The Energy Crunch, in 6 Paragraphs

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This is the month that the world’s energy transition got messy.

Over the past few weeks, the world has sleepwalked into an energy crunch. The benchmark price of a barrel of crude oil is up more than 25 percent from its August low. In Asia, natural-gas prices are approaching an all-time high. The risk of a spillover is high: China, for instance, is not able to secure enough coal to run its mighty power plants, so it has implemented severe cutbacks and periodic blackouts. In response, factories have shut down and production lines have slowed, which is worsening shortages of goods and commodities. One of those commodities is processed silicon, which is getting more expensive—which, finally, is driving up the cost of solar panels. It is an irony of our incomplete, abortive energy transition that a shortage of Chinese coal can increase the price of solar panels in America.

The crunch is caused by a mess of factors. At the top level, the same factors causing shortages of nearly every type of good are also holding back the world’s energy production: that is, there is still a global pandemic happening. But it has been intensified by stupid geopolitical decisions and poor planning. As with every other rupture in the global economy, the ruptures suggest that the world might be breaking into a new regime. After 12 years of crisis recovery and too-small government deficits, a decade when depressed demand was the world’s biggest problem, we are suddenly bursting into a world of tight supplies.

Here’s a guide to the four main energy sources around the world right now—and how they’re jostling one another into new positions:

Natural gas is used for thermal heating, cooking, and also electricity generation. A few things are happening here. First, U.S. frackers are not producing as much gas as they were pre-pandemic. Second, in the past few years, countries have started to liquify natural gas and trade it more readily across oceans—and not just through the point-to-point pipelines that were previously used. This new liquid-natural-gas market has harmonized European and Asian markets so that they are now pulling gas from the same sources. For the first time in history, something approaching a truly global market in natural gas exists, in much the same way that a global oil market exists.

Normally, a larger market might reduce the price for consumers. But natural gas is so in demand right now that it is as expensive as it’s been in years. In Europe, these high gas prices have been exacerbated by Russia’s somewhat petulant decision not to send more gas through its pipelines into Ukraine and the rest of the continent. Russia’s failure to send more gas seems to have emerged from a desire to both “improve” relations with the European Union and win approval for its Nord Stream 2 pipeline, which would allow more gas to bypass Ukraine.

In the United States, that means a fee Congress is considering putting on frackers that release excess methane may not be as significant as it once was, because it is suddenly worth it for producers to capture and sell methane from a rig rather than venting it into the atmosphere.

Coal is important chiefly because it generates electricity. Worldwide, coal-fired power plants still generate a greater share of electricity than any other type of fuel, and they power most of China’s and India’s power grids. Last year, after Australia’s prime minister accused China of obstructing an inquiry into the origins of the virus that causes COVID-19, China stopped buying coal from Australia. To replace that lost supply, it started buying from Europe and South Asia. But that has cut into those region’s ability to power themselves (and Australia, in turn, has just started selling coal to Europe). The result is that India’s coal plants now have only three days of supply on hand when they would normally have two weeks.

Oil is primarily used for transportation, but it is important too for some industrial processes. It’s also a swing fuel, generating electricity. Oil is both supply-constrained and under high demand: EU consumer spending has returned to its pre-pandemic levels, and Americans are driving and flying again. And, as the head of Saudi Arabia’s state oil company has admitted, high natural-gas prices have caused some grids to switch to oil production. This gas-to-oil switching, he suggested, was using more oil than OPEC’s planned increase. Yet, despite the increased demand, OPEC announced, in a show of its own particular power, that it would not increase oil production above its previous target.

Renewables are so far mostly exempt from this—except in Europe. In most of the world, renewables are filling in the gap that natural gas has left. There just aren’t enough of them. The one exception is in Europe, which now uses wind power for 13 percent of its electricity. Its energy crunch has been intensified by a lack of strong offshore winds this season, worsening its need for natural gas.

This is, in part, a product of the specific moment we’re in—not only in the energy transition, but in the economic cycle. Major fossil-fuel producers are fighting over the structure of the post-COVID economy. That means, for now, that they are at their huffiest. For American fracking firms, that means withholding oil and gas production to demonstrate that fracking can be a profitable enterprise. For OPEC, that means slowly ramping up supply in order to raise concerns about declining investment in oil. For Russia, that means demonstrating how much Russia needs its natural gas.

Over the past decade, governments and companies have built the global energy system around natural gas almost as a second thought; it was the cheapest fuel, and easy to integrate into existing systems, so its share of energy production grew and grew. Now they are running into its problems for the first time—its high costs, unreliability, and dependence on just-in-time systems to deliver it just in time. Governments and companies have set the system up such that natural gas is the world’s indispensable swing fuel, available to fill in the gap in an emergency, but everyone can’t draw on its stores at once. In some ways, the world is learning what Texas learned this past winter: In a crisis, natural gas is just as variable as renewables.