At the end of September, global natural gas prices were running 240% higher than six months ago, leading to several energy firms going bankrupt in the UK.
That’s a marked regulatory failure in the benighted country, which is also struggling with empty petrol stations and supermarket shelves as the reality of a hard Brexit becomes painfully clear.
It should not distract from rising alarm across the rest of Europe and Asia.
In US dollar per barrel of oil equivalent, the gas price stands at $156, twice the price of oil itself, according to Bjarne Schieldrop, chief commodities analyst at SEB. He points out we have never seen anything like this.
Energy consumption has stayed high – it is hard-wired into the economy
As winter arrives in Europe, concern about energy security will rise if Russia, a big supplier of gas now restocking its own inventories, cuts exports. And if November is particularly cold and dark, and the wind does not blow through Europe’s turbines, nerves will be stretched.
Production of North Sea oil and gas has been falling in both the UK and Denmark for many years, partly in an effort to reduce carbon dioxide emissions. But energy consumption has stayed high – it is hard-wired into the economy – and renewable sources do not yet provide a big enough share.
SEB suggests that global renewable energy production is now 800 million tonnes of oil equivalent (MTOE) per year, while total energy consumption is 14,000 MTOE. It would be optimistic to expect consumption to remain stable through to 2050 thanks to efficiency gains that offset increases in GDP and population.
Fossil fuel consumption can only be reduced by increasing the supply of cheaper and cleaner alternatives. If you take out the existing supply before the new supply is ready, then you just drive the price of energy up and GDP down.
Lessons
So what is unfolding in gas futures today carries important lessons far beyond those for regulators who allowed poorly capitalized up-start companies to sell cheap fixed-price energy deals to UK households without hedging the floating wholesale price of that energy.
The most important is that the current rate of investment in renewable energy of around $300 billion per year is simply not enough. SEB suggests that to get close to 100% of total energy consumption, investment in renewable energy would have to jump to $1.3 trillion per year and stay there for 10 to 15 years. That is just over 1% of world GDP.
Sounds manageable?
Well, the supplementary investment in transmission and storage of electricity combined with the corporate investment needed for accelerated electrification of processes currently dependent on fossil fuels are likely to be on a similar scale.
And then there’s the hefty cost of adaptation to mitigate the damage already baked in. So think at least $4 trillion a year and closer to 5% of global GDP.
Governments can’t manage this on their own, with finances already stretched by Covid. They will try to fund some of it off balance sheet through guarantees to catalyze private capital. A lot of money is now being allocated to funds that promise to invest in sustainability.
We’re going to need all of it.