China is experiencing rolling blackouts and factory shutdowns. U.K. soda shelves may soon be empty. Fertilizer plants are shutting down and slaughterhouses are growing wary of how long they can withstand periods without a crucial ingredient they need to keep up meat production.
The common denominator between all of these strained industries is a crucial, yet perhaps unexpected commodity: natural gas.
A confluence of factors, and political entities (governments of China, Russia, the U.S., the U.K., and the E.U., to name a few) have coalesced and caused global natural gas prices to surge to record highs. This is concerning, because as winter approaches in the northern hemisphere and countries rally around renewable energy and emissions goals, securing the grid is proving increasingly crucial.
“There's a storyline that this current thing is a sort of perfect storm of a set of circumstances that weren't anticipated and probably won't be repeated,” said Michael Bradshaw, professor of global energy at the University of Warwick Business School. “But there's also, I think, an underlying story about this is the beginning of the problem of not managing the energy transition.”
The web of actors in the global natural gas crisis are many and complicated—the impacts of a shortage even moreso. Here, Motherboard explains everything you need to know about the surge in natural gas prices.
What is causing the global gas crisis?
Energy economists that spoke with Motherboard boiled the issue down to a supply gap caused by COVID-19: As the world went into lockdown and oil and gas prices plummeted to record lows in March of 2020, many producers slowed operations, laid off staff or shut down infrastructure.
The price trajectory of natural gas differed from country to country as virus variants surged, but, broadly speaking, as nations lifted travel bans and opened back up, global energy demand began to resurge. But stored supplies of natural gas remained inadequate to address the gap between what was needed to power a post-vaccine world, so a supply gap emerged and prices surged accordingly.
The U.S., for example, has seen natural gas futures grow to around six times what they were in June of 2020. Now at $6.2 USD per metric million British Thermal Unit (mmBTU), the value of natural gas is the highest it’s been since 2008. Europe has seen natural gas follow a similar, but much starker trajectory: In April, of 2020, Dutch natural gas futures were around 13 euros per megawatt hour; they now cost around nine times that. The U.K.’s natural gas futures also grew by nearly 800 percent in the same period.
In that time, a few things happened to exacerbate the problem: growing recognition of the gravity of the climate crisis led individual nations and jurisdictions within them to place greater emphasis on building out renewables while phasing out coal and natural gas; the U.S. passed federal tax incentives for wind and solar, reducing demand for natural gas and disincentivizing both production and financing for producers; the E.U. set its sights on increasing renewables’ share in the energy mix to 40 percent by 2030; the U.K. enshrined 2035 emissions targets into law and launched record subsidies for renewables, all while reckoning with the 2017 shut down of its largest gas storage site in the North Sea (the country now has enough gas stored to meet the demand of four to five winter days, The Guardian reported last month.)
“If I'm thinking about drilling a well and I see the writing on the wall that all these states are moving towards renewables over the next 10 years, I might not want to drill that well,” explained Christopher Knittel, professor of applied economics and faculty director of the MIT Center for Energy and Environmental Policy Research (CEEPR). “Those are really demand policies. They're reducing the demand for my product.”
China, for its part, is shifting demand away from coal to gas. The country made a commitment to stop building new coal projects overseas last month as part of a broader commitment to be carbon neutral by 2060. China has long held the title of the world’s largest emitter primarily because of its reliance on coal; researchers and environmental advocates alike have been pushing the country to turn off its nearly 1,100 active power plants at home, more than any other country in the world.
As part of this endeavor, the country has taken to buying up liquified natural gas stocks from other countries in a “buying spree” that has left much of the U.K. and the E.U. at a disadvantage. It signed short-term contracts for liquified natural gas (LNG) with countries including Russia and Myanmar, bringing its overall imports to a record high in August. Though the U.S. natural gas export market is small, a steadily growing volume of the LNG we send overseas is being bought up by China.
While China has gotten a fair amount of media attention for this practice, Bradshaw noted that other Asian countries, including Japan, India, and South Korea, have been doing the same.
All of that has left Europe and the U.K. in a tough position. Exports from Russia, which typically supplies the E.U. with around one-third of its demand, have also been consistently dwindling, with major Russian gas exporter Gazprom only booking one-third of the gas transit capacity it was offered for October. This has driven European prices up, sparking debate over whether the move is intentional—a way to put pressure on the EU to speed up approval for the $11-billion Russian Nord-Stream 2 pipeline, which would send 55-billion cubic meters of gas into Germany each year, but that still has to go through testing and certification before it is operational. (A group of European Parliament lawmakers has called for a probe into Russia’s role in the gas price surge, arguing that squeezing the market is a way to get pipeline approval sped up. Bradshaw and Knittel chalk this up to conspiracy theory.)
Though the U.S. has relatively strong gas supply, we’re experiencing natural gas inventory declines of our own, made worse by reduced production capacity after Hurricane Ida ripped through a swath of offshore oil infrastructure in the Gulf of Mexico. Our natural gas price increases are not yet what those overseas are, but as winter nears, some are concerned that this may change.
“If it’s a warm winter in the US, natural gas prices won’t skyrocket and there won't be a crisis,” Dr. Kenneth Gillingham, economist at the Yale School of Environment, said. “In my view it's not certainly a crisis yet, but we see some foreboding indicators.”
Which industries are being affected by rising fuel prices?
It goes without saying that the most dangerous consequence of a natural gas shortage anywhere would be blackouts within households and essential buildings, like hospitals. This is what’s already happening in China, where multiple provinces have spent the last few weeks grappling with outages and rationing electricity. This is almost certainly what grid operators would prioritize in the face of blackouts, Gillingham says, and the likelihood of this level of grid strain remains uncertain.
The squeeze on the global gas market has also touched a number of other seemingly unrelated industries: Fertilizer, soda, and meat are among them. Natural gas is a key ingredient in the production of nitrogen-based fertilizers, a byproduct of which is food-grade carbon dioxide (CO2) that remains crucial for carbonated drinks like pop and beer and for packaging to extend the shelf life of pantry products. Strain on the market for fertilizers could trickle throughout the agricultural system and affect crop supply. CO2 is also used to stun animals in slaughterhouses, so a gas supply shortage could mean bad news for the UK’s meat industry.
“When a basic product like natural gas’s price goes up, that has implications all throughout the economy,” Knittel said.
High prices for a key material in manufacturing reduces producers’ incentives to continue production, because it shrinks their profit margins and makes it untenable to continue. Two fertilizer plants in the U.K. have already shut down because of rising gas prices, a cautionary tale for the other industries that depend on one or both products for feedstock of their own.
The shortage has highlighted just how much of our society and systems are built around gas, and just how fragile that link can be. This year, 12 energy companies in the U.K. have collapsed due to rising fuel prices, forcing regulators to move millions of customers to surviving companies, with some customers experiencing higher bills.
This all raises important questions for what life in a renewable energy economy might look like. Sectors that are directly or indirectly dependent on gas will need to adapt without this key necessary material or risk taking serious long-term financial hits.
“What this has made people understand is that there is a lot of what we would call non-combustible demand for fossil fuels that feeds into the supply chain in complicated ways,” Bradshaw said.
Will winter be worse?
Climate change is another crucial part of what’s driving the current natural gas shortage in the U.K. and E.U.. Europe experienced a colder, longer winter than usual at the start of 2021, a sign of extreme weather symptomatic of a changing climate. This strained the grid and forced the country to tap into stores of energy that were already nearing depletion. A summer wind drought kept green energy suppliers in Europe from replenishing that supply.
“This really starts with a long, cold winter,” Bradshaw said. “Then a set of circumstances through the spring into the summer this year meant storage didn't get filled up.”
Were the U.K. to experience similar conditions this coming winter, it wouldn’t be prepared to meet demand, and with gas prices on the rise and limited help from the EU following Brexit, experts fear that another cold winter could leave households without heat.
“Three million households in Britain already live in fuel poverty, made to choose between heating and eating in the winter,” journalist Samuel Earle wrote in an op-ed in the New York Times this week. “This grim confluence, from fuel shortages to spiraling poverty, has been described by many as a perfect storm.”
In the U.S., a cold snap predicted for New England could see a strained grid cause price increases to nearly $20 per mmBTU, Reuters reported, an increase of more than 300 from the current futures prices percent.
Gillingham believes surging prices could serve as a shield from widespread blackouts, forcing large segments of consumers to reduce their heat usage in small ways in order to prevent grid shortages. But the burden of surging gas prices would inevitably affect low-income consumers more than high-income ones, who may not think twice about a higher-than-usual bill.
“Prices going higher have very strong important equity issues,” Gillingham said. “High prices are not the panacea, by any means, solving all the problems, but high prices would potentially smooth out a lot of the issues.”
Gillingham fears that the threat of blackouts amid cold winter conditions and natural gas supply hiccups could in turn force nations to increase their reliance on coal power. This has already taken form in the U.S.: The price of coal from central Appalachia has risen by 35 percent from the start of the year as the gas crisis strains other energy forms. Prices in other regions of the country are following a similar upward path, Bloomberg reported this week.
It’s part of a feedback loop that’s growing increasingly frequent as climate change grows in severity: extreme weather forces households to increase their energy use, causing the combustion of climate-change inducing fossil fuels to spike, further exacerbating climate change, and so on.
This would be an unfavorable, but feasible option in the US, Bradshaw notes. But the UK demolished its last coal-powered plant in 2020, its nuclear stores are limited, and utilities operate with a price cap designed to prevent extreme bill surges. There, blackouts could be more detrimental.
How long will the gas crisis last, and what can we learn?
With so many factors at play in the flow of natural gas as a commodity throughout North America, Asia, and Europe, there’s no way of knowing for sure how long prices will stay so high. The U.S. Energy Information Administration most recently projected an increase in natural gas prices through the end of 2021. Bradshaw predicts the global market could be strained throughout winter, depending on temperature severity and whether gas-strapped countries can sustain the wind and sun conditions necessary to generate backup energy from renewables.
Like many energy economists, Gillingham, Bradshaw, and Knittel all agree that the gas supply gap has highlighted the precarity of our energy system. But increasing grid resilience can be achieved through any number of means, some of which are better for the environment than others. Building out battery storage stands to ensure that renewable energy sources can fill supply gaps where fossil fuels fall short, noted Bradshaw, who said he is unconvinced that countries like the UK are prepared to phase out oil and gas entirely.
Knittel is slightly more optimistic, noting that battery storage will be key to closing supply gaps amid a transition toward cleaner fuels. Renewables are beholden only to weather conditions, not to inputs from other countries, so they’re less susceptible to trade wars, he says. But weather variance remains a risk, one that only sufficient storage can address. “What we would be doing in a more renewable heavy market is sort of shifting away from one risk and shifting toward another,” he says.
Gillingham believes the global energy industry should move away from a “just in time” approach to inventory, in which companies stockpile the smallest possible additional commodity volumes to cut waste and production costs. COVID-19 proved this approach unwise, he said. It also proved the instability of fossil fuels as an energy source.
“People worry a lot about resiliency and the new technologies, but, it's quite possible that those technologies could lead to a more resilient economy,” he said. “There are weaknesses in resiliency in a fossil fuel economy, too. The fossil fuel economy is not the most resilient either.”