Are we in an energy crisis?

We are currently facing a global energy crisis. Energy prices have skyrocketed, supplies are tight, and fears of shortages and blackouts are growing. But what exactly constitutes an “energy crisis”? And are we really in the midst of one now? Let’s take a closer look.

An energy crisis occurs when the supply of energy struggles to meet demand. This usually leads to spiking energy prices and concerns about the security of supply. Energy crises can be caused by a variety of factors, including:

Limited fossil fuel supplies

Increased energy demand
Insufficient investment in energy infrastructure
Geopolitical tensions disrupting supply lines

Extreme weather events damaging infrastructure

Many of these factors are currently at play. Fossil fuel supplies are tight amid the pandemic recovery, energy demand is soaring, investment stalled during Covid-19, the Russia-Ukraine war has threatened European gas supplies, and climate change is causing more extreme weather.

This perfect storm of issues has led to surging oil, gas, and power prices around the world. The impact has been severe – many households are struggling to pay energy bills, industries face spiraling production costs, and developing nations are racking up debts.

So in many ways, the current situation fits the definition of an energy crisis. But every crisis is different, so let’s analyze the key metrics.

Table of Contents

Fossil fuel supplies

The pandemic caused fossil fuel demand to plummet in 2020. Exploration and production stalled as prices crashed. Now the world economy is reopening, demand has rebounded, but supply is lagging. Here is the status of oil and gas supplies:

Oil

Global oil demand has surpassed pre-pandemic levels, reaching 99.7 million barrels per day (bpd) in 2022 compared to 100.6 million bpd in 2019.
But oil production has been slow to catch up after the pandemic slump. OPEC has struggled to increase output, U.S. shale producers have maintained capital discipline, and Russian output is constrained by sanctions.
As a result, oil inventories in developed nations remain low. OECD commercial inventories fell to 2.62 billion barrels in July 2022, 11% below the 5-year average.

These tight supplies have pushed oil prices from around $50/barrel in early 2021 to over $100/barrel since Russia invaded Ukraine.

Natural gas

Global gas demand is expected to rise 3% in 2022 after sinking during the pandemic. Demand for liquified natural gas (LNG) has been particularly strong in Europe and Asia.

But gas production has not kept pace. U.S. shale gas output remains below pre-pandemic highs and supply issues have plagued export facilities. Russian pipelines to Europe are flowing at reduced rates.
European gas storage levels dropped to just 55% full in July 2022 compared to 73% full on average over the past decade. This has exacerbated fears of winter shortages.
Gas prices have skyrocketed, especially in Europe where they have risen from $6/MMBtu in early 2021 to over $70/MMBtu after Russia squeezed flows.

So in summary, oil and gas supplies are indeed tight relative to current demand. Some of this is pandemic-related, but the Russia-Ukraine conflict has also constrained supplies significantly. This supply-demand imbalance has driven prices sharply higher.

Energy infrastructure investment

Chronic underinvestment in new oil and gas projects during the pandemic has compounded the current supply issues.

Global oil and gas investment plummeted from $525 billion in 2014 to just $350 billion in 2020, a 30% drop according to the International Energy Agency (IEA).

Investment recovered slightly to $387 billion in 2021 but remains far below pre-pandemic levels.
The resulting decline in new production coming online is estimated at 2-5 million bpd of oil and 100 billion cubic meters of gas by 2030, per Rystad Energy.
Most of this investment decline has been driven by shale cutbacks. Shale financing dropped over 70% from 2014 to 2020.

This massive underinvestment in new supplies, especially shale, helps explain why production has lagged demand coming out of the pandemic.

However, underinvestment is not limited to fossil fuels. Renewable energy investment also remains far short of what is needed to transition away from fossil fuels and achieve net zero emissions by 2050.

Despite hitting a record $366 billion in 2021, renewable investment would need to double to meet climate goals, per the IEA.

Energy efficiency, electricity networks, storage and other zero-carbon investments are also lagging requirements.

So while oil and gas investment is rebounding from 2020 lows, it appears insufficient to drive material near-term supply growth. And investment across the wider energy complex remains inadequate relative to needs. This underinvestment heightens supply security risks across both fossil and renewable energy.

Energy demand trends

Energy demand plunged during the pandemic but has rebounded sharply as economic activity normalizes:

Global oil demand sank a record 9% in 2020 but recovered nearly 6% in 2021. It is expected to rise another 2% in 2022 and exceed pre-pandemic highs, per the IEA.
Natural gas consumption dropped 2% in 2020 but rose 4.5% in 2021 and should rise close to 2% in 2022.
Electricity demand growth slowed from a 10-year average of 2.5% pre-pandemic to just 1% in 2020, but it rebounded to an estimated 4% in 2021.

This resurgence in energy usage as pandemic restrictions ease has highlighted how tight supplies have become after two years of underinvestment. It has outpaced the supply response, driving prices higher.

However, there are signs energy demand growth may moderate going forward:

High prices are discouraging discretionary fossil fuel use for power generation and heating while encouraging efficiency.

Europe’s gas demand dropped 10% in the first seven months of 2022 as prices spiked, per think tank Bruegel.
China’s oil demand fell in spring 2022 for the first time since 2000 as Covid lockdowns impacted mobility.
The IEA has downgraded its oil demand growth forecasts for 2022 from 2.1 million bpd to 1.7 million bpd citing recession concerns.

While demand remains robust for now, conservation and substitution effects may dampen growth if high prices persist. But demand still looks likely to exceed constrained supply over the next 6-12 months, sustaining upward price pressure.

Energy security

Energy security – ensuring diversified, reliable and affordable energy supply – is being challenged on multiple fronts:

The European Union relied on Russia for around 40% of its natural gas pre-invasion. Disruptions to these Russian flows have increased continent-wide gas security risks.

Chinese coal supply shortages led to widespread power outages in 2021, idling factories and impacting growth.
India faced coal and power shortfalls in 2021, leading to blackouts that hit hundreds of millions of people.
Underinvestment has heightened the risk of oil and gas supply disruptions due to infrastructure breakdowns, geopolitics or extreme weather.

Europe’s gas supply crunch as Russia squeezes pipeline flows is the most acute example of compromised energy security today. EU storage levels rapidly dwindled from March through June 2022 as Russian deliveries via Nord Stream 1 declined. This has forced Europe to scramble for energy alternatives ahead of the winter heating season.

Supply disruptions can ripple through integrated global energy markets, as evident in surging LNG and oil prices. So the localized European gas crisis has exacerbated global energy security fears. Energy systems across the world are precariously tight at present.

Role of renewables

Expanding renewable energy production will be critical to improving energy security in the long run by reducing fossil fuel dependence. But the transition faces near-term challenges:

The IEA estimates renewables met 29% of global electricity generation in 2021. But fossil fuels still drive the majority of power supply, heating, cooking, transportation and industry.
Total renewable power capacity worldwide needs to quadruple by 2030 to achieve net zero by 2050, per the IEA.
But shortages of critical minerals, supply chain issues, bureaucracy and permitting delays are hampering renewables growth currently.

Intermittency limits the reliability of wind and solar. Battery storage capacity must expand to balance grids. The global energy crisis has slowed progress as budgets are diverted.

So while essential for the future, renewables lack the scale to meaningfully address the world’s surging energy needs in the immediate term. The transition beyond fossil fuels will take time.

Near-term investment is still needed in oil, gas and power infrastructure both to bolster energy security and provide a bridge to a net zero future. A global underinvestment in all parts of the energy complex – fossil and renewable – underlies today’s crisis.

Geopolitical tensions

Geopolitical friction between major powers poses an increasing long-term threat to global energy security and stability:

Russia’s invasion of Ukraine has mobilized Europe to reduce its dependence on Russian oil, gas and coal through 2030. This is fracturing longstanding energy interdependence.
EU bans on Russian oil and coal imports have tightened world markets and raised prices. An embargo on Russian gas could cause deeper shortages.

NATO-Russia tensions risk further energy supply disruptions. Pipelines crossing Ukraine are especially vulnerable.
U.S.-China frictions may hamper cooperation needed to bolster global energy investment, technological innovation and trade flows.

A historical pillar of energy security has been diversity and redundancy of supply. But national security priorities are pushing major economies toward selective “energy independence” from perceived adversary states.

While politically driven, this energy decoupling is economically sub-optimal and threatens to fragment integrated oil, gas and coal markets. The risk of chronic underinvestment and supply crunches may rise.

Geopolitics will likely inject a heightened level of inefficiency, volatility and uncertainty into global energy flows for the foreseeable future.

Financial speculation

Financial speculation in energy markets as prices have whipsawed over the past two years may also be amplifying volatility:

Open interest in exchange-traded oil and gas futures has climbed around 35% since early 2020, indicative of increased speculative trading.
Large investments in oil and gas commodities by banks, hedge funds and commodity indices may drive periodic price surges as investors enter or exit positions en masse.
Retail investor speculation has risen as platforms like Robinhood have opened commodities trading to amateur traders. Regulators warn many are taking outsized risks.

Cryptocurrencies like Bitcoin have also emerged as highly speculative energy assets further divorced from physical supply-demand fundamentals.

While the role of speculation is hard to quantify, inflated money flows can distort prices. Regulators have historically tried to curb excessive speculation during periods of energy market turbulence to reduce artificial volatility.

Key takeaways

In summary, the evidence suggests the global energy system is indeed experiencing an acute crisis period:

Fossil fuel supplies have lagged demand growth coming out of the pandemic, with oil inventories falling to multi-year lows.
Chronic underinvestment has worsened supply tightness as spare production capacity declines.
Demand remains robust as the world economy recovers, outpacing supply and driving huge price spikes.

Energy security is compromised by geopolitics, extreme weather and infrastructure fragility.
The energy transition is progressing but unable to transform systems fast enough to avoid shortages.
Speculation may be amplifying price volatility beyond levels justified by market fundamentals.

Today’s crisis fits a typical pattern where an external shock – the pandemic – disrupts investment flows, causing supply to lag demand recovery. But other unique factors like the Russia-Ukraine war have exacerbated tensions.

The good news is crises driven purely by underinvestment tend to self-correct over time as higher prices revive spending. However supply lost to geopolitics may prove harder to replace. And oscillating speculation could prolong pricing anomalies.

With adequate investment and barring further geopolitical disruption, this crisis should moderate over the next 2-3 years as supplies catch up. But the energy transition will continue and require trillions more in funding. Crisis risks will persist until clean energy achieves adequate scale and reliability.

Policy priorities

To navigate through the current crisis while minimizing impacts, policymakers should focus on:

Incentivizing a short-term investment boost across the full energy spectrum – fossil fuels and renewables.
Securing critical mineral and commodity supply chains needed to expand wind, solar, batteries, EVs, grid infrastructure.

Funding mass energy efficiency programs to dampen electricity and heating demand.
Balancing green ambitions with energy security and affordability priorities.
Curtailing market speculation without impairing liquidity and price discovery.

Stockpiling oil and gas reserves to buffer against supply shocks.
Diversifying energy suppliers while expanding domestic production capabilities.

A comprehensive approach is required to navigate today’s crisis, minimizing economic damage and speeding the transition to a more resilient net zero system. But absent much faster clean energy scaling, fossil fuels will be indispensable through at least mid-century. Realism is vital.

The world has experienced oil crises before. With pragmatic policymaking, cooperation and time, today’s energy crisis too shall pass. But it serves as a reminder that the transition to new energy systems will be volatile unless ambitions are tempered with adequate investment and strategic patience.

Conclusion

In closing, the evidence strongly indicates the world has entered a precarious energy crisis period driven by chronic underinvestment compounded by Russian supply cuts. High prices and heightened insecurity reflect unsustainably tight fossil fuel supplies relative to current demand as the economy normalizes post-pandemic.

While this crisis should self-correct to some degree as investment recovers, risks will remain elevated for years absent much faster scaling of renewables, efficiency and storage. Policymakers face the twin challenges of taming fossil fuel scarcity while also driving an ambitious yet realistic transition. There are no quick fixes.

But with pragmatic strategies, measured clean energy adoption and short-term fossil supply bolstering, today’s formidable energy crisis can be resolved before inflicting excessive economic damages. The transition to a robust clean energy future is vital but will require patience and perspective. There will be turbulence ahead, but the destination makes the risks worthwhile.