Energy Inflation, Energy Security, And When Fossil Fuel Is Not Coming To A Dead End.

Energy inflation.

Inflation in Consumer Price Index (CPI) reached 8.5% per year in May 2022, and is on everyone’s mind, particularly seniors whose income is limited. Energy is a significant part of CPI – without food and energy, CPI was 6.0% in May. The main sources of global energy are still the fossil fuels: oil, natural gas, and coal.

Global oil has risen from zero dollars per barrel in mid-2020 to $102 per barrel now, and that has caused consternation about the prices of gasoline and diesel in the US, even though prices are still lower than most of the world.

Natural gas provides electricity, industrial fuel, home heating, and cooking fuel. Prices vary across the world, but natural gas prices are typically higher in Europe and Asia than in the US, partly because the US produces substantially more natural gas, especially since the shale revolution that began in 2003.

In Europe and Asia gas prices have risen in lockstep from $4-5/MMBtu (or MCF) in 2020 to unheard of highs of $25-40/MMBtu in June 2022. That’s roughly a rise by factors of 5.6 – 8.9 times.

Prices for natural gas in different parts of the world. Source: IEA, License: CC BY 4.0.

In contrast, natural gas prices in the US remained subdued, rising from $2/MMBtu in 2020 to $8/MMBtu in June 2022.

As the world crawled out of the pandemic in 2021 and 2022, businesses roared back to life. Through pent-up demand, people and companies clamored for more of everything, especially oil and gas, and were willing to pay more.

Russia and Ukraine.

Then the war in Ukraine started in February 2022, and energy games began. Talk in the West turned to limiting imports of Russia’s oil because oil and its derivatives, gasoline and diesel, were the main source of export revenue for Russia. Up to $2/3 billion per day was paid mainly by Europe and was used to finance the Russian war, it was claimed.

Natural gas was a minor source of export revenue for Russia, but still raised talk about embargoes by the West. But then Russia stopped gas deliveries to Poland and Bulgaria, ostensibly because these countries refused to pay in rubles. What Russia realized was that stopping gas deliveries to Europe hurt Europe’s economy more than it hurt Russia’s export revenue.

As described by Bloomberg, gas supplies through Ukraine have been reduced. Further, large volumes of Russian gas are conveyed to Germany via the Nord Stream pipeline which is about to shut down for ten days maintenance on July 11. Some observers worry that Russia may not restart the gas flow.

To complicate the picture, Russia has appeared to nationalize the Sakhalin-2 offshore oil and gas field plus LNG terminals. One interpretation is to squeeze out foreign partners, including Shell, from selling their stakes to other investors.

LNG stampede.

One solution to the gas problem for Europe is to import more natural gas from Norway, Europe’s largest supplier. Norway has access to its own North Sea gas reserves, and the second largest LNG port terminals in Europe. For example, the UK imports about 50% of its gas and almost 80% of this comes from Norway.

Another solution for the West is to limit pipeline imports from Russia and expand their imports of LNG (liquefied natural gas) from countries not aligned with Russia. Countries such as Qatar, Australia and the US – the top three LNG exporters.

The US wasn’t permitted to export natural gas before 2016, but the shale gas revolution changed that. Within the past six years, the US has reached the top of LNG exporting countries.

According to the Bloomberg report, 44 countries around the world are importing LNG, almost twice as many as a decade ago. Coal is declining, per the multinational agreement at COP26 in Scotland last November, and many think world oil production has already reached its peak.

But the G7 meeting just last week backed new LNG investments, mentioning Europe as a special need. Natural gas is fast becoming a global market.

New-build LNG projects.

Export LNG terminals are not cheap to build – up to $10 billion each. In North America, Cheniere Energy approved a terminal expansion in Texas. In Qatar, Exxon Mobil and Shell are involved with projects to grow LNG exports that add up to $29 billion.

Since the war in Ukraine, about 20 import LNG terminals have been initiated. Germany has invested $3 billion to implement four floating terminals. In China, who bought the most LNG last year, 10 new LNG terminals will come online in 2023. China’s capacity will double between 2020 and 2025.

Climate dilemma.

The shortages of energy and the rise in prices of gasoline, natural gas, and electricity are forcing policymakers to reevaluate the tradeoff between fossil fuels’ heavy contribution to greenhouse gases (GHG) and the need for energy security.

While writing this piece, the power went off in the local area. Its 92F outside, and my swamp cooler went down. Visiting my house is a person who needs oxygen day and night, but the main oxygen source runs on electricity. It’s a scary moment. We may have to find a hotel that has its own generator. I don’t have to rethink this one – our family wants energy security.

This is the USA, and there are dozens of countries across the world who do not have energy security. As the world transitions from fossil fuels to renewable energies, it needs to do it under the umbrella of energy security.

If the energy transition takes a little longer to guarantee energy security then so be it. The urgency of the transition is a point of contention. The book by Steven Koonin argues that global data trends of extreme weather events have not worsened over the past 50 years or so, when global temperature has risen by about 0.7C (Celsius). It’s a compelling argument that leads to the question: so why should climate scientists be concerned about the urgency of the next 0.5C?

Of course, the argument only addresses extreme weather events like droughts, wildfires, superstorms and hurricanes, and their global trends. People living in local regions such as California or eastern Australia in the past two or three years feel like they are living in climate changing weather extremes.

Natural gas has been pushed by big-oil as a halfway house, or bridge to renewable energies. This concept has taken on a life of its own in a more volatile world as described above. Countries are looking closer at natural gas which is much cleaner to burn than other fossil fuels like coal and oil.

In Europe especially, countries that are desperate to buy natural gas spells a weakening of climate policies that reject all fossil fuels. The needle has shifted a little from financing renewable energies to support natural gas projects.

Takeaways.

LNG imports could meet 40 % of Europe’s needs, according to Bloomberg, by 2026. While this is twice as much as in 2021, it falls far short of current gas imports from Russia.

Voices are rising in Europe that energy shortages promise a recession. Deutsche Bank warns energy rationing will lead to a German recession. Electricity prices are soaring in France and Italy. Morgan-Stanley said Europe will be in a slump by end of this year. Uniper SE, a German company that has to cover the Russian gas shortage by purchasing gas at high spot prices, is quoted as losing $31 million every day.