Energy prices are unlikely to fall in 2022 or beyond – not until major importers get serious about green transition
- Written by Michael Bradshaw, Professor of Global Energy, Warwick Business School, University of Warwick
With today’s high oil prices and record gas prices, it is easy to forget that the situation was reversed as recently as two years ago. At the end of 2019, an over-supply of fossil fuels had left producers concerned about low prices. Saudi Arabia and Russia fell out[1] over the need for further production cuts to support prices. Then the scale and impact of the pandemic became apparent, economies locked down, and energy demand plummeted – most significantly for oil, given its links to transport.
The average price[2] for a barrel of Brent crude oil duly fell from US$64 (£47) in 2019 to US$42 in 2020. It has since rallied to an average of US$71 in 2021[3]. This strengthening reflects the success of oil-producer cartel Opec+ in managing production against rebounding global demand, helped also by only modest rates of recovery in supplies from the US shale industry.
The same cannot be said of the gas market, where prices vary significantly by region. North America is self-sufficient and has been enjoying relatively low prices, but consumers in Europe and Asia have to compete for marginal supplies on the global market.
Using the UK’s spot price[4] as a European benchmark, gas was trading at around £0.35 to £0.40 per therm in early 2020, but by May 2020 it had fallen to £0.084. In the thick of the pandemic, liquefied natural gas (LNG) cargoes in the US were being cancelled due to a lack of demand and Gazprom in Russia was having to scale back production from its fields in Siberia.
Natural gas price (UK spot, pence per therm)
Trading View[27]
The gas situation is more unpredictable. Ordinarily, demand and prices fall when the winter heating period ends in the northern hemisphere. But storage will require re-filling because facilities in many countries were not full even before this winter. And growing global demand, as economies switch away[28] from coal to gas, may stretch supply.
In Europe, the challenge is to ensure adequate supply in the short-term as climate policy drives down demand in the long term. Relations with Russia, which exports gas to Europe via several pipelines, will remain critical to avoid expensive competition with Asia for LNG supply.
Aside from this possibility of Europe contributing to higher demand, it is higher LNG demand in emerging markets that will promote an expansion of natural gas production in the medium to long term. One potential issue is that higher gas prices may dissuade potential new importers like Vietnam[29] from investing in import infrastructure, potentially lowering global demand.
The production problem
Yet in general, few significant oil and gas producing economies are going to stop investing in new production anytime soon. The problem is the credibility gap that exists between ambition and action in importing economies. The producers simply do not believe that demand is going to disappear, that prices are going to fall permanently, or that their assets are going to get stranded.
It is true that financial markets are doing their bit[30] to curb extra fossil fuel production by turning away from financing the sector, but the net result may simply be to hand market share to national oil companies. The real answer lies in fossil-fuel-importing nations – the largest of which are China and India – demonstrating credible plans to decarbonise their economies and delivering on them. At present, they are doing just the opposite.
The current energy crisis will eventually pass as more supply comes on the market. For now, governments in those countries impacted by high prices must hold their nerve and press on with decarbonisation. At the same time, fossil fuel producers should not be fooled into thinking that the good times are here to stay. What the current crisis does highlight is that the challenge of phasing down fossil fuels in an affordable and equitable manner is just as great as that of building up clean energy capacity.
References^ fell out (www.worldoil.com)^ average price (www.statista.com)^ US$71 in 2021 (www.eia.gov)^ UK’s spot price (tradingeconomics.com)^ Trading Economics (tradingeconomics.com)^ on the increase (www.theguardian.com)^ reduce taxation (www.thetimes.co.uk)^ green levies (www.dailymail.co.uk)^ support new exploration (leftfootforward.org)^ even try (www.yorkshirepost.co.uk)^ fossil fuels (www.ft.com)^ physical science report (www.ipcc.ch)^ academics (www.nature.com)^ international organisations (www.unep.org)^ think-tanks (carbontracker.org)^ Paris Agreement (unfccc.int)^ fall way short (climateactiontracker.org)^ are rebounding (www.bbc.co.uk)^ green recovery (www.unep.org)^ clean energy (www.irena.org)^ low carbon technologies (www.theguardian.com)^ are declining (www.wsj.com)^ At present (www.iea.org)^ hesitant (www.ft.com)^ demonstrating financial discipline (www.bloomberg.com)^ Russia-Ukraine situation (www.theguardian.com)^ Trading View (www.tradingview.com)^ switch away (www.reuters.com)^ Vietnam (www.spglobal.com)^ doing their bit (www.cnbc.com)
