In the first part of this series we looked at how we arrived at a global Energy Crisis today
TLDR: a bunch of reasons - mainly high European demand from a strong winter last year, surprising Asian demand as it recovers from COVID lockdowns, under-investment in reliable energy sources, high carbon prices, and low renewable energy contribution to the grid. But check out the post if you like pretty charts.
Today we’ll look at:
what it will take to avoid a severe crisis, and
the numerous impacts it will have, particularly on living standards
The TLDR here: pray for at least an average winter. If this winter is anything like last year (remember the Texas Freeze? Europe also saw more freezing temperatures than normal), the impact will be immediately disastrous. In the even of an average winter, lives will be spared but there will still be significant lasting impacts. Expect increased rhetoric on transitioning to a renewable energy world, policymakers calling for $ trillions more in investments, leading to continued high energy costs - which means high costs in food, fuel, furniture, materials, etc. The lower and middle class will get flattened. I also provide my framework for how to think about this transition towards the end.
“Never let a crisis go to waste.”
What will it take to avoid a disaster this winter?
1. Russia
Russia is seen as the one country with enough spare production capacity to relieve markets with its recently completed NordStream2 pipelines. It could supply Europe with nearly 5 bcf/d of much-needed gas supplies this winter. Although construction is complete and ready to flow gas, there’s a bunch of regulatory hurdles to jump through before it can actually start flowing. Optimistic estimates don’t have the pipe beginning flows until February 2022 - the last month of winter.
So it’s unlikely Russia could ease gas shortages when the world needs it most, though its possible a real emergency could end up bypassing regulation if needed.
2. Alternative fuel supplies
Nations are dusting off the ol’ oil and coal power plants to make up for the lack of affordable gas supplies in the market. Gas power plants are known to emit 50% less CO2 emissions than coal. Even though the operators of those oil/coal plants will face massive carbon taxes, the prices of natural gas today still makes it economic to restart and run.
This will alleviate some pressure and provide power to residential and commercial facilities, though the ultimate impact of this fuel switching isn’t nearly enough to prepare for a cold winter.
3. Weather
All eyes are on global weather forecasts. Last year’s freezing temperatures led to all-time high gas prices back in January 2021. A repeat of this will squeeze already-tight natural gas markets further, driving prices even higher. Weather predictions are all over the place. We are lucky to have had a warmer October than normal, which is reflected in gas prices. Some estimates for the end of November heading into December don’t look as optimistic. Anything beyond a 3-4 week forecast (in many cases 1 week) is a crapshoot.
Weather is going to be the biggest factor that determines the extent of this crisis. It’s too late to invest in supplies now, it’ll take months to develop, extract, and transport any potential natural gas resource base available (and there is A LOT available). Mother Nature will take the wheel on this one.
Narratives and Implications on Livelihoods
Though we don’t know how this winter will exactly pan out, we can bet on one thing: the powers that be will use this as an opportunity to push narratives further. The narrative pushed will be something along the lines of “we must double down on renewable energy investments to avoid a crisis like this again in the future.” Renewable energy spending in 2021 already makes up for 50% of all energy spending. It’s a lot more expensive than traditional energy sources as well.
Can you see where this is going? Lets recap before the kicker
Lack of reliable fuel supplies will devastate nations and its citizens
key industries like fertilizer, steel production etc. are being shut to direct energy resources to residential homes
Damage has already been done
Regardless of what kind of weather we have, this issue will not be forgotten and will be leave a significant mark in history
Policymakers (and central banks) ramp up the rhetoric and checkbooks on renewable energy investment
calling for drastic increases to deploy more solar and wind plants to avoid another crisis like this in the future
$$ Trillions are allocated towards renewable energy
Conclusion: expect significantly higher prices in the short-to-medium term
With the above facts laid out for you, you can make up your own opinion on which way things are headed. Below I offer a potentially helpful framework to follow in terms of transitioning to other energy sources.
Stepping Back - Follow the Framework
To make sure there is no confusion of the broader message we should be aware of, here is a helpful framework, one that I use when analyzing energy-related events:
Anthropogenic (man-made) CO2 emissions needs to be reduced to near-net zero. Whether one believes in climate change or not is irrelevant. For those that don’t believe in climate change: entertain the possibility that climate change does end up being real. Whatever % you want to ascribe to this probability, it’s certainly >0%. The pain, suffering, and economic loss it could cause would be much more damaging to the world than if we began our transformation to clean, innovative energy sources. The risk is not worth it in the long-run, and clean energy sources is the best risk-averse bet we can make for the world.
BUT..
The pace of the transformation has been way too aggressive. Historic transformations took centuries to organically evolve. Any artificial evolution is bound to run into speed bumps. Why? The current unnatural transformation has prevented the invisible hand to perform the miracles it had in prior energy eras. Overtime there’s no doubt that we’d organically transition into a renewable energy world anyways as fossil fuels become more energy-intensive to extract (EROEIs decline overtime). But today, this aggressive transition devoid of natural market forces is leading to the massive dislocations we are seeing today.
Policymakers are pouring trillions into a transformation they have no expertise on how it should evolve. This evolution should be done organically by natural market forces. So enormous gaps have emerged as a result and will have disastrous short-to-medium term impacts on our standard of living. The lower and middle class will feel the impacts disproportionately, spending over 40% of their income on utilities, transportation and food.
There is much we haven’t gone over, such as how higher energy prices and increased renewable energy investment will reverberate throughout the entire economy (higher prices for copper, cobalt, lithium, platinum, steel, food, electricity etc.) Perhaps a post for another day.
But all is not lost. Though the pain is likely to be short-medium term, the longer term outlook remains bright. Humans ability to adapt to adverse conditions through innovation has always stood the test of time.