The world may be heading for a 1970s-style energy crisis – or worse

Unlike those infamous episodes, this one isn’t all about 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’s monitoring group, told Der Spiegel in a 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.”

So far, the global economy has largely weathered soaring energy prices. But prices could continue to rise to unsustainable levels as Europe tries to wean itself off Russian oil and, potentially, gas. Supply shortages could lead to hard choices in Europe, including rationing.

Joe McMonigle, secretary general of the International Energy Forum, said he agreed with the IEA’s depressing forecast.

“We have a serious problem in the world that I think policymakers are just starting to wake up to. It’s kind of a perfect storm,” said McMonigle, whose group mediates between producing and consuming countries. energy, to CNN in a phone interview. .

The scale of this perfect storm – underinvestment, high demand and supply disruptions due to war – will have far-reaching consequences, potentially threatening economic recovery from Covid-19, exacerbating inflation, fueling unrest and undermining efforts to save the planet from global warming.

Birol warned of bottlenecks in the supply of gasoline and diesel, especially in Europe, as well as the rationing of natural gas next winter in Europe.

“This is a crisis the world is unfortunately not prepared for,” 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 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 been confirmed”

Jason Bordoff, a former energy adviser to Obama, and Meghan O’Sullivan, a professor at Harvard University, wrote an article in the Economist at the end of March, warning that the world was on the brink of “what could become the worst energy crisis since the 1970s”.

“Since we wrote this, our fears have been confirmed,” Bordoff, co-founder of the Columbia Climate School, told CNN.

Of course, there are key differences between today and the 1970s. Prices have not risen as much as they did then, and policymakers have not resorted to extreme measures such as price controls. .

“If we were to resort to price controls and price caps, we could have shortages,” McNally said.

When war broke out, the West sought to avoid directly targeting Russian energy supplies because they were simply too critical for world markets. Russia is not only the largest oil exporter in the world, but it is also the largest exporter of natural gas and a major supplier of coal.

But as the brutality of the war became clear to the world, this hands-off approach did not last, with the United States and other countries banning imports of Russian energy.

Russia has responded to Western sanctions by restricting or even halting its natural gas shipments to several European countries.

The European Union announced this week its intention to eliminate 90% of Russian oil imports by the end of the year. The move raised the specter of further retaliation from Russia.

Energy experts are sounding the alarm about the US power grid:

This tit-for-tat situation has only worsened the supply shortfall in already tight energy markets.

“We haven’t seen yet how much worse this energy crisis is going to get,” Bordoff said.

Already, gasoline prices in the United States have jumped 52% in the past year to record highs, sparking public anger and contributing to the country’s inflation crisis.

Prices for natural gas, a vital fuel for heating homes and powering the power grid, have nearly tripled over the past year in the United States. Natural gas prices have soared again in Europe, although they are far from their worst levels.

“Putin just got us there faster”

The current energy turmoil is not simply the result of the war in Ukraine. It is also the byproduct of massive investment in oil and natural gas, which are depleting resources that require massive sums of money just to maintain production, let alone increase it.

Upstream investment in the oil and gas sector was just $341 billion in 2021, 23% below pre-Covid level $525 billion and well below the recent peak of $700 billion in 2014, according to the IEF.

This investment shortfall has been caused by a range of factors, including a push by investors and governments to bet on clean energy, the uncertain future of fossil fuels, and years of low and volatile oil prices.

California drought could cut state's hydropower in half this summer

“Because of the desire to reduce carbon emissions, we have much less appetite to invest in hydrocarbons. And this exacerbates price volatility and makes it more difficult to solve on the supply side,” said Francisco Blanch , Head of Global Commodities at the Bank. from America.

Europe was already in the grip of an energy crisis last year and the prices of natural gas, coal and oil were high long before the first Russian tanks started arriving in Ukraine.

“We were headed for a crisis anyway. Putin just got us there faster and more precisely,” said McNally, who is now chairman of consulting firm Rapidan Energy Group.

Gas shortages and pipes?

The 1973 oil crisis was marked by hour-long queues at gas stations, fuel shortages and panic.

Experts said they are again worried about fuel shortages today, although they see it 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, but maybe not in the United States,” Bank of America’s Blanch said.

Blanch said he thinks that risk is lower in the United States because the country remains one of the world’s largest oil producers and is a major energy exporter. Europe, on the other hand, is more dependent on foreign oil and natural gas, especially from Russia.

The IEA chief warned against natural gas rationing in Europe, which relies heavily on Russia for gas.

Blanch noted that exorbitant natural gas prices have already closed factories in Europe.

“Europe is already in natural gas rationing mode,” he said.

“We have to be careful here”

Energy experts told CNN they fear global policymakers are mismanaging the climate crisis, focusing too much on reducing supply and not enough on curbing the world’s appetite for fossil fuels.

“We are not doing enough to reduce demand for hydrocarbons in line with our climate goals,” Bordoff said.

Focusing on just one side of the equation risks not only causing price spikes, but also social unrest and distracting the public from climate action.

“We have to be careful here because if we allow the public to equate high energy prices with the energy transition, we are doomed,” McMonigle said. “You will essentially lose public support, probably permanently.”

McMonigle urged governments to send signals to investors that not only is it okay to continue investing in fossil fuels, but it’s “necessary” for the global economy and progress on the energy transition.

But even if policymakers convinced investors to increase their investments, it would take a considerable time to translate into increased supply.

What could end the energy crisis

Of course, no one can say for sure exactly how this will all play out. And there could be surprises that alleviate the supply shortage.

For example, a diplomatic breakthrough that would end the war in Ukraine and lift the sanctions imposed on Russia would be a game-changer.

Birol said other surprises that would ease the energy crisis include an Iranian nuclear deal, a deeper economic slowdown in China or an agreement between Saudi Arabia and other OPEC producers to increase production of oil.

Inflation Worries Are Real But It's Not The 1970s

He also reaffirmed that governments were ready to release new emergency stocks of oil. However, even the record release of US emergency stocks had only a modest and fleeting impact on gasoline prices.

In March, the IEA also urged governments around the world to consider drastic measures to reduce demand for oil, including reducing speed limits on highways, working from home up to three days a week when this is possible and car-free Sundays in the cities.
And there is at least one other development that has been front and center lately that would alleviate the energy crisis: an economic recession, or at least one deep enough to cause a collapse in demand.

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