Looking at the past year retrospectively, the rise in global energy prices was a landmark international event. Due to the soaring electricity and natural gas prices, a wave of bankruptcies of European energy suppliers, previously predicted by industry insiders, is fast approaching. More than 40 energy suppliers have closed down, according to Bloomberg News.
Although there were early alarms, the wave of bankruptcies has spread across a wide range of companies, causing a massive shock in the industry attracting global attention. Affected by the energy crisis, 5 large-scale retailers went bankrupt in Singapore, affecting approximately 140,000 households and 11,000 enterprises. Meanwhile, most of the UK's operating energy suppliers are still operating at a loss during the current period. We need to think about how this massive energy industry shock will evolve and whether it will spread further in the future.
Where did the energy crisis originate from?
Currently, the primary energy sources consumed in Europe are crude oil, natural gas and coal, but the three energy sources are highly dependent on imports. Moreover, since the second quarter of 2021, European natural gas prices have soared, and inflation has remained high. Still, the overall energy demand has not changed by much, subsequently causing an energy crisis.
The main problem lies in the energy supply chain. According to statistics, the total global investment in oil and natural gas dropped by about 26% in 2021 compared to pre-pandemic levels. Natural gas production in Europe has gradually decreased over the past two years. Therefore, the region relies heavily on energy imports. Russian natural gas, which supplies 35% of European demand, has acted as a market stabiliser. However, due to geopolitical tensions and the severe cold weather, the energy supply plan between Europe and Russia appears quite fragile. Since 2021, Russia’s gas transmission to Europe has remained at low levels. With the advent of winter, Russia and other energy-supplying countries’ domestic demand has increased, and exports have decreased. Moreover, the ever-changing diplomatic relations between the United States and Russia make Russia unable to guarantee a stable supply of natural gas to the European market in the future.
Additionally, the demand for natural gas in Asia is rising. As a result, Russia is likely to see opportunities in emerging markets and increase the supply of natural gas to Asia in the future, which will further weaken the supply to Europe. If so, this massive shock in the European energy industry may be just the beginning.
According to energy agency data, the European natural gas supply contracts jumped 23% in November, reaching a record high of 117.50 euros per MWh, compared with only 18 euros six months ago, which is higher than 1000% from the record low point in May 2020.
Which industries will be most affected?
As the cold weather hits the European continent, the power shortage caused by the energy crisis has been a drag on the recovery of the Eurozone economy. Rising natural gas and electricity prices put industrial manufacturers under significant financial pressure.
11 European industry associations, including steel, fertiliser, cement, paper, and other industries, warned recently that the energy crisis had caused energy-intensive companies to pay unaffordable costs, which could trigger a wave of industry closures and even cause an economic recession. However, Anne-Sophie Corbeau, a research scholar at the Centre for Global Energy Policy at Columbia University, said recently, “The problem is not just energy costs. Food and heating are both crucial necessities. At present, many people have problems with heating, but the risk of rising food prices may materialise in the future”.
The increasingly severe energy crisis has been the leading cause of the sharp fluctuations in the European stock markets since October 2021. The market’s fear of energy shortages has gradually intensified with the arrival of a severe winter. Still, the performance of the relevant stocks has also been affected by the economic cycle. From the performance of energy stocks, we can see that they had accumulated significant gains before October this year, but there has been a market correction recently. On Monday this week, the European natural gas price declined for 4 consecutive trading days, which temporarily eased the market’s oversupply. However, this doesn’t mean that the danger has been eliminated.
How about the future development of the energy crisis in Europe?
With the continuing recovery of the global economy, some countries have gradually resumed partial travel and reopened their borders. As a result, the demand for crude oil in various countries has started rising, leading to higher gasoline prices. As a result, market analysts said that oil and natural gas prices may face further upward pressure in 2022, which is unsuitable for the European energy crisis.
Some analysts have warned that European natural gas prices rose by 729% in 2021, and electricity prices soared by 500%. If the prices keep rising, the worst situation may trigger a "market crisis" on a global scale.
However, other analysts pointed out that the current energy crisis indicates that the world is still dependent on the older sources of energy, including crude oil, natural gas and coal, even as it transitions to cleaner energy sources. For example, the infrastructure for some clean energy sources hasn’t been fully built yet. Therefore we cannot apply clean energy sources on a large scale in the energy industry. To some extent, the crisis is an opportunity to accelerate the improvement of the new energy systems.