China and the UK are at the forefront of a growing global energy crunch. It is a prelude to major systemic dangers in the very near future.
In the UK, 1.7 million customers lost their energy providers, and three UK energy companies folded under the weight of rising natural gas prices. Thousands of miles away in China, blackouts continued throughout last week, shutting down factories and forcing homes into darkness. One municipality in China urged a town to store the water they would need for the next several months due to increasingly frequent losses of power “of indeterminate lengths, at indeterminate times, without plan, without warning” until March. Last Friday, streetlights, and factories shut down throughout the northeastern part of the country due to power outages.
We are seeing the beginnings of a global energy crunch that will wreak havoc on supplies chains and the global economy. It is timed to hit the US just in time for Christmas.
Asian Energy Crunch
At the root of the global energy crunch are supply issues on natural gas and coal fronts. As natural gas prices skyrocketed (more than tripling so far in Europe and Asia), China tried to switch its energy consumption to coal. That attempted shift cause demand for coal to surge and disrupted the global supply and distribution of that fossil fuel.
China’s recent power outages are the result of coal shortages. Those shortages were caused by a limited supply and new initiatives in China to reduce carbon emissions. A trading dispute between Australia and China drastically altered the world’s supply lines for coal, leading China to turn to new sources. Even as China sought out new coal sources, the needs of its growing national consumption outpaced China’s secured supply. Official figures show Chinese factory production in September dropped to its lowest level since February 2020, when the pandemic shut China down. Goldman Sachs estimates that 44% of China’s industrial activity has been affected by power shortages. And as new sources of coal began diverting their supplies to China, longstanding coal supplies have been reduced elsewhere around the world.
In India, Asia’s third-largest economy, coal generates 70% of the nation’s electricity. India’s coal stockpiles are lower than they have been in years, just as the season of heightened demand has arrived. India’s Power Minister, Raj Kumar Singh, warned that India could be caught in a supply squeeze for the next six months.
Pakistan says it will “definitely experience power shortages” over the winter as the price of natural gas has exploded. The country moved toward greater dependence on natural gas in the last six years, but shortages in Europe are pushing the global price higher and higher.
Afghanistan has not paid the country’s electricity bills for the last three months. The cause for the crisis in Afghanistan is related to the transition of power back to the Taliban and the US freezing the country’s overseas financial reserves. As the global energy shortage ramps up, the default payments from Afghanistan will justify turning off the juice and adding yet another layer to the country’s devastating woes.
Europe Energy Crunch
Coal shortages in China led to natural gas supplies being rediverted to Asia and away from Europe, which resulted in a global spike in prices and supply shortages as natural gas supply lines sought to recalibrate. European coal prices have reached a 13 year high.
European gas prices surged by nearly 500% in the last year. On Friday, European gas surged to 100 Euros after China ordered its state-owned companies to secure supplies for the winter at all costs. Such moves have rediverted flows of natural gas out of Russia away from Europe and toward China.
France has taken moves to block the pain of skyrocketing natural gas prices from hitting consumers, including cutting taxes on electricity. European storage sites are less than 75% full, the lowest level in more than a decade, and the cold months have not yet arrived.
Ripple Effect
As Europe and China face their energy crunches, expect these supply issues to reverberate throughout the world.
This week, natural gas prices jumped 9.5% in the US this week, the highest they have been since 2008. As the US heads toward the winter months, nationwide inventories are 15% lower than a year ago.
As gas prices increased globally, nations have turned not only to coal but also to oil. The price of oil is rising. In the face of the energy crunch from Europe to Asia, oil reached a three-year high last week at $80 a barrel. That price is expected to continue to rise in the coming weeks, and analysts anticipate $90 a barrel by Christmas.
All these issues of energy prices contribute to further growing inflation. The prices for everything are beginning to rise, which will accelerate as higher energy prices cascade down to customers at the grocery stores. Ongoing disruptions of energy supplies will further exasperate supply lines which will further ramp up expenses and prices. We are entering a cycle of inflation and shortages worldwide. That point was put forth by the world’s top central bankers last Wednesday, who warned all these issues would lead to shortages in the near future, and those shortages will accelerate inflation.
The power outages in China have occurred mainly in the northeastern industrial section of the country. That means critical Chinese production industries are halting and sputtering production, which in turn will further rattle global supply chains. Those supply chains were already disrupted and bottlenecked during the pandemic, but things are about to get worse once again.
As production stops, consumption will become frustrated during the winter and holiday months in Europe and the US. All of this ultimately leads to further economic chaos, for which the globe is not prepared. No amount of stimulus checks can make people feel better when they don’t have heat in the cold winter. As the effects of the energy crunches and shortages begin to ripple across the globe in the coming weeks, watch for spurts of panic buying to form that will accelerate the crisis.
All of this is occurring on top of already compounding political, pandemic, and humanitarian crises. The International Chamber of Shipping (ICS) issued an open letter to the United Nations last week warning of a “global transport system collapse.”
The COVID winter of 2020 was harsh, even deadly, for many. The winter of 2021 could be even worse.
