Winter is Coming – The Global Energy Crisis

By Richard Nop

As of September 2021, European natural gas spot prices have jumped sixfold since 2019 and have soared to a record price of $US116. Similarly, prices for natural gas in Asia have quadrupled the recorded amount in 2019, clocking up at US$34.47 per million British thermal units which is equivalent to US$190 per barrel of crude oil. As the world re-emerges from the coronavirus pandemic, there has been a significant recovery in demand for goods, but there are supply shortages of natural gas and coal, thus propelling an extreme surge in their prices. China’s industrial sector and major provinces are currently dealing with power shortages and Europe is currently facing a supply shortage. As winter approaches, it has prompted them into an all-out global bidding war for these power-producing fuels. 

China’s Position 

The Chinese Communist Party (CCP) had announced its intention to achieve carbon neutrality by 2060. According to Nomura, coal-based producers fuel about 67 percent of the country’s electricity, but with the CCP’s unwavering push towards carbon neutrality, this has effectively limited coal mining activity and growth.  

What ensued was China being unable to meet its power demands due to the shortage of coal. This places China in a unique position, fighting a battle on two fronts. First, the energy crunch has severely limited output from its industrial sector: Goldman Sachs estimates that 44 percent of China’s factories have been hit with power shortages. The CCP has had to ration electricity to these energy-starved businesses, and even close some factories temporarily to deal with the power curbs. Simultaneously, they are also trying to reduce the amount of greenhouse gas emissions, to progress towards their long term climate goals. Subsequently, to guarantee heat and electricity supplies, the Chinese Electricity Council announced that they were “expanding their procurement channels at any cost”. 

Some experts also suggest that China’s sanction on Australia over a political dispute also played a role in their shortages. China didn’t anticipate that it would run out of coal; tensions are likely to continue between the two countries as the Biden Administration rallies with Australia, to counter the CCP’s influence across the Indo-Pacific. Additionally, drought conditions in China have obstructed hydropower output, forcing China to draw supplies from globally traded fuels contributing to the surge in fuel prices. 

China’s industrial sector had contracted for the first time since the beginning of the pandemic. A standstill in industrial activity due to tight energy regulations has stalled production in China.  This in turn could lead to the disruption of global supply chains. Nomura has downgraded its GDP growth forecasts for China from 8.2 percent to 7.7 percent. China’s producer price index (PPI) is expected to rise which will likely lead to higher inflation in global consumer prices. 

Europe’s Position

Europe depends heavily on Russia for natural gas imports, representing more than 40 percent of imports to the European Union. It is reported that Russia has been limiting the supply of natural gas to Europe via the Yamal-Europe pipeline, as supply fell by 77 percent according to Gazprom. This is leaving Europe starving for fuel as its storage sites are just under 75 percent full, compared to 94 percent capacity this time last year as reported by Gas Infrastructure Europe. Furthermore, wind generation in Europe has been below average, Germany has decided to remove three nuclear reactors off the grid, and the need for heating and electricity for the winter months has catapulted European gas prices by 300 percent in the past year. Climate change policies also contribute to this price surge, due to the rising prices of carbon permits. 

The effects of the shortages are widespread: fertilizer producers have been forced to reduce output, and in the United Kingdom, 30 percent of petrol stations have exhausted the supply. Ten small U.K. energy suppliers have gone under, which has forced 1.7 million people to switch providers. The price hikes can be felt across markets, dampening prospects of economic recovery as price pressure exacerbates global inflation.

The Revenge of The Old Economy

Jeff Curie, Head of Commodities Research at Goldman Sachs offers a unique perspective on this energy crisis and labels this event as the “revenge of the old economy”. In an interview with Bloomberg, Curie reveals that there is an over-investment in the new economy (renewables) and under-investment in the old economy (hydrocarbon-based fuels). As a significant amount of capital is directed towards renewables, it reveals the problem when there is not enough hydropower, wind power or solar power to generate renewable energy. He claims that the solution to this problem is natural gas which belongs to the old economy. Exploration and production companies have experienced negative returns for more than five years, and to compensate for this, it is putting higher prices on fossil fuels. 

A Win for Australian Exporters?

Australian liquified natural gas exporters are expected to be the biggest winner from this crisis. Skyrocketing prices for gas and coal will drive the resources exports to a record AU$349 billion as Europe and China battle for supply. The Department of Industry predicts that this rally would provide more than an offset for the slump in iron ore prices. Prices for Australian thermal and coking coal have hit record highs and the department estimates that the value of thermal coal exports would rise to AU$24 billion.


This global energy crunch has revealed the risks of transitioning from fossil fuels to renewable energy. It has also highlighted that heavy reliance on these fossil fuels is detrimental to the global economy, causing increasing inflationary pressure and disrupting global supply chains.  As the climate change summit approaches, it will be interesting to see how countries will navigate around the energy squeeze while simultaneously aiming towards carbon neutrality. 

Sources: Al Jazeera, Australian Financial Review, Bloomberg, Caixin Global, Euronews, Financial Times, Morningstar, New York Times, Reuters, The Guardian

The authors of this publication are not qualified to provide financial or investment advice and as such the content provided should not be construed in this manner. All information is intended purely for educational purposes and is provided for the personal interest of UNIT members. The opinions expressed within the article do not reflect those of UNIT as an organisation, its partners or its sponsors.