Energy inflation, energy security and when fossil fuels are not at an impasse.

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Energy inflation.

Consumer Price Index (CPI) inflation reached 8.5% per year in May 2022 and is of concern to everyone, especially the elderly with limited incomes. Energy is a big part of the CPI – without food or energy, the CPI was 6.0% in May. The main sources of global energy remain fossil fuels: oil, natural gas and coal.

Global oil has gone from zero dollars a barrel in mid-2020 to $102 a barrel now, and that has caused some consternation about gasoline and diesel prices in the United States, even though prices are still lower to most countries in the world.

Natural gas provides electricity, industrial fuel, home heating and cooking fuel. Prices vary around the world, but natural gas prices are generally higher in Europe and Asia than in the United States, in part because the United States produces much more natural gas, especially since the revolution. shale which started in 2003.

In Europe and Asia, gas prices have risen in parallel, rising from $4-5/MMBtu (or MCF) in 2020 to all-time highs of $25-40/MMBtu in June 2022. ‘about 5.6 to 8.9 times.

Natural gas prices in different parts of the world. Source: IEA, License: CC BY 4.0.

In contrast, natural gas prices in the United States remained subdued, rising from $2/MMBtu in 2020 to $8/MMBtu in June 2022.

As the world emerged from the pandemic in 2021 and 2022, businesses came alive. Due to pent-up demand, individuals and businesses demanded more of everything, especially oil and gas, and were willing to pay more.

Russia and Ukraine.

Then the war in Ukraine started in February 2022 and the energy games began. Discussions in the West turned to limiting Russian oil imports because oil and its derivatives, gasoline and diesel, were the main source of export revenue for Russia. Up to 2/3 billion dollars per day was paid mainly by Europe and was used to finance the Russian war, it was claimed.

Natural gas was a minor source of export revenue for Russia, but still sparked talk of embargoes from the West. But then Russia stopped gas supplies to Poland and Bulgaria, apparently because those countries refused to pay in rubles. What Russia has realized is that stopping gas supplies to Europe has hurt the European economy more than Russia’s export earnings.

As Bloomberg described, the gas supply via Ukraine has been reduced. In addition, large volumes of Russian gas are transported to Germany via the Nord Stream gas pipeline which is about to stop for ten days of maintenance on July 11. Some observers fear that Russia may restart the flow of gas.

To complicate the picture, Russia appeared to nationalize the Sakhalin-2 offshore oil and gas field as well as LNG terminals. One interpretation is to prevent foreign partners, including Shell, from selling their stakes to other investors.

LNG rush.

One solution to Europe’s gas problem is to import more natural gas from Norway, Europe’s largest supplier. Norway has access to its own gas reserves in the North Sea and to the second largest LNG port terminals in Europe. For example, the UK imports about 50% of its gas and almost 80% of it comes from Norway.

Another solution for the West is to limit imports by pipeline from Russia and increase its imports of LNG (liquefied natural gas) from countries not aligned with Russia. Countries like Qatar, Australia and the United States – the top three LNG exporters.

The United States was not allowed to export natural gas until 2016, but the shale gas revolution changed that. Over the past six years, the United States has risen to the top of LNG exporting nations.

According to the Bloomberg report, 44 countries around the world import LNG, nearly twice as many as ten years ago. Coal is in decline, according to the multinational deal at COP26 in Scotland last November, and many believe global oil production has already peaked.

But the G7 meeting last week backed further investment in LNG, mentioning Europe as a particular need. Natural gas is rapidly becoming a global market.

New LNG projects.

Export LNG terminals are not cheap to build – up to $10 billion each. In North America, Cheniere Energy approved the expansion of a terminal in Texas. In Qatar, Exxon Mobil and Shell are involved in projects to increase LNG exports which total $29 billion.

Since the war in Ukraine, around twenty LNG import terminals have been set up. Germany has invested 3 billion dollars to set up four floating terminals. In China, which bought the most LNG last year, 10 new LNG terminals will be commissioned in 2023. China’s capacity will double between 2020 and 2025.

Climate dilemma.

Energy shortages and rising gasoline, natural gas and electricity prices are forcing policymakers to reassess the trade-off between fossil fuels’ high contribution to greenhouse gases (GHGs) and the need energy security.

While writing this article, power went out in the area. It’s 92 F outside and my swamp cooler broke down. In my house, it’s a person who needs oxygen day and night, but the main source of oxygen is electricity. It’s a scary moment. We may need to find a hotel that has its own generator. I don’t have to rethink this one – our family wants energy security.

It’s the United States, and there are dozens of countries around the world that don’t have energy security. As the world transitions from fossil fuels to renewables, it must do so under the umbrella of energy security.

If the energy transition takes a little longer to guarantee energy security, so be it. The urgency of the transition is a point of contention. Steven Koonin’s book argues that global trends in extreme weather event data have not worsened over the past 50 years or so, when global temperature increased by around 0.7°C (Celsius). It’s a compelling argument that leads to the next question: Why should climate scientists worry about the urgency of the next 0.5C?

Of course, the argument is only about extreme weather events like droughts, wildfires, super storms and hurricanes, and their global trends. People living in local areas such as California or eastern Australia for the past two or three years feel like they are living in extreme weather conditions.

Natural gas has been pushed by big oil companies as a halfway house or a bridge to renewables. This concept took on a life of its own in a more volatile world as described above. Countries are paying closer attention to natural gas, which is much cleaner to burn than other fossil fuels like coal and oil.

In Europe in particular, countries desperate to buy natural gas mean a weakening of climate policies that reject all fossil fuels. The needle has shifted a bit from renewable energy funding to supporting natural gas projects.

Take away food.

LNG imports could meet 40% of Europe’s needs, according to Bloomberg, by 2026. Although this is twice as much as in 2021, it is well below current gas imports from Russia.

Voices are being raised in Europe to say that energy shortages promise a recession. Deutsche Bank warns that energy rationing will lead to a German recession. Electricity prices are soaring in France and Italy. Morgan-Stanley said Europe would be in crisis by the end of this year. Uniper SE, a German company that has to cover Russia’s gas shortage by buying gas at high spot prices, would lose $31 million a day.

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