So What’s Fuelling our Energy Crisis?
For years the world economy and the price of a barrel of oil have been linked due to the fact that much of the world’s industry relied on oil either as a fuel or a raw material in manufacturing. High oil prices mean high transport costs, which has a knock on effect on other prices.
The previous oil crisis in the 1970s when oil prices soared was caused by a surge in the price crude oil alone, but the energy crisis we are living with at present is caused by both oil and gas prices rising sharply, which is having a much wider more severe effect across the globe. Energy prices are soaring to levels never before experienced. Domestic energy bills are doubling if not trebling and gas dependant industries are reeling from the cost increases in manufacturing, with some plants cutting back on manufacturing and others in countries like China have had their energy supplies cut off. Small businesses are closing due to rising costs and jobs are being lost as a result.
While it could be argued that there are a number of reasons for the present crisis, it has to be said that the main factor behind this has been the Russian invasion of Ukraine and the subsequent support given to Ukraine by NATO countries. Prior to the Ukraine invasion, Russia was by far the world’s largest exporter of oil and gas, its main market being Europe. In 2021 a quarter of all fossil fuels consumed in the EU came from Russia.
Few EU countries produce oil or gas and as their demand for gas grew the European Union looked for a source of supply to meet their needs. They were offered supplies from Algeria with a subsea pipeline from Tunisia to southern Spain and from there to northern Europe via an existing pipeline network. The alternative offer was from Russia via a proposed new pipeline, “Nordstream” which delivered its first gas in September 2011, running from Siberia and the Yamal Peninsula, under the Baltic Sea to Germany.
The decision to take supply from Russia may now be regretted as Russia has now cut natural gas supplies to countries in the European Union by over 80% because of their opposition to their invasion of Ukraine. There are two main routes from a gas producing area to consumer countries, subsea and overland pipelines or by sea as Liquefied Natural Gas (LNG).
Pipelines are the less expensive of the two but are impractical for Qatar to export to Japan or the US to supply European countries, so LNG becomes a necessity. Gas is liquefied by reducing its temperature to liquefy it, transporting the liquid in specially designed LNG Carriers then gasifying it again in a regasification terminal at its final port of call. Once in gas form, it can be transported in the normal way to its destination.
Seeking to replace Russian gas the European Union now has to join the bidding for ship-borne liquefied natural gas (LNG). The world's largest exporters of LNG are Australia, Qatar and the US. The US has more than doubled its LNG exports to Europe since this crisis began, exporting 46 million tonnes in the first nine months of 2022, compared with 22 million tonnes in 2021, making it Europe’s biggest supplier. Australia ships the majority of its LNG to customers in Asia, while Qatar exports much of its LNG to Asia as well as European countries such as the UK, Belgium, and Italy. Qatar sells most of its gas on long-term contracts to countries like Japan which makes LNG from Qatar difficult to source in the short term.
The price of natural gas was already rising post Covid as demand from industry started to increase even before the outbreak of the war in Ukraine. The combination of both has seen the price of natural gas increase almost five-fold since mid-2020. Demand for coal has seen coal prices also rising sharply, trebling in the past year. This is due to the fact that as gas becomes less available to the market, many power stations around the world have switched back to using coal. Oil has also risen in price as sanctions from European Union countries, along with the UK and US, have banned purchases of Russian oil. Electricity prices are normally linked to the price of gas, so as the price of gas has risen so to have electricity prices.
LNG producers are now trying to increase their capacity to export but this means expanding onshore or floating offshore gasification plants and building new LNG carriers to transport the liquefied gas. Importers likewise, are trying to build regasification terminals to increase the amount of LNG they can receive, but these are costly projects and take years to build and commission with few coming into operation in before 2026.
In conjunction with infrastructure to enable increased export/import of LNG, new exploration licences are being issued to try to develop new gas fields in the North Sea, but again these projects will take years to come on stream so will have little or no influence on today’s gas prices and consequentially, electricity prices will remain high unless we can influence them in others ways.
While all of these market forces are coming into play, we should remember one thing. The cost of production of a barrel of oil or a cubic metre of gas has not risen fivefold in the last two years. The cost of transporting liquefied gas by ship is higher than moving gas by pipeline. The UK recently received its first cargo of Australian LNG in six years, as it struggles to replace Russian gas but consider the cost of shipping LNG from Australia as opposed to receiving gas by pipeline from Russia and this is still not enough to cause the price increases we are seeing at present.
If we deduct the transportation costs we still have a massive increase in gas prices to the consumer. That means gas production companies can produce their product for roughly the same cost but sell it on the open market for almost five times the price due to market demand for the product. That would explain why we are hearing reports of the major gas producing companies reporting record, massive profits.
If we want to find a positive from the present situation, it is that governments are seeing that importing fossil fuels from potentially hostile countries such as Russia can have devastating economic outcomes as we are witnessing now. This has accelerated the drive toward renewable energy as hostile countries may be able to stop supplying oil or gas but they cannot stop the wind blowing across our wind turbines or the sun shining on our solar panels.