The World Is on the Brink of a Potentially Greater Energy Crisis Than the 1970s Oil Crisis

High Energy Prices Can Lead to a Crisis Affecting Both Oil and Gas and Electricity Sectors

The high energy prices currently observed threaten a crisis across multiple sectors, from gasoline and natural gas to coal. In an interview with CNN, officials and former energy sector employees warned of concerns that the war in Ukraine, coupled with years of underinvestment in the energy field, has triggered a global crisis comparable to the oil crises of the 1970s and early 1980s.

However, unlike previous crises, the current situation is not limited to oil. Faith Birol, head of the International Energy Agency’s (IEA) monitoring group, stated in an interview with Der Spiegel that the planet must now face a crisis of oil, a crisis of gas, and a crisis of electricity simultaneously, making this energy crisis much larger and likely longer than the oil crises of the 1970s and 1980s.

So far, the global economy has withstood the rising energy prices well. However, Europe’s attempt to become independent of Russian gas and oil may drive prices to unsustainable levels, while supply shortages on the continent could lead to difficult decisions, such as rationing.

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The Secretary-General of the International Energy Forum, Joe McMonigle, stated in an interview with CNN that policymakers are only now paying attention to the serious problem the world faces, which he described as a kind of “perfect storm.” McMonigle also expressed agreement with the IEA’s concerning forecast.

Underinvestment, strong demand, and supply disruptions resulting from the war – components of this perfect storm – will have a significant impact, including inflation rise, threats to economic recovery after the Covid-19 pandemic, intense social discontent, and setbacks to efforts aimed at saving the planet from global warming.

Faith Birol also warned of issues with the supply of gasoline and diesel, especially in Europe, as well as potential natural gas rationing next winter on the continent.

In addition to high energy prices, extreme temperatures and severe droughts are also challenging the reliability of the electrical grid. In light of this scenario, the United States faces the risk of electricity shortages and even blackouts during this summer in some regions of the country, confirming the assertion of 

Robert McNally – energy advisor to former President George W. Bush – that the world is regrettably unprepared for the current crisis.

Crisis Was Already Foreseen by American Scholars in March

At the end of March, an article published in The Economist by former energy advisor to Obama, Jason Bordoff, and Harvard University professor Meghan O’Sullivan, already warned of the potential crisis the world would face, characterizing it as the worst and most serious since the 1970s. Bordoff, who is now the founding dean of Columbia Climate School, opines that his fears were confirmed after the article was published.

It is important to mention, however, that there are significant differences between the current period and the 1970s. Prices, for example, have not risen as dramatically as they did during that time, and extreme measures such as price controls have also not been necessary. According to McNally, if price controls and caps are instituted, there is a risk of shortages.

Although the West sought to avoid impacting Russia’s energy supply at the beginning of the war, as trade with the country is essential for global markets, this approach did not last long. This is because, as the brutality of the war became evident to the world, the United States and other countries began to ban imports of Russian energy.

Russia, in turn, responded to Western sanctions by reducing or even halting the delivery of natural gas to various European countries. The European Union then announced plans last week to cut 90% of Russian oil imports by the end of the year, which provoked even more retaliation from the country.

The tension has exacerbated the supply deficit observed in energy markets, which were already facing a complicated situation. In this sense, Bordoff stated that the severity of the energy crisis has not yet been fully acknowledged.

Last year, gasoline prices in the United States already increased by 52%, reaching record levels, irritating the public and contributing to the country’s inflation crisis. Natural gas prices, in turn, nearly tripled over the past year in American territory, while in Europe, they rose even further, although still below their worst levels.

Turmoil in the Energy Sector Is Not Only Due to the War in Ukraine

The looming energy crisis is not solely associated with the war in Ukraine but can also be linked to reduced investments in oil and natural gas production. 

In 2021, the amount invested in the oil and gas sector was only US$ 341 billion, which is 23% below the pre-Covid level of US$ 525 billion and far below the recent peak reached in 2014 of US$ 700 billion.

This investment deficit occurred due to a range of factors, including: pressure from governments and investors for investments in clean energy; the uncertain future of fossil fuels; and years of weak and volatile oil prices.

In this context, Francisco Blanch – head of global commodities at Bank of America – stated that, due to the desire to reduce carbon emissions, there is much less interest in investing in hydrocarbons, which exacerbates price volatility and complicates the resolution of low supply. Therefore, Europe had already been experiencing an energy crisis since last year, with natural gas, coal, and oil prices notably high even before the first Russian attacks on Ukraine. It can be concluded that the crisis was already on its way anyway, having only been accelerated and exacerbated by Putin’s invasion.

Experts Fear Fuel Shortages

In the 1970s, the oil crisis caused long lines at gas stations, fuel shortages, and panic. Now, experts are once again concerned about fuel shortages, with Europe at a greater risk of this happening than the United States. According to Francisco Blanch, this is a global issue that will be observed very soon, although perhaps not in the American powerhouse.

For him, the concern is less in the United States because the country remains one of the largest oil producers in the world, as well as a major energy exporter. 

Europe, on the other hand, is more dependent on oil and natural gas from other countries, especially Russia.

In this context, the head of the IEA warned of potential natural gas rationing in Europe, while Blanch observed that the region is already in product-saving mode, with factories shutting down due to high prices.

Caution Is Needed in Managing the Crisis

According to some energy experts, global policymakers may be mismanaging the climate crisis, as they focus on reducing supply but do not concentrate enough on eliminating the world’s appetite for fossil fuels. In this sense, Bordoff stated that not enough is being done to consistently reduce demand for hydrocarbons in line with global climate goals.

In the current scenario, with measures focused on only one side, there is a risk of social discontent, price spikes, and public disengagement from climate action.

Furthermore, McMonigle added that care is necessary, as if individuals start to associate high energy prices with the energy transition, public support will likely be permanently lost. He also called for governments to signal to investors that maintaining investments in fossil fuels is not only correct but essential for the global economy and the progress of the energy transition.

It should be noted, however, that even if policymakers manage to encourage investors to increase investment, it would take considerable time for this to lead to greater supply.

How Will the Energy Crisis Come to an End?

Multiple possible events can alleviate the supply crisis. If the war in Ukraine ends, for example, sanctions against Russia may be lifted, representing a turning point for the crisis.

Moreover, according to Faith Birol, other factors capable of mitigating the global energy crisis include an Iranian nuclear agreement, a deeper economic slowdown in China, or an agreement among Saudi Arabia and other OPEC producers to expand oil production.

Birol also emphasized that governments are ready to release new emergency oil reserves; however, this measure may only have a modest and fleeting impact on gasoline prices.

In March, the IEA also called on governments worldwide to consider drastic measures aimed at reducing oil demand, such as lowering speed limits on highways, imposing remote work for up to three days a week, and establishing car-free Sundays in cities.

Lastly, a deep enough economic recession to cause a collapse in demand would also be a potential alleviator of the energy crisis.