Wild energy markets continue to roil the global economy. Over recent days, demand for fossil fuels touched highs not seen since well before the pandemic.
Whatâs happening? In short, a combination of poor planning, lousy climate luck, and exploding demand for goods is driving up prices.
Poor planning
Many electricity suppliers, particularly in Europe, failed to buy enough natural gas this year to restock reserves adequately. Generally, these companies use whatâs known as futures contracts to purchase gas months and even years in advance.
This season, far too many producers relied on shorter contracts than longer ones, which has caught them flat-footed.
Bad weather luck
An eager push to drop our dependency on carbon-heavy energy sources (think coal and natural gas) left us exposed to climate risk.
This year, a lack of wind and a lot of rain meant that wind and solar panels couldnât produce enough electricity to meet demand. In turn, electricity suppliers had to turn to dirty sources.
Since burning coal is expensive and one of the most polluting ways to turn on the lights, energy producers turned to natural gas.
As these companies ran down their reserves this summer, they needed to restock. Of course, if everyone restocks simultaneously, prices go up, which we see now.
Everyone wants the goods.
Weâve talked about it before, but economic activity shifted from consuming services to wanting goods during the pandemic. Of course, producing goods requires energy and materials (which also need power). With no end to goods demand in sight, energy prices face even more pressure.
Energy drain
Combined, the high cost of electricity and natural gas is rippling all across the global economy. Many manufacturers are either curtailing production or stopping altogether.
Food production is taking a hit as the greenhouses in northern Europe are paying more to keep the heat on.
Some places are even removing caps on carbon-heavy energy production. Bloomberg has a pretty good run-down of all the sectors under disruption right now.
Should I worry about inflation?
With all of the pressure on the global economy, prices are inevitably rising. These increases create inflation, which, if unchecked, could make economic woes.
Before we all start screaming and hoarding gold (although you probably shouldnât), there are a couple of points to keep in mind.
As the pandemic winds down, people will go back to spending money on services. When they do, pressure on manufacturers will drop, lowering demand for energy and goods.
Since the oil shock of the 1970s, weâve gotten incredibly good at energy-efficient manufacturing and production. This chart from the World Bank shows how, since 1990, weâve nearly tripled our economic output (GDP) per unit of energy used. Energy price increases also impact inflation, but not as profound as we saw in the past.
For sure, prices will change due to energy markets putting pressure on the global economy. However, this disruption wonât be permanent. Hold tight, though; the next few months could be rough.
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