The International Energy Agency (IEA) in its world energy outlook report has stated that the world is facing the first global energy crisis triggered by Russia’s invasion of Ukraine. According to IEA, the present energy crisis is “delivering a shock of unprecedented breadth and complexity.” But IEA is optimistic that demand for every fossil fuel will either reach peak or plateau soon. This in turn will lead to faster energy transition moving towards net zero.
When we look at the last 50 years of global energy history, it has been shaped mostly by oil shocks, hence it is hard to believe about this energy crisis. In 1973, Yom Kippur war resulted in crude oil price jumping up by 400 per cent as a result of the oil embargo by Organization of Arab Petroleum Exporting Countries (OAPEC) specially against the US. Such an embargo led to the developed countries forming IEA to promote oil security.
Second oil shock took place around 1978-79 when Iraq attacked Iran, soon after Iranian revolution. Again, the world faced huge oil supply deficit resulting in 300 per cent price increase.
Third oil shock of 1986, started by Saudi Arabia was a different kind. Oil prices collapsed below single digit. It did not affect oil supplies. But it gave mixed signals to market and oil companies had to bring about dramatic change in their investment strategies. Many years later, such a massive price shock resulted in oil prices reaching a high of $145/barrel in 2008.
Fourth oil shock was brought by the world-wide lockdown in 2020. Oil demand collapsed and OPEC had to reduce their production by a historic amount of 10 million barrels per day. When we consider these four oil shocks, it is difficult to claim that today we have a truly global energy crisis.
Impact of war
When Ukraine war started, west did not impose any oil or gas sanctions against Russia. However, they were quick to be critical when countries like India purchased Russian oil at deep discounts. Only after ensuring minimum problems with any likely disruption from oil and gas sanctions, they imposed sanctions.
To prevent any oil supply crunch and also to control price, west decided to release petroleum reserves of 240 million barrels in nine months (0.9 million barrels per day). Though it does not look significant when in comparison to world oil demand of 100 mmbd, when oil surplus capacity of OPEC+ is only around 3.1 mmbd, it has some impact in balancing supply/demand.
It was in May 2021, IEA was asking oil companies to stop developing new oil fields to reach net zero by 2050. The same IEA is now urging oil companies to produce more oil. Oil investment cannot be switched on and off as in the case of some industries.
Similar policy decision was taken by the USA President Biden, after he took office. He was implementing his campaign assurance of stopping new permits to explore oil and urged oil companies to reduce investment. However, when Ukraine war started, he urged US oil companies to produce more and also Saudi Arabia. Despite his criticism of Saudi Arabia’s crown prince Mohammed Bin Salman (MBS), President Biden went with a begging bowl to Saudi Arabia to produce more oil.
Not only MBS refused the request, Saudi Arabia also convinced OPEC+ to reduce production quota by 2 mmbd. Since many OPEC+ members did not have the adequate production capacity, they were producing below their quota. Thus, actual reduction was less than one mmbd. Even then oil supply/demand was reasonably well balanced.
Shortage of Gas
The world gas supply has been hit and this has resulted in world LNG prices sky rocketing across all markets. This had an impact on Indian gas market both in terms of price and quantity. Still, it did not cause much problem since there was more than adequate coal power generation capacity.
For Europe, Russia first claimed that Nordstream-1 with 55 billion cubic meters had maintenance problem and supply was reduced. As the financial sanctions on Russia was getting aggressive, Russia stopped gas supplies through Nordstream -1 and other gas lines. Thus, Europe lost potential Russian gas supplies of 90 BCM which is larger than annual gas demand of 70 BCM of Germany.
Russia was meeting 40 per cent of European gas supplies before Ukraine war. Though Europe claims to have adequate gas storage to manage winter months, they are also buying more quantities of LNG at a higher price. It is bound to suffer, unless a miracle takes place. To that extent, Europe may have energy crisis. But the USA, definitely has no problem of meeting its energy requirements. Most of the world also has no problem. Undoubtedly energy prices are higher. But they are no higher than what they were historically. Also, there is no energy supply shortage. Thus, it is a mystery why IEA is stating that the world is truly facing the first global energy crisis.
But as the world continues to deal with energy transition, it is more than likely that we will indeed face a gigantic global energy crisis. What we have experienced as a result of Ukraine war is just a warning. Though IEA argues that energy crisis was not the result of energy transition, it has definitely played a significant role. World oil surplus capacity is at a critical level and this is the direct result of reduced investment in petroleum sector.
