a number of seemingly unrelated events have conspired to create a global energy crisis.
Several reasons account for this energy crisis. First, the effect of population growth on energy consumption cannot be overlooked. Simply put: more people equals a higher demand for energy. Population growth has put a lot of pressure on the global energy grid, leading to price shocks.
In addition, we are still very dependent on fossil fuels. According to Forbes, 84% of the world’s energy comes from fossil fuels. In an effort to transition to renewable energy sources, fossil fuels are being phased out. However, renewable energy still can’t effectively replace fossil fuels. This premature transition is causing energy prices to rise.
There is also an ongoing war between Russia and Ukraine (which has allied itself with the West). In the aftermath, Europe’s access to natural gas supplies from Russia has been blocked. The war is escalating quickly, sparking fears of a catastrophic World War 3, which could result in all types of crises (including an energy calamity).
All of these things are happening in tandem while the world is still recovering from the coronavirus pandemic, which shut down global supply chains.
The Energy Crisis is Very Real
The crisis is centered in Europe, but it affects markets, politics, and economies all over the world. Since 2021, energy prices have been steadily on the rise. According to data from the U.S. Bureau of Labor Statistics on Consumer Price Increase, US consumers spent 14.3% more on electricity in 2022 than in 2021! This is more than twice the normal 6.5% increase in prices, and is largely associated with increasing prices of fossil fuels.
This is made worse by the fact that Saudi Arabia and OPEC are refusing to pump more oil, which is causing a shortage of fossil fuels on the market and sending prices skyrocketing at the pump.
Meanwhile, the military conflict in eastern Europe between Russia and Ukraine is escalating. The natural gas market experienced a shock when someone destroyed the Nord Stream Pipeline, which brought Russian gas to Europe. The fact that Europe’s energy needs aren’t being met has put more pressure on energy markets around the world, which has caused prices to go up.
As the world tries to find solutions to growing energy problems and resolve the geopolitical instability arising from the war, the energy crisis is getting worse, with a possible major meltdown on the horizon.
Causes of the Global Energy Crisis
Decreased Global Supply of Fossil Fuels
- Two million barrels per day of oil output were scheduled to be slashed starting in late 2022, as agreed upon by the world’s main oil producers. This move is being made by the oil-producing organization Opec+, which includes Russia, in an effort to increase oil prices.
- The sabotage of the Nord Stream pipeline in Europe has severed Europe’s access to Russian natural gas, placing more strain on global markets and resulting in price hikes.
- The Biden administration has implemented several policies and regulations that have effectively curbed America’s supplies of oil and gas. Its decision to shut down the Keystone Pipeline has significantly decreased the supply of crude oil in North American markets. The Keystone Pipeline is crucial in getting crude oil from Canada and the United States to consumers all around North America. Also, the Biden administration has decided to block oil and gas production on federal lands, accounting for roughly one-fourth of total US production.
Europe’s Shutdown of Nuclear Power Plants
Many people are opposed to nuclear power because they believe it is an unsafe and wasteful method of creating energy by heating water to a boil. After the disasters at Three Mile Island in 1979 and Chornobyl in 1986, many countries stopped building new plants.
In 2000, a coalition government of the SPD and the Greens started shutting down nuclear power reactors in Germany. Ten years after the 2011 Fukushima nuclear accident, Germany’s conservative CDU-led government chose to close the country’s remaining nuclear power reactors.
The era of German nuclear power usage came to an end on New Year’s Eve 2021, as people in Berlin were finishing up their preparations for the New Year’s Eve fireworks show. Germany decommissioned three of its six nuclear power facilities on December 31. By the end of 2022, the remaining three facilities would also be permanently closed. As a result, households faced higher electricity costs.
Combined with the lack of natural gas, the closing of nuclear power plants in Europe will also increase the need for fossil fuels and renewable sources. Nuclear power plants will likely be replaced by the energy that comes from gas, coal, wind, and hydropower.
Russia-Ukraine War
Russian energy companies are among the world’s largest and most influential. With Saudi Arabia and the United States, it is a top three crude producer globally. Russian gas reserves are the greatest in the world, and the country is the world’s second-largest producer of natural gas. In 2021, 45 percent of Russia’s state budget came from oil and natural gas exports!
Russia supplies Europe with gas through Ukraine’s pipelines as well as its own Nord Stream pipelines. Pipelines carrying Russian oil and gas through Ukrainian territory have not been shut off entirely since the conflict began. But after the Nord Stream pipeline was sabotaged and destroyed, natural gas from Russia to Europe was significantly decreased.
However, this has not derailed Russia. The war has caused global oil and gas prices to skyrocket, benefiting producers like Russia.
The invasion of Ukraine by Russia in February 2022 had a big effect on the energy markets all over the world. It has forced Europe to turn away from Russian natural gas and look elsewhere, which has caused prices to go up everywhere.
The International Energy Agency (IEA) says that the current situation is “the first true global energy crisis, with effects that will be felt for years to come.” Russia’s invasion of Ukraine has made it hard for the European Union to find a way to deal with its growing energy problem. As a result, energy costs have gone up around the world, including in the European Union.
USA Fuel Production/Refining Shortages
The US federal government has curbed the country’s fuel production and refining capacity by implementing several policies that limit fossil fuels. These include the banning of oil production on federal lands (roughly 25% of total oil production), as well as introducing strict environmental policies and regulations designed to cut CO2 emissions, thereby reducing oil production and refining. Such policies have resulted in rapid spikes in energy costs and the depletion of the SPR.
Effects of the Global Energy Crisis
Painfully High Inflation Rates
The price of crude oil and the rate of inflation in an economy are directly linked. Crude oil is a critical component or input in the manufacturing industry, used for materials, electricity generation, and industrial heating processes. Products made using crude oils include perfumes, cosmetics, toothpaste, soap, clothing, gum, and asphalt. It is also used in the production of petrochemicals used in plastics. As a result, an increase in oil prices almost certainly results in an increased rate of inflation in an economy, with prices on a whole range of products going up.
Not to forget that increased energy prices means it’s more expensive to transport goods, leading to hiked prices.
While different Countries have varying degrees of inflation, it has been a major problem all around the world in recent years. Food and energy are the main things that are driving up prices. Inflation rose by 7.7% in the United States, 6.5% in Brazil, 88% in Argentina, 10.4% in Germany, 12.6% in Russia, 2.1% in China, 6.8% in India, and a whopping 269% in Zimbabwe! Holy cow!
Certain product categories have been hit harder by inflation than others. The most-affected products included food, fuel, and air travel. For example, food prices at elementary and secondary schools have increased by a head-scratching 305.2%, while the price of eggs increased by nearly 60%. Jet fuel oil has increased by 41.5% while motor fuel prices have increased by 32.3%, according to CNBC.
How will inflation develop in the coming years? That’s something we’d all love to know.
Food Crisis
As energy prices have been soaring, food prices have also been going up and showing no signs of slowing down. This has placed an estimated 345 million people globally at risk of starvation, according to a study by the United Nations. There are many reasons why rising energy costs are affecting food prices:
- Farmers are feeling the sting of higher costs of buying fertilizers for their crops, forcing them to pass the buck to consumers by raising prices on basic goods like wheat, corn, and edible oils.
- As the cost of fuel for cars, trucks, jets and ships increases, the cost of transporting agricultural inputs and outputs is also increasing, causing rising food prices.
- As traditional fossil fuels are becoming more expensive, more food is being used for generating biofuels, leaving less supply for food production and causing price hikes.
Soaring Energy Prices
Since 2021, there is a clear tendency of rising energy prices across the board, from electricity to gasoline and natural gas. According to research published in Nature Energy by a multinational team of experts, the cost of energy for families worldwide might have grown by between 62.6% and 112.9% since Russia’s invasion of Ukraine!
The research simulated how increasing energy costs might affect the purchasing habits of 201 groups representing various income brackets and geographic locations across 116 nations, accounting for 87.4% of the world’s population. According to their calculations, this might cause an increase for 78–141 million people living in poverty throughout the globe!
Electricity rates in the United States have also increased by 15.8% over the last year due in major part to the rising cost of natural gas, which is used to provide over 40% of the country’s energy.
The future for oil prices is likewise rather worrying. On March 8, 2022, Russia’s invasion of Ukraine and low global crude oil inventories united to send crude oil prices to their highest level compared to inflation since 2014. A prolonged rise in oil prices over the near to medium term is often accompanied with reduced economic growth and increased inflation. The market is reacting unfavorably to this, causing stock prices to plummet.
Depleted Strategic Petroleum Reserves
In more ways than one, President Biden’s policies have been emptying America’s Strategic Petroleum Reserves (SPR). Almost 26% of the SPR has been used up since January 2021. President Biden stated on March 31, 2022, that the SPR will release an additional one million barrels of crude oil per day for six months in an effort to combat rising oil and gasoline prices. Since President Biden took office, the SPR has dropped from 640 million barrels to 450 million barrels.
Probably the most criticized of Biden’s energy policies has been his plan to sell oil from the United States’ SPR to foreign firms, particularly in China. Millions of barrels of oil from U.S. reserves were sold to China last year, including to a subsidiary of Sinopec, China’s state-owned oil firm. Since Congress overturned a nearly 40-year restriction on most U.S. crude oil exports in 2015, the Department of Energy, which administers the stockpile, could no longer prevent the export of SPR oil to foreign countries and corporations.
China is not the only country benefiting from American oil exports. For example, American oil company Phillips 66 had purchased SPR oil and sold about 470,000 barrels of it to Italy, according to government data. As a result, the SPR is at its lowest level since 1984, which could lead to major problems in the future. When the energy crisis hits the hardest, the US will have a far lesser stockpile of domestic petroleum to lean on, increasing dependency on foreign oil imports.
People in England Freezing Over the Winter
As the weather got colder, the average energy bill in England doubled from end-of-year 2021 to the same time in 2022, with many Brits heating less to save on energy bills. Six in ten (61%) claim that when their heating was on, it was either not on for as long as they would have liked, it was not as hot as they would have liked, or both. 15% of respondents said they did not have the heater on at all!!
Germany: Firewood Demand has Skyrocketed
Gas heating systems are used by almost half of German households. But since the Russian-Ukrainian conflict, the reliability of the gas supply has been in question. As a result, an increasing number of Germans are switching to burning wood again. The phenomenon of “wood poaching” in Germany (and globally) has recently exploded as more and more wood poachers have resorted to unlawful tree cutting.
This problem is anticipated to get worse as the price of wood pellets used in central heating systems has risen by 85%. Illegal wood cutting has become a global trend in several regions of Europe, South America, Southeast Asia, and even in California! Cameras are now being installed in forests and people are being asked to report suspicious activity in an attempt to crack down on this.
EU Crackdown on Heating and Cooling
The European Union is urging its member states to set limits to cooling and heating in homes and public areas. The European Commission recommends that heaters in public areas in wintertime not be set higher than 19 degrees celsius while cooling in summertime not be set below 25 degrees celsius.
Moreover, nations have enacted their own (often more severe) restrictions and temperature rules for residential and public heating/cooling. In many Swedish apartment complexes, for instance, the maximum allowable internal temperature is 21 degrees Celsius; in Switzerland, the limit is just 19 degrees for buildings with gas heating. In addition, Italy, Greece, and Spain have enacted temperature limits for public places such as hotels, restaurants, and airports.
Strain on US Energy Grid
Throughout modern history, the United States electric grid has been more than 99% reliable. But now, this is quickly changing. Nearly 70% of the U.S. electrical system is now 25 years old, and our energy grid’s reliability is at a record low.
In 2020, the average American experienced 8 hours without electricity, a record high! Power outages are becoming more frequent and more severe, with an increase in major blackouts of over 60% from 2015 to 2020!
In many cases, the American energy grid is no longer resilient enough to handle extreme weather conditions and storms, leading to disasters like the great Texas Winter Blackout of 2021.
In an attempt to relieve the strain on the energy grid, many States are trying to tamper energy use. In New York, mayor Bill Deblasio urged New Yorkers to reduce their home energy use by turning off “everything they don’t need.”
The Great Texas Winter Blackout of 2021
On February 11-20, 2021, a historic winter event occurred that broke several records. The February 2021 severe freeze in Texas revealed the state’s energy supply chain’s inability to endure exceptionally low temperatures.
Almost 5 million Texans were without electricity at its height, with 11 million suffering a blackout at some point in time, some for more than three days. After almost two years, it is still unclear if the electrical system has become more resistant to cold weather.
Diesel Shortages
Major restrictions on global oil refining are mostly to blame for the drop of global diesel supplies. Environmental policies restricting CO2 emissions and ESG policies have severely cut the global oil refining capacity, resulting in a diesel fuel scarcity and accompanying price spike. In just 2 years, US diesel prices increased from about $2.64 per gallon in January of 2021 to almost $4.60 in January, 2023!
Some states in the USA have already implemented radical policies to cut diesel emissions, exacerbating diesel shortages. For example, California’s plan would mandate that all new trucks be emission-free by 2040. Big corporations will need to change their fleets over the next few years. Truckers are concerned about the affordability and viability of electric vehicles.
What are the Takeaways?
Make no mistake about it – the world is facing a huge energy crisis which is likely about to get worse. But, that doesn’t mean that we need to panic. We should, however, do the best we can to be informed about the ongoing situation and do everything in our power to prepare for the worst.
A few steps we can take to prepare for the energy crisis and potential blackouts include:
- Plan for batteries, candles, and other alternative sources of energy and lighting
- Stock up on essentials
- Detail your energy consumption by appliance
- Prepare for an all-around emergency
