Prof. ST Hsieh
Director, US-China Energy Industry Forum
June 2, 2022
World in 1970s is very different from today, it was the cold era, back and white: US against the evil empire Soviet Union. There was not much energy export from Soviet Union to Europe. When OPEC exercised the oil embargo against west, it was about crude oil only. Natural gas was only a domestic issue for the US. There was no globalization or WTO, China was still busy with cultural revolution by herself.
Now, even with the current trend of de-globalization, US is till the largest economy in the world, but China is the second largest economy and catching up. The US is the largest energy producer in the world, but China is the largest energy consumer now. The 1970s oil crisis was initiated by OPEC against the western industralized nations, the west responded by organizing an OECD based IEA to coordinate energy policy. The purpose was to fend off another OPEC oil embargo.
Now fifty years later, it is a very different world from the 1970s. The bad news is that a “1970s-style energy crisis” will be more devastating than ever. If it were worse, then the world economy could be in recession for generations.
The world has yet to recover from the global COVID-19 pandemic, if the Ukraine war does not reach a cease fire soon, winter of 2022 will be very cold!
The world may be careening toward a 1970s-style energy crisis — or worse
New York (CNN Business)The world is grappling with gravity-defying energy price spikes on everything from gasoline and natural gas to coal. Some fear this may just be the beginning.
Current and former energy officials tell CNN they worry that Russia’s invasion of Ukraine in the wake of years of underinvestment in the energy sector have sent the world careening into a crisis that will rival or even exceed the oil crises of the 1970s and early 1980s.
Unlike those infamous episodes, this one is not contained to oil.
“Now we have an oil crisis, a gas crisis and an electricity crisis at the same time,” Fatih Birol, head of the International Energy Agency watchdog group, told Der Spiegel in an interview published this week. “This energy crisis is much bigger than the oil crises of the 1970s and 1980s. And it will probably last longer.”
The global economy has largely been able to withstand surging energy prices so far. But prices could continue to rise to unsustainable levels as Europe attempts to wean itself off Russian oil and, potentially, gas. Supply shortages could lead to some difficult choices in Europe, including rationing.
Joe McMonigle, secretary general of the International Energy Forum, said he agrees with this depressing forecast from the IEA.
“We have a serious problem around the world that I think policymakers are just waking up to. It’s kind of a perfect storm,” McMonigle, whose group serves as a go-between for energy producing and consuming nations, told CNN in a phone interview.
The extent of that perfect storm — underinvestment, strong demand and supply disruptions from the war — will have wide-reaching consequences, potentially threatening the economic recovery from Covid-19, exacerbating inflation, fueling social unrest and undermining efforts to save the planet from global warming.
Birol warned of supply bottlenecks of gasoline and diesel, especially in Europe, as well as rationing of natural gas next winter in Europe.
“It is a crisis for which the world is woefully unprepared,” said Robert McNally, who served as a top energy adviser to former US President George W. Bush.
Not only are energy prices very high, but the reliability of the power grid is being challenged by extreme temperatures and severe drought. A US power grid regulator warned last month that parts of the country could face electricity shortages and even blackouts this summer.
‘Our fears have borne out’
Former Obama energy adviser Jason Bordoff and Harvard University professor Meghan O’Sullivan wrote a piece in the Economist in late March warning that the world was on the cusp of “what may become the worst energy crisis since the 1970s.”
“Since we wrote that, our fears have borne out,” Bordoff, co-founding dean of the Columbia Climate School, told CNN.
Of course, there are key differences between today and the 1970s. Prices have not spiked nearly as much as they did then and policymakers have not resorted to extreme steps like price controls.
“Were we to resort to price controls and price caps, then we could have shortages,” McNally said.
When the war started, the West sought to avoid targeting Russia’s energy supplies directly because it was simply too critical to global markets. Russia is not just the world’s largest oil exporter, but it is the biggest natural gas exporter and a major supplier of coal.
But as the brutality of the war became clear to the world, that hands-off approach did not last, with the United States and other countries banning Russian energy imports.
Russia retaliated against Western sanctions by restricting or even halting its shipment of natural gas to multiple European countries.
The European Union announced plans this week to phase out 90% of Russian oil imports by the end of the year. That move has raised the specter of further retaliation from Russia.
This tit-for-tat situation has only worsened the supply shortfall in energy markets that were already tight.
“We have not yet seen how bad this energy crisis is going to get,” Bordoff said.
Already, US gasoline prices have surged by 52% over the past year to record highs, angering the public and contributing to the nation’s inflation crisis.
Prices for natural gas, a vital fuel for heating homes and powering the electric grid, have nearly tripled over the past year in the United States. Natural gas prices have skyrocketed even further in Europe, though they are well off their worst levels.
‘Putin just brought us there faster’
Today’s energy turmoil is not simply the result of the war in Ukraine. It is also the byproduct of cratering investment in oil and natural gas, which are depleting resources that require massive sums of money just to maintain their production, let alone increase it.
Upstream investment in the oil and gas sector stood at just $341 billion in 2021, 23% below the pre-Covid level of $525 billion and well below the recent peak in 2014 of $700 billion, according to the IEF.
This investment shortfall has been brought on by a series of factors, including a push among investors and governments to bet on clean energy, the uncertain future of fossil fuels and years of weak and volatile oil prices.
“Because of the desire to bring down carbon emissions, we have a lot less appetite to invest in hydrocarbons. And that exacerbates the price volatility and makes it more difficult to resolve the supply side,” said Francisco Blanch, head of global commodities at Bank of America.
Europe was already grappling with an energy crisis last year and prices for natural gas, coal and oil were high long before the first Russian tanks began rolling into Ukraine.
“We were heading towards a crisis anyway. Putin just brought us there faster and sharper,” said McNally, who is now the president of consulting firm Rapidan Energy Group.
Shortages and gas lines?
The 1973 oil crisis was marked by hours-long lines at gas stations, fuel shortages and panic.
Experts said they worry about fuel shortages again today, although they view that as a greater risk in Europe than in the United States.
“Fuel shortages are a global problem. You’re going to see that very soon, though maybe not in the US,” said Bank of America’s Blanch.
Blanch said he thinks this risk is lower in the United States because the country remains one of the biggest oil producers on the planet and is a major exporter of energy. Europe, on the other hand, is more reliant on foreign oil and natural gas — especially from Russia.
The IEA chief warned of natural gas rationing in Europe, which is heavily dependent on Russia for gas.
Blanch noted that sky-high natural gas prices have already shut down factories in Europe.
“Europe is already in natural gas rationing mode,” he said.
‘We have to be careful here’
Energy experts told CNN they worry global policymakers are mismanaging the climate crisis, focusing too much on reducing supply and not enough on cutting the world’s appetite for fossil fuels.
“We’re not doing nearly enough to reduce hydrocarbon demand consistent with our climate goals,” said Bordoff.
Focusing on just one side of the equation risks not only price spikes but social unrest and turning the public off to climate action.
“We have to be careful here because if we allow the public to equate high energy prices with the energy transition, we’re doomed,” said McMonigle. “You will essentially lose public support, probably permanently.”
McMonigle urged governments to send signals to investors that not only is it okay to still invest in fossil fuels, but it’s “necessary” for the world economy and progress in the energy transition.
But even if policymakers convince investors to ramp up investment, that would take considerable time to result in more supply.
What could end the energy crisis
Of course, no one can say with certainty exactly how all of this will play out. And there could be surprises that ease the supply crunch.
For instance, a diplomatic breakthrough that ends the war in Ukraine and allows sanctions to get lifted from Russia would be a gamechanger.
Birol said other surprises that would ease the energy crisis include an Iranian nuclear deal, a deeper economic slowdown in China or an agreement by Saudi Arabia and other OPEC producers to ramp up oil production.
He also reiterated that governments stand ready to release further emergency stockpiles of oil. However, even the record-setting release of US emergency stockpiles had just a modest and fleeting impact on gasoline prices.
In March, the IEA also urged governments around the world to consider drastic steps to slash oil demand, including reducing speed limits on highways, working from home up to three days a week where possible and car-free Sundays in cities.
And there’s at least one other development that has been front-and-center lately and would ease the energy crisis: An economic recession, or at least one that’s deep enough to cause demand to collapse.
OPEC+ announces 50 percent increase in oil output for July and August
Zack Budryk Thu, June 2, 2022, 7:17 AM
OPEC+ nations on Thursday agreed to increase oil output by about 50 percent for the next two months after initially standing by a 400,000-barrel release.
Ministers announced the agreement to increase output in July and August to 648,000 barrels a day.
Gas prices in the U.S. saw another spike heading into the Memorial Day holiday, while across the Atlantic, European Union members reached an agreement on banning Russian oil imports in response to the country’s invasion of Ukraine. As recently as earlier Thursday morning, U.S. prices hit another record average high of $4.71 a gallon.
The move represents a reversal after the oil-producing nations had previously refused to budge on output, even after oil prices soared following Russia’s invasion of Ukraine. On May 5, its second most recent meeting, OPEC+ announced it would stick to the 400,000-barrel figure in the wake of the initial EU sanction announcements.
Russia, a member of the OPEC+ bloc of oil-producing countries that are aligned with OPEC but not members, has also seen its production fall amid international sanctions. Russia is the world’s third-largest oil producer, behind the U.S. and Saudi Arabia. OPEC+ data indicated crude production in Russia fell by nearly 9 percent in April, before the EU announcement but after numerous international sanctions, including an American import ban.
The Biden administration had previously appealed to Saudi Arabia, the de facto leader of OPEC, to produce more to handle the energy crunch in the U.S., but to no avail.
White House press secretary Karin Jean-Pierre said in a statement Thursday the U.S. “welcomes” the news.
“This announcement accelerates the end of the current quota arrangement that has been in place since July of last year and brings forward the monthly production increase that was previously planned to take place in September,” she said.
It remains to be seen how the increase will affect gas prices, if at all. Saudi officials argued in May an increase would have no effect. Energy Minister Abdulaziz bin Salman, defending that month’s smaller increase, said there remain “physical impediments that no producer can solve.”
Oil prices reverse higher as US inventories dive while energy giant says OPEC+ output boost isn’t enough
Phil Rosen Thu, June 2, 2022, 10:23 AM
- Oil prices turned higher after OPEC+ announced a larger-than-expected increase of oil output.
- The increase is not enough to offset Russia’s missing barrels, according to the CEO of Hess.
- The OPEC+ announcement clears the way for Saudi Arabia to ramp up crude production.
Oil prices on Thursday reversed course and moved higher as a production increase by OPEC+ countries was viewed as potentially too little to offset the absence of Russian supply, while US crude inventories declined sharply.
On Thursday, OPEC+ agreed to boost oil output for July and August by a larger-than-expected amount amid Russia’s invasion of Ukraine, and oil prices surged on the news.
The CEO of shale giant Hess, however, said the increased OPEC+ output isn’t enough to offset the declining number of Russian barrels in the global market.
West Texas Intermediate moved 1.249% higher Thursday to $116.70, while Brent crude, the international benchmark, jumped about 1% to $117.47.
The international oil alliance will increase production by 648,000 barrels per day for the two summer months, inching closer to plugging the gap left by the roughly 10 million barrels per day it pulled from the market in April 2020 as the pandemic began.
Global energy markets have reeled since Russia launched its war on Ukraine. The OPEC decision follows the European Union’s partial Russian oil embargo that passed this week, and the US sanctions against Russia from March.
Thursday’s news also opens the door for Saudi Arabia to ramp up its own output if wartime sanctions force Russia to pump less crude.
OPEC+ and non-members like Russia agreed previously to lift production, but some countries have floated the idea of excluding Moscow from its quota after it missed its target.
President Biden has not yet worked with Saudi Arabia’s Mohammed Bin Salam, and the crown prince has spurned calls from the White House. But with energy prices surging, pressure is mounting for Biden to visit Saudi Arabia, Bloomberg reports.