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The world is experiencing "the first truly global energy crisis," International Energy Agency Executive Director Fatih Birol said on the release day of the new episode of the "Economics out Loud" podcast with NES Visiting Professor Alexander Malanichev. By coincidence, he talked about the current energy crisis. There are many similarities between the shocks of the 1970s and the present day. For example, expensive oil and gas have become fuel for accelerating inflation. The rise in energy prices is fueled by political confrontation. Finally, Western economies again intend to come out of the crisis renewed and with smaller dependence on former suppliers and non-renewable energy sources in general.
What will Europe face this winter? How will the oil and gas markets change? Will the West manage to deprive Russia of at least part of the petrodollars, and will Russia manage to redirect its oil and gas exports from Europe to Asia? What lessons can we learn from the 1970s? These questions were discussed in the podcast.
Energy crises happened long before the 1970s, but they were not global in their scale. For example, oil prices were high at the end of the 19th century, when the beginning of its commercial production led to the spread of kerosene. Demand spiked and producers were unable to meet it, Alexander Malanichev says. Though, at that time oil was not yet widely used by either households or industry. As its consumption grew and markets became more global, so did the vulnerability of economies to price increases and supply disruptions. This was proven by the crisis of the 1970s, when oil prices soared manyfold after the 1973 Arab embargo on oil supplies to the US and its European allies, and in 1979 due to the revolution in Iran.
The world came out of that crisis renewed: despite the growth of the economy, the share of oil consumption as a percentage of GDP in Western countries is now much lower than before the oil shocks. But dependence on other fuels has increased: the share of expenditure on natural gas in the leading European economies is now even higher than on oil in the 1970s. According to Alexander Malanichev's calculations, in 1975, when inflation was high and oil prices were galloping, the share of expenditure on oil was 2.7% of GDP in Italy, 2.4% in France, almost 2% in Germany, and 2.2% in Spain. Today, the share of expenditure on natural gas is 4.4% of GDP in Italy, almost 2% in France, 2.7% in Germany, and 3.2% in Spain. Natural gas is widely used for heating homes, generating electricity, and in industrial production.
Gazprom has cut supplies to Europe by two-thirds. Even though the EU has filled 90-95% of its storage facilities, and receives LNG and pipeline supplies from other countries, in case of a cold winter, the Union may face a shortage of this fuel.
Noteworthy, a small miracle happened with LNG: in spring, it was expected that there would not be enough capacity to significantly increase production, but now Europe runs short on facilities to unload all incoming LNG tankers.
Alexander Malanichev notes that high prices provoked the redirection of supplies from other places to the European market, and the US was able to quickly increase production – by 13% this year. The problem is that the United States does not have enough terminals for LNG exports. New capacities should be commissioned in 2024-2025, so natural gas prices will remain high until then. Some shale oil producers in the US are even gradually switching to more profitable natural gas production. Moreover, the quality of oil reserves and the output of drilling rigs are declining.
Oil prices will also remain high for the time being and will not fall much below the level of $100 per barrel, Alexander Malanichev believes. They will be supported by the OPEC+ deal (Russia and OPEC countries have agreed to remove 2% of global oil production from the market) and the stagnation of shale production in the United States.
Another important factor is the embargo on Russian oil supplies to Europe. Currently, Russia exports about 7.5 mln barrels per day of oil and petroleum products. So, the European or even the entire world market will lose about 1-1.5 mln barrels.
Western countries are also trying to introduce a price cap for Russian oil. Its value has not yet been determined, but discussions stand at around $65 per barrel. Meanwhile, Asian countries, primarily China and India, did not support the idea, but still, they will use the restriction imposed by the West in their own negotiations with Russia, seeking to reduce the price. Anyway, the mechanism will not work to its full potential, because it violates market principles, Alexander Malanichev believes.
Russia uses various schemes to redirect supplies from Europe to Asia. However, it requires changing the tanker fleet transporting the country’s oil (currently, it is mostly European vessels), which will negatively affect the efficiency of logistics.
The world oil market will be restructuring. The rising prices and longer delivery terms will lead to a decrease in the efficiency of the world economy and further increase in oil prices.
Because of the problems with the oil and gas exports, the Russian budget begins to suffer, although the commodity prices are still high. Meanwhile, the collapse of imports and so far large exports create another problem – strengthening of the ruble, which negatively affects budget revenues.
Russia is losing the European market. In Q3, for the first time in history, the United States delivered to Europe more LNG than Russia’s pipeline supplies. Part of the natural gas from Taymyr can be redirected to Asia, but this requires building new pipelines. Also, Asia does not need so much gas (in the EU market, Gazprom has lost 100 bln cubic meters of supplies per year, and may soon lose the remaining 55 bln).
The development of the domestic market may be a solution. For example, the Murmansk region and some large cities like Chita still lack natural gas infrastructure, while in Krasnoyarsk it would be good to substitute coal power stations with natural gas ones to improve the environment. Perhaps it is also worth developing natural gas-powered transport.
High energy prices foster technological innovations, change the incentives and methods of consumption, even the structure of the economy. What consequences can the current crisis have, given the green transition already underway?
Alexander Malanichev believes that oil prices may see another peak before demand begins to decline against the expansion of electric vehicles and renewable energy. They are not yet effective enough, so the world will have to restore nuclear energy generation. Together with natural gas power plants, it will cover basic energy consumption needs, compensating for seasonal declines in the production of solar and wind energy.
New technologies are being introduced in the nuclear power industry. For example, Russia has developed a fast neutron reactor that uses radioactive waste from conventional nuclear power plants as fuel. Low-power reactors are also being introduced. Important areas will be the development of energy storage, new batteries, and green hydrogen, which can be used in fuel cells, says Alexander Malanichev.
After the energy crises of the 1970s, the world has changed a lot. Of course, the current crisis will also provoke large-scale transformations in the energy sector, economy, and technologies. And in the long run, those who are more flexible, more enterprising and free will win.
