Power shocks zap the world

money-glitz | Agencies and staff reporter 4 Oct 2021

The world is facing a build-up in stagflationary forces as surging energy prices caused by energy shortages boost inflation and slow the recovery from the pandemic-driven recession.

While there is no single reason for the shortage -- things like customer demand, emission cuts, technical problems, and a lack of investment are all playing a part -- the crisis, which is currently most present in Europe, is threatening to spread to more nations and upend the global economic recovery.

Nations are more reliant than ever on natural gas to heat homes and power industries amid efforts to quit coal and increase the use of cleaner energy sources. But there isn't enough gas to fuel the post-pandemic recovery and refill depleted stocks before the cold months.

Countries are trying to outbid one another for supplies as exporters such as Russia move to keep more natural gas home. The crunch will get a lot worse when temperatures drop.

The crisis in Europe presages trouble for the rest of the planet as the continent's energy shortage has governments warning of blackouts and factories being forced to shut.

Inventories at European storage facilities are at historically low levels for this time of year. Pipeline flows from Russia and Norway have been limited. That's worrying as calmer weather has reduced output from wind turbines while Europe's aging nuclear plants are being phased out or are more prone to outages--making gas even more necessary. European gas prices surged by almost 500 percent in the past year and are trading near record.

The spike has forced some fertilizer producers in Europe to reduce output, with more expected to follow, threatening to increase costs for farmers and potentially adding to global food inflation.

Fertilizer woes

About half of the continent's ammonia - a key ingredient to make fertilizer - capacity is probably at risk of shuttering or curtailing production, or already closed, according to CRU Group.

Average site costs for ammonia have surged, from about US$188 (HK$1,466) a ton in the fourth quarter of 2020 to more than US$900 likely in the last three months of this year, says CRU head of fertilizers, Chris Lawson.

"As fertilizer prices continue to rise, farmers will either cut application rates, cut fertilizer entirely in hopes for lower future pricing, or cut other farm products to account for the bigger expected spend," says Alexis Maxwell, an analyst at Green Markets, a business owned by Bloomberg.

Either way, it will slam farmers already buckling under the strain of rising costs to produce food.

Meanwhile, across the strait, the UK is facing a fuel shortage crisis - not a shortage of the fuel itself, but an inability to get it to where it's needed to meet demand because of a lack of car drivers. UK drivers are queuing for fuel in scenes that are reminiscent of the 1970s, creating a national crisis out of something that what was initially a relatively minor logistics problem.

The government has responded by enacting the Downstream Oil Protocol - exempting industry from competition law - and putting military tanker drivers on standby. Other measures, like making 5,000 short-term visas available for foreign drivers and encouraging retired UK drivers to return to work, aren't expected to provide a quick solution.

Oil prices climbed to more than US$80 a barrel for the first time in three years last month amid the global energy crunch.

This came as Goldman Sachs raised its forecast for year-end Brent crude oil prices to US$90 per barrel from US$80. The investment bank says that while it has long held a bullish oil view, "the current global supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts."

Also holding a similar view is Trafigura Group, one of the world's largest commodity trading houses.

"We're going to see higher oil prices," says Ben Luckock, Trafigura's co-head of oil trading. "I struggle to see anything but higher prices going forward in the next two years".

The market was mispricing forward oil contracts for the next couple of years because traders hadn't yet woken up to the fact the supply-demand balance will remain tight for some time, Luckock adds.

CHINA CRUNCH

On the other side of the globe, a power crunch across China has rippled from factory floors to homes and even traffic lights in some places, leading economists to cut their growth forecasts for the world's second-largest economy.

The shortages mirror tight energy supplies in Europe and elsewhere that have roiled commodity markets, as well. Part of the problem is that the economic rebound after the Covid lockdowns has boosted demand, while lower investment by miners and drillers has constrained production.

But the crisis in China is mainly because it's short of the dirtiest fossil fuel - coal. Coal-based producers account for more than 70 percent of the country's electricity generation, but President Xi Jinping's push to reduce greenhouse gas emissions and go "carbon neutral" by 2060 has capped the growth of coal mining. Demand for power from Chinese factories soared as orders from overseas mounted, but utilities were unable to buy enough fuel after prices surged. China's coal production grew by 6 percent in the first eight months this year, but the power output from coal-fired generators surged 14 percent in the same period, leading to a decline in coal inventories. Certain northern areas also need to reserve enough coal for the upcoming winter heating season, which is worsening the current shortage.

While more than 90 percent of the fuel the country uses is mined locally, it's difficult to raise local output at short notice and the price of imported coal is rising.

European coal has risen to a 13-year high, and Australian Newcastle coal has more than tripled over the past year to within range of the record set in 2008.

The shock of global energy shortage and rising fuel prices has already drawn comparisons with the mix of economic stagnation and oil-driven inflation spikes that dominated the 1970s. While many central bankers dismiss this as hyperbole, the concern is that more enduring price increases will feed into demand for higher pay, tipping the economy into a vicious cycle.

If this continues, in the worst case scenario, Europe could face blackouts and China's industrial users, including chipmakers and aluminum smelters, may shut factories, with repercussions echoing around the globe. Economies that can't afford the fuel -- such as Pakistan or Bangladesh -- could simply grind to a halt.



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