The emerging global natural gas market and energy crisis 2021-2022

summary

The ongoing energy crisis at the end of 2021 is expected to move into 2022. It already has far-reaching effects on the economy, the environment and security. This paper looks at some of the tensions that arise for government policy, investors, and consumers. The crisis has three distinct elements: COVID-19 and supply chain disruptions, increased interconnectedness of natural gas markets and signs of volatility in energy prices during the energy transition away from fossil fuels.

With the global economy still hesitant to recover from the COVID-19 pandemic, energy prices and availability threaten to derail it. The pandemic resulted in a historic decline in energy demand and prices, but the recovery in demand is now weighing on fossil fuel markets for oil and gas and even coal. Prices skyrocket as demand chases after fuel supply that has not yet recovered from the decline in the pandemic.

In the past, global supply crises have usually been limited to oil, but the rapidly changing natural gas markets are also in crisis. A growing and more flexible liquefied natural gas (LNG) market has enabled global competition for gas supplies, a situation that was not possible when gas was supplied via pipelines or LNG under long-term contracts. Europe and Asia compete for the same supply of LNG, driving up prices in both markets, and expanding today’s narrow market to the United States. In a way, natural gas is a victim of its own success: the displacement of coal-fired power for economic or environmental reasons has been a major source of gas demand. However, as coal production declines in the United States, an important buffer for gas demand and prices is disappearing. Since less coal can be used to generate electricity when the demand for natural gas is high, the demand for gas becomes less elastic and prices fluctuate.

Energy markets are inherently price inelastic and therefore volatile. However, the recent emphasis on the environment and affordability in the early stages of the energy transition may have resulted in less attention being paid to energy security. The new networking of the energy markets across fuels and regions has also changed the spread of crises. Measures such as strategic reserves and demand response may require more attention, as may programs to support low-income consumers, who are always hardest hit by high energy prices. The diversification of the energy supply with renewable energies will also help, since these sources, once built, are not subject to the whims of the world markets.

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