Soaring natural gas prices are rippling through global
energy markets and other economic sectors from factories to utilities.
According to a report by International Monetary Fund (IMF),
an unprecedented combination of factors is roiling world energy markets, rekindling
the memories of the 1970s energy crisis and complicating an already uncertain
outlook for inflation and the global economy. Energy futures indicate that
prices are likely to moderate in the coming months.
Spot prices for natural gas have more than quadrupled to record
levels in Europe and Asia and the persistence and global dimension of these
price spikes are unprecedented. Typically, such moves are seasonal and
localized. Asian prices, for example, saw a similar jump last year but those
didn’t spill over with an associated similar rise in Europe.
Analysts expect prices will revert back to normal levels
early next year, when heating demand ebb and supplies adjust. However, if
prices stay high as they have been, this could begin to be a drag on global growth.
Meanwhile, ripple effects are being felt in coal and oil
markets. Brent crude oil prices, the global benchmark, recently reached a
seven-year high above US$85 per barrel, as more buyers sought alternatives for
heating and power generation amid already tight supplies. Coal, the nearest
substitute, is in high demand as power plants turn to it more. This has pushed
prices to the highest level since 2001, driving a rise in European carbon
emission permit costs.
Bust, boom, and inadequate supply
Given this backdrop, it helps to look back to the start of
the pandemic, when restrictions halted many activities across the global
economy. This caused a collapse of energy consumption, leading energy companies
to slash investment. However, consumption of natural gas rebounded fast—driven
by industrial production, which accounts for about 20 percent of final natural
gas consumption—boosting demand at a time when supplies were relatively low.
Energy supply, in fact, has reacted slowly to price signals
due to labor shortages, maintenance backlogs, longer lead times for new
projects, and lackluster interest from investors in fossil fuel energy
companies. Natural gas production in the United States, for example, remains
below pre-crisis levels. Production in the Netherlands and Norway is also down.
And Europe’s biggest supplier, Russia, has recently slowed its shipments to the
continent.
Weather has also exacerbated gas market imbalances. The
Northern Hemisphere’s severe winter cold and summer heat boosted heating and
cooling demand. Meanwhile, renewable power generation has been reduced in the
United States and Brazil by droughts, which curbed hydropower output as
reservoirs ran low, and in Northern Europe by below-average wind generation
this summer and fall.
Coal supplies and inventories
While coal can help offset natural gas shortages, some of
those supplies are also disrupted. Logistical and weather-related factors have
crippled production from Australia to South Africa, while coal output in China,
the world’s largest producer and consumer, has fallen amid emissions goals that
dis-incentivize coal use and production in favor of renewables or gas.
In fact, Chinese coal stockpiles are at record lows, which
increases the threat of winter fuel supply shortfalls for power plants. And in
Europe, natural gas storage is below average ahead of winter, adding risk of
more price increases as utilities compete for scarce resources before the
arrival of cold weather.
Energy prices and inflation
Coal and natural gas prices tend to have less of an effect
on consumer prices than oil because household electricity and natural gas bills
are often regulated and prices are more rigid. Even so, in the industrial
sector, higher natural gas prices are confronting producers that rely on the
fuel to make chemicals or fertilizers. These dynamics are particularly
concerning as they are affecting already uncertain inflation prospects amid
supply chain disruptions, rising food prices, and firming demand.
Should energy prices remain at current levels, the value of
global fossil fuel production as a share of gross domestic product this year
would rise from 4.1 percent (estimated in our July projection to 4.7
percent. Next year, the share could be as high as 4.8 percent, up from a
projected 3.75 percent in July. Assuming half of this increase in costs for
oil, gas, and coal is due to reduced supply, this would represent a 0.3
percentage point reduction in global economic growth this year and about 0.5
percentage points next year.
Energy prices to normalize next year
While supply disruptions and price pressures pose
unprecedented challenges for a world already grappling with an uneven pandemic
recovery, the silver lining for policymakers is that the situation doesn’t
compare to the early 1970s energy shock.
Back then, oil prices quadrupled, directly hitting household
and business purchasing power and, eventually, causing a global recession.
Nearly a half century later, given the less dominant role that coal and natural
gas plays in the world’s economy, energy prices would need to rise much more
significantly to cause such a dramatic shock.
Moreover, we expect natural gas prices to normalize by the
second quarter as the end of winter in Europe and Asia eases seasonal
pressures, as futures markets also indicate. Coal and crude oil prices are also
likely to decline. However, uncertainty remains high and small demand shocks
could trigger fresh price spikes.
Tough policy choices
That means central banks should look through price pressures
from transitory energy supply shocks, but also be ready to act
sooner—especially those with weaker monetary frameworks—if concrete risks of
inflation expectations de-anchoring do materialize.
Governments should act to prevent power outages in the face
of utilities curtailing generation if it becomes unprofitable. Blackouts,
particularly in China, could dent chemical, steel, and manufacturing activity,
adding to global supply-chain disruptions during a peak season for sales of
consumer goods. Finally, as higher utility bills are regressive, support to
low-income households can help mitigate the impact of the energy shock to the
most vulnerable populations.
