As we enter Q3, we begin to notice subtle changes in the world around us. The air is turning cooler, the nights are drawing in, the leaves on the trees are turning ever-so-slightly amber, and days are growing shorter. Yes, Fall is on the way, which means that winter’s icy grip won’t be far behind.
In terms of energy usage, winter is of course an expensive season for obvious reasons. Not only do homes and businesses use more gas for heating their homes, but as it is dark for so long, electricity usage is also up massively because of the need for lighting. As a result, energy usage increases, and supplies fall.
In 2022, the world found itself in the midst of an energy crisis on an epic scale. Since then, prices have somewhat stabilized, though there are concerns that, due to ongoing geopolitical tensions with Russia, along with a growing dependence on renewable energy sources that are still under development, Europe could be heading for yet another energy crisis this winter. So how are governments preparing?
What Caused the Global Energy Shortage in 2022
For an economic standpoint, 2022 caused one heck of a headache for business owners, bankers, financial advisors, and investors alike. Following an impressive Santa Claus Rally at the end of 2021, the markets started off in the red, and, remained there virtually all year long.
Along with that, inflation was rising at an alarming rate, meaning that the cost of goods and services was also increasing. In a bid to tackle that, monetary policy makers such as the Federal Reserve (FED) the Bank of England (BoE) and the European Central Bank (ECB) began initiating interest rate increases. This again meant that people were spending more on interest repayments and had less disposable income.
Just to add to people’s financial misery, the world also found itself in the midst of a global energy crisis, when energy prices increased rapidly. So what caused this energy crisis?
Natural gas prices, for example, increased by more than five times in comparison to the pre-Covid level. It was sold for the equivalent of $250 for a barrel of oil. According to IEA (International Energy Authority) this was driven mainly by Russia’s invasion of Ukraine in February of that same year.
After having heavy sanctions imposed, in retaliation, Russia cut natural gas supplies to countries in the EU, along with the UK, by more than 80%. This then resulted in huge bidding wars for gas supplies all across the globe.
Even before this happened, however, the price of gas was increasing as countries emerged from lockdowns following the Covid-19 pandemic, and economic activity picked up massively.
Coal prices were also affected, as, due to a shortage of gas, global power stations were forced to instead turn to coal. This caused coal prices to triple.
Oil prices also surged for many of the same reasons, with Brent crude peaking at $125 per barrel. This resulted in governments stating that the energy crisis in 2022 was worse than the oil shortages of the 1970s, because coal and natural gas were also affected.
Is Europe Heading for a Winter Energy Crisis in 2024?
Since global energy prices soaring in 2022, 2023 saw prices fall. In early 2024 there was a great deal of optimism surrounding energy reserves and prices, as natural gas reserves were stocked to the brim, literally reaching all-time highs.
Because there was suddenly such an abundance of gas, wholesale prices fell sharply and energy prices edged closer to where they were at before the Russia-Ukraine conflict.
So, surely with natural reserves at record highs, and with wholesale prices falling, this means that Europe’s energy crisis is finally over? Well, not exactly. Lurking in the shadows is the risk of yet another energy crisis in winter 2024, that experts have warned could potentially last years.
You see, despite gas reserves being at record highs, eventually they will run out. As gas supplies wane, this will obviously drive up its price as it becomes rarer. Not only that, but electricity markets have also suffered in recent years. This has been driven largely by Europe’s commitment to reducing its carbon footprint, particularly the EU. Subsequently, a greater emphasis has been placed upon renewable energies that are still under development and are not yet fit-for-purpose. While renewable energy literally is the future of our planet, we’re not yet where we need to be, and energy markets are suffering as a result.
The primary threat of an upcoming energy crisis in Europe, however, is the Russia-Ukraine conflict, which is still ongoing. Prior to Russia’s invasion, Russian pipelines were the primary source of imported gas for virtually all of Europe. This had been the case for over a decade. Following the sanctions imposed on Russia by Europe, imports suddenly reduced by two thirds which caused a shock in the market and increased wholesale prices massively.
In the UK, unit prices for electricity will increase by 10% in October 2024, and 14% for gas. There will also be a slight increase in standing charges. Now, you must remember that the UK has only seen one interest rate cut since rates were hiked 14 consecutive times between 2022 and 2023. Put simply, people are still feeling the pinch and this increase in energy costs will be felt by households and businesses alike.
Wholesale prices are also higher, which means that the current energy price cap is forecast to rise by 3% in Q1 of 2025.
A winter energy crisis in Europe in 2024 is not a certainty, however. The EU helped to reduce gas demand between 2022 and 2024 by 138 billion cubic meters. Energy prices are also more stable for now, and imports from other nations such as the US and Norway, have increased, while the share of Russian gas in EU imports dropped by 18% by June 2024.