The world is currently embroiled in a global energy crisis that has greatly affected commodity prices, with repercussions for households, manufacturers, and the wider economy alike. As reduced global natural gas supply could not keep up with the growth in demand arising from the first stages of economic recovery from the coronavirus pandemic,
. Record high prices for natural gas saw demand for coal as an alternative - and
- also rise. The ripple effects of the energy supply shortage have since been felt in the prices of electricity, transportation fuels, and even fertilizers.
A perfect storm for the European energy sector
Between a long and cold winter that depleted gas stocks, extreme temperatures in the summer months, and the rebound of commercial and industrial activities, 2021 saw
primary energy demand in Europe return to pre-pandemic levels. However, the growth in demand was met by low wind speeds which impacted wind power generation, coal-fired and
nuclear electricity capacities that have been declining for over a decade, and a reduced natural gas supply from its main source, Russia. In turn,
monthly wholesale electricity prices surged across the continent. Although prices had seen small signs of recovery in the first two months of 2022, since Russia’s invasion of Ukraine (and the trade and economic sanctions that followed) prices have been on an upward trend, breaking records month after month, and reminding the
European Union of its reliance on Russia for meeting energy demand.
China and a coal supply crisis
On the other side of the world, China’s energy crisis primarily concentrated around coal. Like Europe, China’s electricity demand has increased in the “post-pandemic” recovery, sparked by both domestic and international appetite for Chinese goods. Coal is the main
source of energy generation in China. However, in recent years, the government has slowly tried to transition away from this emission-intensive fuel, resulting in a slowing of coal production. Combined with a ban on coal imports from its largest supplier, Australia, power demand began exceeding supply. In turn, the government had to ration electricity, leading to factories facing blackouts and reduced output, and causing supply chain disruptions the world over. More recently, in mid-2022, a record heatwave and subsequent drought has impacted China’s hydropower capacity, boosting coal demand once again. Rising coal prices affected other major coal consumers in the continent, such as India, and also brought about swelling
prices for commodities such as aluminum and steel, which are produced in smelters using coal.
Repercussions for wider economy
As the Northern Hemisphere heads once again into the winter months, greater energy demand for heating is set to exacerbate the supply shortage and force manufacturers into increasing consumer prices further.
Global inflation rate forecasts show that costs for goods and services are to increase by more than seven percent in 2022, when compared to the previous year. With energy commodities traded in the global market, even countries fairly independent of fossil fuel imports have not been spared. For example, the U.S. saw its
retail prices for diesel fuel grow more than 75 percent in June 2022, year-on-year. Meanwhile, the European Commission has proposed a series of emergency measures as they prepare for the winter, from
filling up natural gas storages and reducing peak electricity demand, to redistributing excessive profits from fossil fuel activities.
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