WorldConvulsion in energy markets scares the world economy

Convulsion in energy markets scares the world economy


Oil well in Watford City (North Dakota, USA), in image taken in August.Matthew Brown (AP)

The turmoil in the energy sector is causing a shiver of unease in a world economy that seeks to leave the pandemic depression behind as quickly as possible. Natural gas and coal at record levels; oil, around 80 dollars (430 reais) a barrel, still far from its peak in 2008, but even more from its low in April of last year, with the outbreak of the covid-19 crisis; China, the world’s factory, engulfed in a wave of blackouts that threatens to wreak havoc on its industry; the gas-driven electricity bill and the rising price of CO₂ emission rights, eroding the purchasing power of many families right after a period of economic hardship. A worrying picture, in a world already burdened by stressed supply chains and with social unrest accumulated after the pandemic drama.

In retrospect, a convergence of several factors — a very cold winter, low summer wind power output, driven demand by boom in post-pandemic consumption, maintenance tasks at Russian and Norwegian plants (the two largest European suppliers)—explains the price hike. In terms of projections, an essential factor stands out as a conditioner of the future trajectory. The northern hemisphere is about to enter the cold season when demand soars. And a second freezing winter, after last year’s snow and ice storms in Europe and the United States, would make things even uglier. “The truth is, I don’t remember any precedents for something like this,” Francisco Blanch, head of raw materials at Bank of America, emphasizes by telephone.

Unlike other critical moments in the past, today’s escalation does not affect a single primary energy source, but all of them. Yes, the world had to deal, not so long ago, with triple-digit oil prices. But this time the novelty is the coincidence in time of historical highs in the natural gas and coal markets and crude oil at more than respectable levels. Behind this escalation, in addition to the aforementioned factors, there is also a decrease in investment in the exploration and production of fossil fuels: even the most iconic oil companies have long been fleeing from wells to embrace windmills and solar panels.

“They stopped investing in hydrocarbons without taking into account that they continue to account for more than 80% of the primary energy consumed in the world. Of course, it is necessary to make an energy transition, but it is necessary to govern it better”, criticizes Mariano Marzo, professor emeritus of Earth Sciences at the University of Barcelona. “If the winter is bad, people will be very nervous and supply problems cannot be ignored.” By the end of the year, confirms Samantha Dart, head of natural gas analysis at Goldman Sachs, everything will depend on the meteorological variable: if temperatures deviate below their historical average, there will be problems; otherwise, prices will start falling before the second quarter arrives.

Withering deposits

Accumulated reserves, the quintessential buffer when supply falters and prices soar, don’t help either. In Europe, gas deposits are now just above 70% of their capacity, almost 13 points less than usual at this time of year, after high consumption last winter and this summer, when combined cycle plants had to compensate for the lack of wind. The big Asian countries, write analysts at Bloomberg New Energy Finance in a very explicit monograph, are “prepared” for the cold, “but not Europe”.

To try to save the situation, Spain has already asked the European Commission to centralize gas purchases in order to obtain a better joint price. A request that has already received the approval of the president of the European Central Bank (ECB), Christine Lagarde, but which will hardly be able to yield results in the very short term. Meanwhile, Governments are mobilizing to guarantee supply and mitigate the most regressive effects of the market upheaval. The Spanish Executive Friday launched a public consultation to reform an important type of regulated tariff; the Frenchman announced measures on Thursday to curb the climb; the Italian had done the same days before.

The sudden rise in natural gas leaves first-order side effects. Coal, an energy source with more past than future — is less efficient and much more harmful to the environment — has more than doubled in price since January. The triggering factor is China, which still depends to a great extent on the mineral to quench its inexhaustible thirst for electricity and which has redoubled its bet on it in the face of the implosion of the gas market. Protecting itself is costing more than ever, but Beijing can’t afford more cuts in midwinter.

Looking at the sky… and the thermometers

“This started as a purely European story, then it also affected China and is now global,” says Norbert Rücker, head of economic analysis at Julius Baer. However, he still sees no traces of a structural shakeout, but rather a concatenation of unfortunate events that are likely to be diluted in the near future: after the summer stoppages, he says, Norway and Russia will be pumping more gas again in Soon, renewable energy generation will pick up again in the northern hemisphere as the wind returns, leaving behind the abnormally low production of recent months. Once again, the market looks at the sky: “A windy and rainy autumn could brutally change the picture”, he trusts.

If the situation persists, however, the repercussions will be systemic. Talking about energy is much more than talking about an extra raw material. On the contrary, it is talking about the engine that moves the wheel of the economy. “It’s everything,” sums up March. And it is in virtually every area: no crack in the modern economy escapes its scope. Factories, as the Chinese case attests, suffer cuts in the midst of the economy’s recovery, when demand for products begins to return to their levels after the stoppage of covid-19. Transport becomes more expensive at a time that is already complicated: before you started to feel the increase in fuel, freight had already skyrocketed. Even the primary sector, a priori more protected, it is seriously compromised by the shortage of fertilizers, for which gas is essential in production. And, yes, here it is also raining in the wet: food is already at maximum values ​​for a decade and so far this year has accumulated an increase of more than 30%, according to the Food and Agriculture Organization of the United Nations (FAO).

An employee of the Abqaiq oil field in Saudi Arabia in 2019.
An employee of the Abqaiq oil field in Saudi Arabia in 2019.Stanislav Krasilnikov (Stanislav Krasilnikov/TASS)

“If there are supply cuts in winter, a significant risk if temperatures are low, this crisis will affect economic growth,” predicts Henning Gloystein, head of Energy and Climate at strategic consultancy Eurasia, in a note to clients. In the same vein, some analysis houses have already started cutting their forecasts for China with the forced closure of factories due to lack of electricity supply. However, while these risks are expected to materialize, the macro variable that has jumped the most is inflation: after several years of zero and close, prices have clearly risen for months, fueled in large part by energy. On Friday, Eurostat announced that the eurozone’s September data is the highest in 13 years. And central banks — led by the ECB — are beginning to feel the air running out at a very delicate moment: a rise in interest rates would complicate the financing of states with their debts at maximum levels after having smothered the recession with public spending. Although under very different circumstances, Europe simply cannot afford to commit a replica of the Trichet error just a decade later.

“Three weeks ago I would have said that it is a one-off problem, but now I think we may be moving from a purely energy issue to a macro one,” emphasizes Blanch, who believes that in a cold winter oil could exceed $100. “And that would be stifling for consumers.”

A loophole for social discontent

Expensive energy opens a loophole through which political and social discontent can easily seep. Stability itself is at stake: the rise further deepens the wound of inequality, disproportionately affecting the most vulnerable families. Although in European societies the level of social cohesion is generally high compared to other Western countries, the feeling of inequality and that globalization has generated winners and losers is becoming increasingly evident. Many experts consider it a driving force with significant political consequences. Brexit is an example of the relevance of this feeling. The mobilization of yellow vests, which broke out in 2018 in France with the increase in diesel taxation, is another, in this case with circumstances similar to the current ones.

The turbulent situation in the energy market thus highlights a structural reality in the broader framework of the ecological transition: it is an industrial conversion with strong regressive aspects. Isidoro Tapia, expert on the subject and author of A different planet, a new world (Editora Deusto), points out the impact on everyday life of this revolution and its elements inequalities, at least in the transitional phase: outgoing, because internalizing the costs of pollution in energy prices hurts the most vulnerable homes more intensely —the European Commission proposes to include the payment of CO₂ emission rights also in the domestic heating sectors and transport, which would increase the regressive effect. Second, because many of the green incentive measures tend to benefit wealthy families more, for example, because they are more likely to buy an electric car.

It is in this context that the actions of the various Governments to limit the impact on the population as much as possible should be understood: ceilings on the final price of electricity or gas, financial compensation for the poorest families, reducing taxes or directly draining part of the profit billionaire harvested year after year by electricity companies. Meanwhile, the Commission, concerned about the rise of extremism, is studying a social compensation fund. But the road to shaping effective rebalancing measures is long and arduous. The current scenario, therefore, seems to increase awareness of the problem and launch a race in which the competent authorities have to act before the situation causes profound damage to vulnerable households and results in radical protest dynamics. In 2019, 7% of the European population was unable to keep their homes warm in winter, according to Eurostat data.

“The context that cannot be forgotten, and in which this crisis takes place, is that of the weakening of the middle class for 30 years as a result of globalization. Today, any development that affects purchasing power is dangerous. Governments are sitting on a powder keg”, considers the French geographer Christophe Guilluy, author of several essays that study this phenomenon, including O end of the middle class; The fragmentation of elites and the exhaustion of a model that no longer builds societies (ERecord editor) and Le Ordinary gens temps (Flammarion Publisher). “If high prices persist, there is a risk of triggering a new protest movement. Today, social movements are not similar to those of the 20th century, they have a cultural and existential dimension. It’s a fight for survival. In France, we not only had the movement of yellow vests, linked to the increase in diesel, but there was also the red bonnets, in 2013, as a result of a tax on the transport of trucks”, he says, by telephone. “This is a flammable material.”

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