Global crude oil prices have hit a 7-year high, exceeding $80 a barrel. This is in stark contrast to spring of last year, when demand had cratered and prices were in the negative for the first time in history. Gas and coal prices are also on the rise.
What’s behind these soaring costs? Three major factors have come together in a perfect storm.
The first is robust demand. Last winter, business activity was down due to the pandemic. This, combined with unseasonably warm weather around the world, led to oil, gas, and coal producers reducing output. But with business now picking up, the stockpiles are proving insufficient.
The second factor is geopolitical tension. China’s power crunch is partly the result of a feud with the country that once supplied roughly a third of its coal. Beijing banned imports of the fuel from Australia after Canberra backed calls for an inquiry into China’s early handling of the COVID-19 outbreak.
Meanwhile, much of Europe is running out of gas as Russia has limited supply through trans-continental pipelines. Some in Europe say Moscow is trying to manipulate markets and push up prices but the Kremlin denies this.
And finally, the third element, which may be less passing circumstance than new reality: countries around the world are turning away from fossil fuels. New policies to fight climate change have led to smaller supplies of high-emission sources of energy. But renewable energy production is not yet sufficient to make up for this shortfall.
Many oil importers are now calling on major producers, such as OPEC+ members, to ramp up production in the short-term. But analysts say those countries are reluctant to do so as the current high prices will help them make up for losses incurred during the pandemic.
Economists are worried the crisis will lead to a period of stagflation that would derail the post-coronavirus recovery. The World Bank says it expects energy prices to remain high well into 2022, with a 2.3 percent increase compared to this year. It would come at a time when many countries are still struggling with high unemployment due to the pandemic.
The crisis is already leading to painful effects for the regular consumer. According to analysis by Daiichi Life Research Institute, Japanese households should expect to pay an additional ¥46,000, around $400, on average this year on energy.
In China, the impact may be even greater. Restrictions on electricity usage has forced factory lines to halt. This has led to decreased production of silicon and magnesium, which in turn is disrupting semiconductor and auto production. Meanwhile, a cold snap is increasing the strain on the power system.
For energy-importing countries, the only viable long-term solution is to invest in the development of renewable energy. And as green policies take hold around the world, this sort of shortfall will be less disruptive to the global economy. But in the short-term, these countries will have to come up with backup plans to increase stockpiles. Otherwise, low-income consumers will feel the hurt every time there is a crisis like this in the future.