Planet is on the brink of an energy crisis potentially bigger than the oil crisis of the 1970s

High energy prices could lead to a crisis that encompasses both the oil, gas and electricity sectors

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

However, unlike previous crises, the current scenario is not limited to oil only. Faith Birol, head of the International Energy Agency's watchdog group (IEA), stated, in an interview with the website Der Spiegel, that now the planet must face an oil crisis, a gas crisis and an electricity crisis at the same time, this energy crisis being, therefore, much greater and probably longer than the oil crises of the 1970s and 1980s.

So far, the global economy has withstood well the rise in energy prices. However, the European attempt to become independent of Russian gas and oil could cause prices to rise to unsustainable levels, while the shortage of supply on the continent could lead to difficult decisions, such as rationing.

The secretary general of the International Energy Forum, Joe McMonigle, declared, in an interview with CNN, that policymakers are only now paying attention to the serious problem facing the world, which he called a kind of “perfect storm”. ”. McMonigle also said he agreed with the EIA's worrying forecast.

Underinvestment, strong demand and interruptions in supply arising from the war – these being components of the aforementioned perfect storm – will cause strong impacts, which include rising inflation, the threat to economic recovery after the Covid-19 pandemic, intense social discontent and damage to efforts to save the planet from global warming.

Faith Birol also alerted to the problems in the supply of gasoline and diesel, mainly in Europe, in addition to natural gas rationing in the coming winter on the continent.

In addition to high energy prices, there are also extreme temperatures and severe droughts as challenging factors for the reliability of the electrical grid. Given this scenario, the United States runs the risk of electricity shortages and even blackouts this summer in some regions of the country, which confirms the assertion of 

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

Crisis had already been predicted by American scholars in March

At the end of March, an article published in The Economist by Obama's former adviser on energy, Jason Bordoff, and by Harvard University professor, Meghan O'Sullivan, already warned of the possible crisis the world would go through, characterizing -the worst and most serious since the 1970s. Bordoff, who is now founding dean of the Columbia Climate School, believes that, after the publication of the article, his fears were confirmed.

It is important to mention, however, that there are important differences between the current period and the 1970s. Prices, for example, did not rise as significantly as they did at that time, and extreme measures such as price controls were not necessary either. According to McNally, if controls and price caps are instituted, there is a risk of shortages.

Although the West sought to avoid hitting Russia's energy supply during the early part of the war, since trade with the country is essential for global markets, this approach did not last long. That's because, as the brutality of the war became evident to the whole 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 interrupting the shipping natural gas for several European countries. Plans were then announced by the European Union last week to cut 90% of Russian oil imports by the end of the year, which provoked even more retaliation from the country.

The tense scenario intensified the supply deficit observed in the energy markets, which were already facing a complicated situation. In this sense, Bordoff declared that the seriousness of the energy crisis has not yet been fully contemplated.

Last year, gasoline prices in the United States have already increased by 52%, reaching record levels, angering the public and contributing to the country's inflationary crisis. Natural gas prices, in turn, have almost tripled in the last year in the US, while in Europe they have risen even more, despite still being below their worst levels.

Turbulence in the energy sector is not only due to the war in Ukraine

The imminent energy crisis scenario is not only associated with the war in Ukraine, but may also be related to reduced investments in oil and natural gas production. 

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

This investment deficit was due to a series of factors, including: pressure from governments and investors to make contributions to clean energy; the uncertain future of fossil fuels and years of weak and volatile oil prices.

Under this bias, Francisco Blanch – head of global commodities at Bank of America – said that, thanks to the desire to reduce carbon emissions, there is much less interest in investing in hydrocarbons, which exacerbates price volatility and makes it difficult to resolve the low supply. Thus, Europe was already going through an energy crisis since last year, with the prices of natural gas, coal and oil notably high even before the first Russian attacks on Ukraine. It can be concluded, then, that the crisis was already under way anyway, having only been accelerated and exacerbated by Putin's invasion.

Experts fear fuel shortages

In the 1970s, the oil crisis led to long queues at gas stations, fuel shortages and panic. Now experts are worrying again about fuel shortages, with Europe at greater risk than the United States. According to Francisco Blanch, this is a global problem that will be observed very soon, although perhaps not in the North American power.

For him, the concern is less in the United States because the country remains one of the largest oil producers on the planet, in addition to being a major exporter of energy. 

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 natural gas rationing on the European continent, while Blanch noted that the region is already in product economy mode, with the closure of factories caused by its high prices.

Caution is needed in crisis management

According to some energy experts, global policymakers may be mismanaging the climate crisis as they focus on reducing supply but not enough on eliminating the world's appetite for fossil fuels. In this regard, Bordoff stated that not enough is being done to lower demand for hydrocarbons consistently 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 withdrawal from climate action.

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

It should be noted, however, that even if policymakers were able to get 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 ease the supply crisis. If the war in Ukraine is ended, for example, sanctions against Russia could be lifted, which would represent a watershed for the crisis.

In addition, according to Faith Birol, other factors capable of mitigating the global energy crisis include an Iranian nuclear deal, a deeper economic slowdown in China, or even an agreement by Saudi Arabia and other OPEC producers to expand production of Petroleum.

Birol also stressed that governments are ready to release new emergency oil stocks, however the measure may only have a modest and fleeting impact on gasoline prices.

In March, the IEA also asked governments around the world to analyze drastic measures aimed at reducing the demand for oil, such as the reduction of speed limits on highways, the imposition of home office up to three days a week and the establishment of car-free Sundays in cities.

Finally, an economic recession deep enough to cause demand to collapse would also be a potential energy crisis reliever.