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The high energy prices are wreaking havoc with the world economy and it’s unlikely we can expect any reversal of fortune in the near future. And with the recent explosion of the Russian-based Nord Stream 1 and 2 natural gas pipelines in the Baltic Sea earlier this week, the energy shortages, especially for Europe, have been exacerbated. The energy crises will only get worse and this bodes a bad omen for the global markets.
A high number of experts explained that oil & gas prices would likely trend lower over what they describe as “demand destruction.” This would infer that amid price spikes over fossil fuels, energy consumers start to make adjustments by cutting back on electricity usage, as well as changing their transportation modes to reduce their household spending during a high inflationary period.
Nonetheless, the “demand destruction” on energy resources takes a long time before balancing out without inflicting tremendous harm to people’s livelihoods.
Meanwhile, oil & gas companies worry about the long-term objectives over investing into drilling and exploration projects. Why invest billions or even tens of billions of U.S. dollars to explore for oil and gas when sovereign governments are suggesting that we should transition away from fossil fuels?
And when such economic imbalances ensue on the world stage, the disruptions lead to recessionary conditions, higher inflation and serious cracks to global supply chains. Soaring energy prices would hurt ordinary and poor people the hardest.
Oil demand still high, but respective investments are low
The Russia-Ukraine conflict, the central banks of many countries raising interest rates and more severe weather conditions on account of climate change have created a perfect storm for a looming deep recession in Europe and North America. Although many oil & gas suppliers have scored windfall profits this year, they stand reluctant to pour back their profits into more energy exploration projects.
According to Oil Price, Saad Rahim, Chief Economist for Trafigura, spoke at the APPEC petroleum conference in Singapore earlier this week and forecast that the slowing economies and interest rate hikes would keep investors and traders off risk assets including crude oil, which may mean that oil prices might not exceed $100 per barrel again this year.
“We’re potentially moving from a world of commodity cycles to a world of commodity spikes because of the under-investment that has taken place in the last decade,” said Rahim.
Saudi Aramco, the world’s biggest oil and gas refiner, has also warned of under-investments along with no serious back up plans, with the company’s CEO Amin Nasser also speaking at the APPEC conference. He forewarns of a series of supply shocks coming that will inevitably result in price spikes starting by the fourth quarter of 2022.
Nasser pointed out that investment in oil and gas had more than halved between 2014 and 2021, and he added, “The increases this year are too little, too late, too short-term.”
So from a logical standpoint, oil and gas companies do not have strong incentives to boost investments on their current and future projects. Energy prices are high for the moment, but that’s not sustainable when global economic conditions keep deteriorating.
Supply-demand will set the standards
The soaring energy prices were not caused by rising demand but by diminishing supply. And under such circumstances, ordinary families will struggle even though the United Kingdom and European Union have pledged to deliver relief packages to households.
German Chancellor Olaf Scholz announced that his government would spend up to 200 billion euros to assist consumers and struggling businesses to pay their electric bills. As reported by Euro News, Berlin is reactivating its economic stabilizing fund.
He pledged the fund “will do everything it can” to bring prices down, which would cap the price German customers pay for gas. Additionally, British Prime Minister Liz Truss imposed an annual 2,500 pounds price cap per British household on their utilities bills.
Yet, the proposed price caps on electricity could lead to unintended consequences such as energy suppliers lowering their investments and that would create a destructive cycle of lower supply but still high demand since price caps benefit the consumers, not the producers.
European markets and governments not prepared for the storm
Many small and medium-sized enterprises have been crushed by high energy prices. European manufacturers are making some tough decisions, such closing down factories, downsizing and transferring their productions’ lines to Asian countries to curb costs.
The German-based steel giant, ArcelorMittal has slashed its production in half at its main steel mill in the country. The glass manufacturing company, Arc International disclosed that high energy costs have forced it into large-scale downsizing.
Apparently, energy prices are expected to stay high for the rest of this year and into 2023. The European economy is already in poor shape now and it will lead to chain reactions of steeper economic downturns in the United States and other parts of the world, as well.
