Energy in Crisis: A hiccup or a major crash?

Those of us who drive their own petrol-powered vehicles may have noticed it, gas prices are way up. This is by no means a Swiss specialty and is a symptom of a distributed and global shock to the energy system.

A market for hot coals

Looking around the continent, we begin to see a trend. For weeks, the UK has seen massive lines building up at petrol stations around the country; there has been a massive increase in natural gas prices across Europe as energy demand has outstripped supply.

Looking out further, US gas prices are reaching 3.4 USD, almost 150% of the pre-pandemic average, China is running out of coal and India risks seeing rolling blackouts to conserve fuel.

The causes of this are both global and local. Naturally the unexpectedly high demand for energy as economies bounce back from the pandemic, coupled with supply chain issues, can account for a big part of it. Local factors range from the Brexit-induced lack of truck drivers to distribute the existing fuel to petrol stations across the UK to refineries being knocked out by hurricanes in the United States, which have become more frequent as a result of climate change. In Europe, the scarcity results from a strong dependence on imports in a time where high global demand makes the stuff hard to obtain.

Green New Deal or Russian Winter?

The consequences of this crisis are being felt across the economy, geopolitics, and environmental policy.

As winter approaches and people move indoors, demand for energy is set to rise further, spurring fears of a worsening shortage which could threaten the post-pandemic economic recovery.

In Europe, there is the added factor of a dependence on Russia for natural gas. So far, Putin’s Russia has been reluctant to increase supplies. It has demanded the fast-tracking of a controversial pipeline, NordStrom 2, and that the EU agrees to long-term gas contracts, which would threaten the European green new deal.

Unlike in previous crises, there are no signs of oil producers ramping up investments to boost production and alleviate the energy shortages. Europe may well be left to the capricious mercy of the authoritarian leader.

Oil companies, under intense pressure from activist investors, are reluctant to invest in new projects and capacity as they used to in response to past crises. Indeed, such behaviour could threaten a carefully curated narrative of reducing their carbon output and may be a liability going forward.

A Green Path forward, but a hard one

As the world seeks to embark on a clean energy revolution, we are reminded of the fragility of the current system. Thus, it is sensible to examine the risks that shocks pose to tight markets and the challenges that will need to be mastered for the energy transformation to success.

The first is the transient nature of some renewable power sources and its sensitivity to changes in weather and seasons. A prolonged drought for example, could cripple hydropower production – a considerable hazard for a country like Switzerland where hydropower accounts for just shy of 60% of the electricity production.

Additionally, renewable power production is dependent on local factors and thus supply is located far away from where demand is strong. Taking Italy as an example, the sunny south lends itself well for solar power, but power is needed most in the heavily industrialized north. By extension of this analogy, there is a need to invest in power infrastructures if renewable electricity is to be transported across the European continent efficiently.

Finally, there needs to be buffer capacity to face temporary variations of power production. But this issue is not unique to renewables, as the current crisis shows.

All those are challenges for the coming years, and for now it remains to be seen how the energy situation evolves. Will we face an unexpected energy crisis severe enough to threaten the economic recovery? Or will supplies be unlocked by a bullish Russia in time to turn the tide? Time will tell.

Marius Gobet

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