The world is facing its gravest energy shock since the 1970s oil crisis. Four decades ago, only the petroleum market was involved. This time, oil, natural gas, electricity and thermal coal — the world’s top sources of energy — are being hit simultaneously.
Price spikes in crude alone do not hurt as much as they once did. That is because the share of petroleum in the world’s energy mix has decreased since the 1970s oil crisis. It has fallen to 30 percent today from 45 percent in 1973.
However, the crisis today affects nearly every fuel source with the exception of renewables. Oil, natural gas and coal together account for more than 75 percent of the world’s primary energy consumption. Add biofuels — which are made of increasingly expensive corn and vegetable oils — and it is the energy equivalent of a punch in the face.
While oil generates the biggest headlines, gas and electricity are deeply worrisome concerns for Europe, which is the epicenter of the energy shock. The price of power on the continent is set by the most expensive source — and right now that would be power stations fueled by gas imported from Russia.
Short-term power prices on Monday surged above 550 euros (US$607.33) per megawatt hour in some countries, or 1,000 percent higher than pre-crisis highs. At those levels, large chunks of the continent’s manufacturing industry, particularly energy intensive companies such as aluminum smelters or paper mills, are simply not viable.
The cost of natural gas in the wholesale market rose to a record of 345 euros per megawatt hour. One year ago, the same gas sold for as little as 15 euros.
The cost of coal, measured by the API4 benchmark in South Africa, is almost US$450 per tonne. One year ago, it changed hands for less than US$100 per tonne.
The 1970s oil crisis largely affected the world’s transportation system. Driving, trucking and flying became prohibitively expensive, but this time the shock is to be felt beyond transportation to heating, cooking and electrification.
Since Russia invaded Ukraine nearly two weeks ago, Western leaders have tried to carve out energy and commodities from the sanctions they imposed on the Kremlin. The policy has failed spectacularly.
The flow of natural resources has been disrupted. Some markets, such as wheat, have completely seized up. Politically, the commodity loopholes are becoming untenable. The West is today paying more money to Russia than before the invasion, probably more than US$1 billion a day.
Western leaders were facing an ugly choice. They could impose official bans on Russian oil and other commodities, and witness even higher prices, or allow the trade, disrupted as it is, to continue, thereby financing the Kremlin.
They have chosen an impossible third way — talk openly about embargoes without actually implementing them. The result is higher prices for Western consumers and higher revenues for Russia.
The recalcitrant approach reflects the difficulties of unplugging Russia from global energy markets. Europe alone buys roughly 25 percent of its oil from Moscow, and another 50 percent of its coal, plus nearly 40 percent of its gas. Gas and coal go toward generating electricity, which therefore comes indirectly from Russia.
A ban on Russian energy exports would require rationing in Europe. Policymakers would have to convince the public to lower demand along the lines of 1970s-style conservation, otherwise soaring prices would destroy energy demand, forcing the poorest families to use less energy and tip the economy into recession.
Rather than implement energy savings, they are letting market forces act. That could lead to the same thing that Europe suffered 40 years ago with the oil crisis: stagflation, the terrible combination of high inflation and reduced economic growth plus unemployment.
Only in France are politicians making serious efforts to ask citizens to reduce demand.
Demand needs to come down. Now. A ban on Russian energy flows cannot be offset through higher supply from elsewhere. US shale and increased production from Saudi Arabia and others might lead to more oil flowing into the markets, but that is not enough to replace Russian petroleum. There are even fewer offsets for gas and coal.
There are simple measures to take: Reduce speed limits on highways; ask consumers to turn down their thermostats slightly; encourage the use of public transportation by reducing fares; or let people ride buses and trains for free on weekends.
The International Energy Agency has been preparing for a crisis such as this for 40-plus years and has a 78-page handbook, “Saving Oil in a Hurry,” ready for use. Decisiveness is key. If politicians do not figure out the way forward, market forces would surely take the lead, and without forgiveness.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times.
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