THERAN - As the world slowly recovers from the consequences of the coronavirus pandemic, just before winter sets in, demand for fuel is surging and so are the prices of oil and its byproducts.
The world is encountering an energy crunch as the supply of energy sources is failing to meet demand.
Natural gas prices have increased several-fold in Europe, while several factories in China have shut down recently due to power outages linked to the short supply of coal.
In the UK, meanwhile, many fuel pumps shut off and the country’s military has been called in to overcome any violence.
India’s power plants are also running on critically low coal stocks.
In the United States, people are dealing with natural gas prices that have gone up 47% since the beginning of August, and the energy crunch has caused oil prices to hit seven-year highs.
These circumstances are causing central banks and investors to worry. Rising energy prices are adding to inflation, which already was a major issue with the global economy trying to recover from the continuing effects of COVID-19. Dynamics over the winter could make matters worse.
In the meantime, two countries with some of the largest hydrocarbon reserves in the world, Iran and Venezuela, are under U.S. oil sanctions.
Since energy prices impact economic policies across the supply chain, the rise in prices has had a significant effect on economies, with many companies in Europe and Asia shutting down, unable to bear high energy costs.
Analysts have attributed the rise in global energy prices to several factors. Some see “the rise as driven primarily by the bounce-back witnessed in consumer demand, as economic activity returns to normal after the pandemic. Production however, has failed to bounce back as quickly, due to disruptions to the supply chain caused by the pandemic.”
Other analysts see the rise in energy prices as “an example of ‘greenflation’ caused by increasing restrictions placed by governments on traditional energy sources.”
The incident which has affected oil markets is a shortage of LNG gas. Because the world could not have predicted that things would go back to normal this fast and it appears that it didn’t plan for the winter season. On the one hand, the demand has risen dramatically, and on the other, natural gas cannot be supplied as easily as oil. Also, Russia hasn’t delivered surplus shipments to the European market in recent months. Now if we want to calculate the oil price based on the gas prices, it must be somewhere near 180 dollars per barrel. This has caused concerns.
Oil prices went over $80 a barrel this week for the first time in three years, with natural gas and coal also reaching multi-year peaks.
The Organization of the Petroleum Exporting Countries, OPEC, is planning to meet shortly, to decide whether to free up spare production capacity to help control prices.
OPEC and OPEC + seem to have reached an intellectual maturity in cooperation and are very cleverly and wisely managing the global oil market in proportion to their long-term interests and not necessarily to the detriment of consumers.
However, they are concerned about the outlook for the oil market and, given this concern, are trying to manage and control the supply of oil to world markets in the sense that, despite expectations, and despite pressure from the United States and some the industrialized countries.
Additionally, Iran and Venezuela two founding members of OPEC have inked an oil contract to counter the sanctions the United States has illegally imposed on both nations’ oil exports.
As the South American country seeks to boost its oil exports in the face of U.S. sanctions, it has agreed to a crucial contract to swap its heavy oil for Iranian condensate that it can use to improve the quality of its crude.
The swap agreement is planned to last for six months in its first phase, but could be extended.
To what extent does boycotting big oil producers, such as Iran and Venezuela, increase prices and decrease demand?
The Trump administration was in favor of sanctions because it wanted to find a market for its oil and gas under its Energy Dominance strategy. If that didn’t happen, the U.S. increased supply would result in an imbalance and the prices would drop as a result. That scenario would prove damaging to the U.S. energy dominance. In case the prices went up, American consumers would be at a disadvantage. That’s why Trump had reached a price range of between 45 to 65 dollars. The Biden administration published its national security strategy in March 2021 in which it explained the system it’s going for is one favoring the transition toward renewable energies. This new system brings a new serious threat to the prices.
A Chinese logistics firm is going to play a key role in the supply of oil from Iran and Venezuela, even after it was blacklisted by Washington two years ago for handling Iranian crude under the sanctions regime. “This highlights the limitations of Washington’s system of restrictions”, analysts say.
According to Julia Friedlander, who is a senior fellow at the Atlantic Council’s GeoEconomics Center, these types of events “show there are limits to what the U.S. sanctions can do, especially when you target multiple like-minded, or selectively like-minded actors, like oil traders. So, you incentivize these alternative axes of resilience,”
U.S. officials, typically, do not move to intercept Iranian or Venezuelan oil shipments bought by Chinese or any international customers. But they do make it difficult for those involved in the trade by barring U.S. citizens and companies from dealing with them, making them outcasts for western banks.
Energy supplies are likely to remain limited for a while, as it takes time for producers to boost their output in response to higher demands.
The crunch is expected to get worse if a severe winter increases energy demand further. Much will also depend on how governments on either side of the Atlantic react to the current crisis. As it stands now, countries are already trying to outbid one another for supplies. It could get a lot more competitive when temperatures drop during the winter.
The current energy crisis in Europe is an alarming sign of what’s to come for the rest of the planet in the coming months.