Being Pakistani comes with the clear understanding of what the words “load shedding” mean from an early age. We've become masters at balancing our lives between “light agai” and “light chali gai”.
But today, it looks like many other countries in the world are going to also become familiar with "load shedding" as they brace for power outages unlike ever before. Global fuel supplies are short and the demand for electricity is peaking, but there is not enough fuel to meet demand.
The result? Countries are scrambling for fuel supplies, going back to fossil fuel-based power plants and rationing electricity supplies for consumers.
What is the global energy crisis?
The global energy crisis is making headlines across the world. To understand the extent of this crisis, and what is causing it, we will have to go back to April last year.
Back then, global oil prices made headlines for completely the opposite reasons.
In April 2020, global oil prices crashed – not just crashed, they fell to -$38 or minus or negative dollars at one point. This essentially meant that oil producers were paying buyers to take oil off their hands (instead of how they have traditionally taken payment for their supplies). There was a glut of crude oil in the world, but there was no place to store it. This forced oil producers to pay buyers to take barrels of oil they could not store.
The incredible drop in oil prices happened because of Coronavirus. As the pandemic spread governments clamped down on industry, transport, and the aviation industry to control the spread of the pandemic. Planes were grounded, factory workers went home, public transport came to a standstill. The lockdowns meant people were told to stay home. They did not use their cars. Demand for oil fell by a whopping 27 million barrels a day in April.
Due to the shortage of oil supplies, China, Europe, and other Asian countries entered the Liquified Natural Gas (LNG) market, where its prices went up as well...
To fight back, the oil market reacted to such low prices by cutting oil production. So the United States slashed its production by 900,000 barrels a day in April. OPEC+, an alliance of 13 oil-producing countries and Russia, reached a historic deal to cut oil production by more than 10%, or 10 million barrels a day.
This was done to stop crude oil prices from crashing. The rough reasoning is: cut supply, so it becomes short, then demand will stabilise or rise and you can charge more.
Now, one year later, the demand for oil has jumped back up as societies and countries went back to some semblance of normal. But supply has been simply unable to cope. As economies went back to functioning (factories opened), the demand for oil rose. But the production and supply chain was unable to cater to this surge, and as a result, a demand and supply gap made oil prices shoot to over $80 per barrel for the first time in three years.
Due to the shortage of oil supplies, China, Europe, and other Asian countries entered the Liquified Natural Gas (LNG) market, where its prices went up as well. Earlier this month, the Asian LNG spot price rose to a record high of $34.47 per million British thermal units (mmBtu).
In East Asia, the cost of natural gas is up 85% since the start of September. Prices in the United States have also risen to their highest levels in 13 years.
Experts believe that the rise in LNG prices took place because of a gas shortages in Europe.
The impact of global energy crisis
This fuel shortage had a big impact on the economies of China, India, and the UK. The shortage means they had to ration the supply to industries and households. The world grew worried that energy demand would further rise in the upcoming winter season, when more heating and lighting is needed (because temperatures drop and the sun sets earlier).
The rising cost of fuel then forced countries to raise their electricity prices.
China’s state planner, the National Development and Reform Commission, said it would consider raising energy prices for industries to discourage consumption. In September, the Korea Electric Power Co. said that it would increase electricity prices for the first time in almost eight years.
In Spain, consumers are facing a 35% annual rise in their power bills. The UK is now considering lending money to energy-intensive industries to help them pay their power bills.
This has an effect of making manufacturing more expensive. When manufacturing costs go up, so do commodity prices. This has created a crisis of global inflation and has reduced people’s purchasing power.
In September, the Food and Agriculture Organization (FAO) Food Price Index, which tracks international prices of commonly-traded food commodities, was up 1.2% compared to August. It was 32.8% higher than in September 2020. In Europe, the annual inflation reached a 13-year high in September as oil and natural gas prices soared.
In Pakistan, the per liter fuel prices have been raised by almost Rs15 since October 1. The rate of inflation increased from 8.4% in August to 9% in September 2021.
The power outage caused by fuel shortages also hit manufacturing industry and supply chains. With economies opening up, the demand for goods has increased, but the fuel shortage and power crisis mean that industries around the world are unable to manufacture goods fast enough.
The “climate” angle of the global energy crisis
There is also another critical factor at play in this crisis: climate change. It is a reason for both; the peak in demand for electricity and the drop in production of oil.
The trouble started brewing last winter when colder-than-usual temperatures led to higher demand for power to warm up homes. The oil and gas producers, who were just starting to ramp up production saw their already reduced reserves come under severe strain.
In the summer that followed, again record-high temperatures pushed up the demand for electricity as people increased the use of air conditioners in homes and offices to fight the heat.
The gradual opening up of economies post-Covid-19 meant that industries, as well as retail businesses, also needed electricity. Faced with high electricity demands, the power companies looked up to oil and gas manufacturers to ramp up the supply, which they are reluctant to do so because, again, climate change.
The world powers have been, for some years, transitioning from fossil fuel and coal to clean energy sources.
In September 2020, Chinese President Xi Jinping said China will reach carbon neutrality before 2060. To meet this target, the country has been gradually reducing its carbon emission. Rules imposed by Beijing have seen lower coal production as well.
The European Union unveiled in July a set of proposals to cut the EU's greenhouse gas emissions by at least 55% before the end of the decade. Germany has plans to become carbon-neutral by 2045 and aims to cut nearly 1 billion tons of carbon dioxide emissions.
But, the transition to cleaner energy sources didn’t happen fast enough. The output from existing renewable energy sources, like wind and hydro, remained lower than expected due to, again, climate.
In Europe, low wind pressure and dry weather conditions throughout the season have reduced output from wind turbines and hydel power.
In Germany, the contribution of wind power to the electric grid dropped significantly from 29% last year to 22% in 2021. According to CNBC, UK’s energy giant SSE said its renewable assets produced 32% less power than expected between April 1 and Sept. 22. Power companies from other European countries also reported reduced output from renewable energy sources.
To fill the gap, European countries moved to gas to produce electricity but low gas imports from Russia and Norway and the rising LNG prices increased the gas prices in Europe by almost 500% in the past year.
China faced a similar crisis. According to the Chinese authorities, in the Liaoning and Guangdong provinces, low water levels in hydropower reservoirs and a decline in wind power had an impact on its electricity supply.
A quick summary of the entire global energy crisis: the demand for oil reduced during the pandemic; producers slashed oil output; global economy reopened; oil supplies couldn’t rebound; oil prices rose...
In Indonesia, higher-than-normal rains mean that the coal production will be less compared to last year.
But, faced with the double whammy of rising fuel prices and power outages, countries are now setting aside their renewable energy goals and moving towards dirtier fuels to amp up power production.
The Chinese government has ordered a rapid expansion of coal mines to address the energy shortfall, despite its promises to cut the use of coal.
However, coal is also getting harder to procure. While China has asked its power companies to stock coal for winters “at all cost,” India has said that almost half of its coal-fired power plants have two days or less of supplies. According to data from the Central Electricity Authority of India, the stocks of nearly 80% of the country’s coal-fired plants could run out in less than five days.
Indian states have issued panicked warnings that coal supplies to thermal power plants are running dangerously low. Many states including Punjab, Maharashtra, Rajasthan, Jharkhand, and Bihar have been experiencing power cuts lasting up to 6 to 14 hours.
Here is the quick summary of the entire global energy crisis: the demand for oil reduced during the pandemic; producers slashed the oil output; global economy reopened post-pandemic; oil supplies couldn’t rebound fast enough; oil prices rose; world moved to gas; gas prices rose; not enough fuel to generate power; electricity shortfalls in many countries; manufacturing industry hit; expensive electricity raised commodity prices; high commodity prices caused inflation.
Is there an end to the crisis in sight?
As things stand right now, the answer has to be “no”. The demand for electricity has already peaked, and it will further increase in the upcoming cold winter season. However, the production of oil seems unable to match this demand until the end of this year.
The International Energy Agency (IEA) estimated that OPEC+ will pump 700,000 barrels per day less crude oil than the demand in the fourth quarter of this year. It means that the demand will outpace supply at least until the end of 2021.
The Bank of America has predicted a surge in demand due to the cold weather which could push the price of Brent crude past $100 a barrel. The US energy secretary Jennifer Granholm has said the country may use its emergency oil stocks to bring down fuel prices.
Images are coming from China and other countries showing entire cities gone dark due to power outages. The rising inflation as a result of record oil and gas prices is threatening the recovery of global economies post coronavirus. Despite hectic efforts by global powers to source energy supplies and bridge the supply-demand gap, all indicators point that the crisis is here to stay, at least until winter this year.