Year over year price increases for fossil fuels range from double to nearly septuple. Quite suddenly, the world does not have enough energy supply to meet demand. The terrifying part is that there is no solution for the immediate term. A convoluted amalgamation of contributing factors have all come together to spark this mess with a common thread of COVID dislocation and climate change. It comes from both supply and demand shocks, making even medium-term solutions difficult.
Producers of fossil fuels, perhaps fearing a plunge of demand last year, abruptly cut back capital spending. The US has roughly 430 active oil rigs now, but pre-COVID that number was more than 50% higher. It was down to 250 last spring. Mother nature decided to help things along with Hurricane Ida – Gulf production is still down. It is much the same story everywhere. Chinese production of coal plunged last year and still has not recovered while their factories are humming along at larger rates of production than ever before.
Down the supply chain, we have more constraints. In the UK, a lack of available drivers for fuel trucks sparked a shortage of gasoline. Many drivers retired last year for COVID-related reasons and not enough have come to take their place. Eventually, pay will rise and that will recover, but that does not help in the short term. The British military has had to help by using soldiers to transport gas. Europe is beginning to see similar issues. Geopolitical constraints have kept Russian natural gas out of the European market and sent prices to more than seven times their levels last year and to record levels by a wide margin. Chinese powerplants – unable to raise prices because of the government-controlled economy – have shut down for lack of affordable coal. That problem, much like Europe’s, would fade if coal was free to float in from nearby Australia.
Demand for power, meanwhile, has shown real strength. China has faced rolling blackouts after impressive growth from the manufacturing sector. Rather than dampening demand, the rest of the world being unable to go out has been an excuse for consumers to spend money on goods instead, which means different parts of the world need more electricity. Closer to home, working from home has scattered many across the US and electricity consumption has been much less concentrated in typical places. Spikes in power demand when people get home from work have changed as those people have their appliances running over less predictable times.
Simultaneously, we are shifting away from fossil fuels into renewables like wind and solar. Levels of investment into the exploration and production of those fuels is the lowest it has been in decades. Solar, wind, and hydro power sources are inherently intermittent, though. Parts of Europe that rely more on renewable power have struggled with cloudy weather and less wind than usual. Supplies of natural gas to Europe, the bridge the US is using to help us until there are better methods of power storage than currently exist, are controlled by an increasingly hostile Russia. Despite a recent expansion of production, very little is being exported to Western Europe. Many coal power plants have shut down. Europe’s best option would be nuclear power, but only France has shown willingness to use significant amounts of that. Germany shut down all of its reactors after the Fukushima disaster even after it became glaringly obvious that the root cause of that was an unwillingness to use modern safety measures.
The confluence of contributing factors mean that there is no cure-all. We cannot attack the problem with a single solution because there is no single issue. Instead, many features of the current energy landscape are piling on top of one another to create this problem. A collection of solutions is needed to correct the collection of issues.
- The natural gas price spike is a geopolitical issue that can be partially fixed over time as the US continues to grow liquefaction capabilities, which in turn will allow us to export more liquefied natural gas to Europe. In the meantime, Europe is running dangerously low on one of its largest power sources. Further diversification of supply to Qatar may help them, but they also have limited liquefaction capacity. Russia is trying to make a point that they are still relevant and, to Europe, they are. We will soon be headed into winter and the only solution that does not involve forgiving Russian aggression (in Ukraine and in assassinating people on European soil and in meddling in elections) is to reopen shuttered nuclear plants and/or coal plants.
- In the medium term, this will continue to be an issue unless we use more market-based solutions. Governments are not able to predict future weather, future demand, or even future supply. Markets can adjust much more quickly than planning – as China is discovering now with its rolling blackouts. Putting a price on carbon via cap and trade or taxation encourages adjustment without clumsy restrictions.
- Baseline power production is needed to cover for the inconsistent production coming out of renewable sources. Nuclear would be the best way of covering that with existing technology, but perhaps energy storage technology will be commercialized in the future. Since relying on yet-to-be-invented technology is reckless, encouraging more widespread usage of nuclear could start with lowering the obscene regulatory costs associated with running nuclear power plants.
- While the shortage is much less acute in the US, supply chain issues still exist. One possible stopgap measure is using military logistics. Higher prices for both crude oil and natural gas will encourage more drilling, but worker shortages may still be creating resistance. Getting people back into the workforce may also help solve energy shortages.
- Care needs to be taken to simplify the safety regulations for nuclear power producers and we need larger investments into energy storage technologies. It’s too important to leave to chance. Redundancies are better than shortages when it comes to powering our homes, businesses, and factories.