Introduction
In the light of Russia’s declaration of war on Ukraine, the importance of Putin’s most significant geopolitical asset has come to the forefront of technocratic debate. This issue is pronounced in Europe whereby its former dependence on Russian oil must be re-evaluated within the context of a re-defined political climate. In the US, however, the availability of natural resources and a certain extent of spare capacity offers alleviation to Europe’s desperate cry for a new energy solution. Thus, the situation in the US is key, in its intertwinement with Europe, to better understand the energy crisis in a global setting. Greater focus herein will be placed on the US, given, first, its “superpower” status and significance in the Ukraine-Russia conflict, and furthermore, its ability to inform energy policy elsewhere, not least in Europe, where the energy crisis appears to be most established.
Geopolitical Situation
The self-imposed embargo on Russian oil has globally caused supply constraints. Although popular sentiment suggests the United States have become “energy-independent”, the US still needs to import heavier crude oil for domestic shale production. However, spare capacity offers a shock absorber for a tightened oil market stemming from suppressed demand and deterred levels of investment as a result of the Covid-19 pandemic. In the short-term, the US must look to Saudi Arabia and the UAE, the two states in which the overwhelming majority of spare capacity sits (3 to 3.5 million bpd). Equally, the Biden administration could look to rectify political relations with Venezuela, adding 600 thousand barrels a day to the global oil supply. However, OPEC+, in a recent meeting on the 31st of March, agreed on a modest 432 thousand bpd oil pump with the aim to stabilise oil markets without intervening in global politics. The Biden administration is looking into the release of 180 million barrels over a multi-month timeframe from its Strategic Petroleum Reserve (SPR). The International Energy Agency (IEA) member countries, likewise, are also weighing up a collective oil release to mitigate oil price hikes since the Russia-Ukraine conflict. The imagined short-term scenario suggests the US is all but immune from a supply-constrained oil market.
Medium-term responses, from a US perspective, however, could issue relief in the form of energy security. The ability to boost domestic oil and natural gas production, still at 10 to 15% below pre-pandemic highs, depends on the Biden administration’s willingness to re-evaluate its “green” agenda. It is likely that supply-chain bottlenecks are likely to come under fiscal environmental policies in the future, meaning domestic producers are incentivised to produce at higher realised prices rather than under today’s current climate. The same analysis applies to shale producers that acknowledge the need to generate higher free cash flow without necessarily increasing output through greater capital spending. The ever-rising importance assigned to ESG in investment portfolios means energy producers are likely to remain cautious of production growth given their need to self-fund as lending and capital markets become more opposed to traditional energy.
Sources
The reasons for the different natural gas and electricity price scenarios between the US and the rest of the world can be attributed to the way in which the US generates and extracts its energy. For the production of electricity, the US is about 60% dependent on fossil fuels, 20% on nuclear energy and 20% on renewable sources. In particular, natural gas only amounts to 40% of the energy produced, followed by coal with 19% and petroleum with 1%. The use of natural gas has been increasing since the 2007 crisis, especially as a replacement for coal. The raw materials which the US uses to produce electricity, however, cannot be an explanation for the stability registered in the electricity and natural gas markets, since European energy is also generated with similar balances. In fact, Europe as a whole generates 44% of energy from combustible fuels, 26% from nuclear energy and the rest from renewable sources of energy. Among this 44% of combustible fuels, around 20% is composed of natural gas, 13% from coal and lignite.
The electrical energy price difference therefore must rely on the way in which the most used sources of energy are extracted and where they are extracted from. With regards to this, a large difference can be noted between the US and Europe, especially with regard to natural gas, which is one of the most important sources of electrical energy in both regions. As shown in the graph, imports of natural gas in the US have been extremely low, and have even become negative in the past years. The US generates natural gas prevalently by extracting gas from shale (sedimentary rock trapping natural gas in its pores), sandstone and carbonate reservoirs (also called tight natural gas). Out of the 33.5 trillion cubic feet of natural gas produced in 2020, only a portion was used for domestic consumption, while approximately 10% was exported to other countries.
In the light of Russia’s declaration of war on Ukraine, the importance of Putin’s most significant geopolitical asset has come to the forefront of technocratic debate. This issue is pronounced in Europe whereby its former dependence on Russian oil must be re-evaluated within the context of a re-defined political climate. In the US, however, the availability of natural resources and a certain extent of spare capacity offers alleviation to Europe’s desperate cry for a new energy solution. Thus, the situation in the US is key, in its intertwinement with Europe, to better understand the energy crisis in a global setting. Greater focus herein will be placed on the US, given, first, its “superpower” status and significance in the Ukraine-Russia conflict, and furthermore, its ability to inform energy policy elsewhere, not least in Europe, where the energy crisis appears to be most established.
Geopolitical Situation
The self-imposed embargo on Russian oil has globally caused supply constraints. Although popular sentiment suggests the United States have become “energy-independent”, the US still needs to import heavier crude oil for domestic shale production. However, spare capacity offers a shock absorber for a tightened oil market stemming from suppressed demand and deterred levels of investment as a result of the Covid-19 pandemic. In the short-term, the US must look to Saudi Arabia and the UAE, the two states in which the overwhelming majority of spare capacity sits (3 to 3.5 million bpd). Equally, the Biden administration could look to rectify political relations with Venezuela, adding 600 thousand barrels a day to the global oil supply. However, OPEC+, in a recent meeting on the 31st of March, agreed on a modest 432 thousand bpd oil pump with the aim to stabilise oil markets without intervening in global politics. The Biden administration is looking into the release of 180 million barrels over a multi-month timeframe from its Strategic Petroleum Reserve (SPR). The International Energy Agency (IEA) member countries, likewise, are also weighing up a collective oil release to mitigate oil price hikes since the Russia-Ukraine conflict. The imagined short-term scenario suggests the US is all but immune from a supply-constrained oil market.
Medium-term responses, from a US perspective, however, could issue relief in the form of energy security. The ability to boost domestic oil and natural gas production, still at 10 to 15% below pre-pandemic highs, depends on the Biden administration’s willingness to re-evaluate its “green” agenda. It is likely that supply-chain bottlenecks are likely to come under fiscal environmental policies in the future, meaning domestic producers are incentivised to produce at higher realised prices rather than under today’s current climate. The same analysis applies to shale producers that acknowledge the need to generate higher free cash flow without necessarily increasing output through greater capital spending. The ever-rising importance assigned to ESG in investment portfolios means energy producers are likely to remain cautious of production growth given their need to self-fund as lending and capital markets become more opposed to traditional energy.
Sources
The reasons for the different natural gas and electricity price scenarios between the US and the rest of the world can be attributed to the way in which the US generates and extracts its energy. For the production of electricity, the US is about 60% dependent on fossil fuels, 20% on nuclear energy and 20% on renewable sources. In particular, natural gas only amounts to 40% of the energy produced, followed by coal with 19% and petroleum with 1%. The use of natural gas has been increasing since the 2007 crisis, especially as a replacement for coal. The raw materials which the US uses to produce electricity, however, cannot be an explanation for the stability registered in the electricity and natural gas markets, since European energy is also generated with similar balances. In fact, Europe as a whole generates 44% of energy from combustible fuels, 26% from nuclear energy and the rest from renewable sources of energy. Among this 44% of combustible fuels, around 20% is composed of natural gas, 13% from coal and lignite.
The electrical energy price difference therefore must rely on the way in which the most used sources of energy are extracted and where they are extracted from. With regards to this, a large difference can be noted between the US and Europe, especially with regard to natural gas, which is one of the most important sources of electrical energy in both regions. As shown in the graph, imports of natural gas in the US have been extremely low, and have even become negative in the past years. The US generates natural gas prevalently by extracting gas from shale (sedimentary rock trapping natural gas in its pores), sandstone and carbonate reservoirs (also called tight natural gas). Out of the 33.5 trillion cubic feet of natural gas produced in 2020, only a portion was used for domestic consumption, while approximately 10% was exported to other countries.
Source: IEA
Source: Eurostat
Almost 45% of this gas was produced between Texas and Pennsylvania, allowing the US to be auto sufficient in natural gas production. The completely opposite can be seen in Europe. In fact, as the graph shows, only a small fraction of the energy sources used to generate electricity are not imported. In particular, net imports of energy sources amounted to 31,700 Petajoules (Peta = 1015) in 2020, approximately 57.5% of the whole energy requirement. This situation, therefore, poses Europe in a situation of dependency on its energy suppliers. In particular, the largest net importers in Europe were Germany, Italy, France and Spain, while the only net exporter of the EU is Denmark. The main suppliers of raw materials for energy production depend on the type of energy source considered. Natural gas, for example, is 40% imported by Russia, 19% from Norway, 8% from Algeria and 4% from Qatar in 2020. To supply this natural gas, there is currently a system of underground pipelines which connect sites of production to the whole of Europe. For example, the North stream 1 and 2 connect Russia to Germany through the Nordic sea, while the Medgaz pipeline connects Algeria to Spain. Since 2019, Europe has been relying also on Liquid Natural Gas (LNG), which is imported into the continent through supercooled tankers which maintain a temperature so low to allow natural gas to be kept as a liquid. In 2021, 26% of imported LNG originated from the US, 24% from Qatar and 20% from Russia. Especially in 2021, there has been a rise in dependency on LNG given the continuous decline of natural gas produced in Europe due to environmental challenges, and the low storage inventories available. The prices in 2021 however have soared due to the decrease in the flux of gas arriving from Russia and the inelasticity of the supply of LNG. This dependency on natural gas imports therefore can be considered the reason why prices have soared in Europe while they have remained unchanged in the US. The fact that around 20% of electricity is produced through natural gas, caused electricity prices to surge as well.
US reaction to the energy crisis in Europe
The increasing pressures in prices in Europe have been answered by the US by redirecting exports of LNG from Asia to Europe. US global exports of natural gas have increased by 42% in 2021 in comparison to 2021 and Europe accounted for 37% of US exports in January 2022. The Ukrainian war is raising the necessity to decrease the dependency of the EU on Russian natural gas, the reason for which agreements are being stipulated to divert the 50 billion cm of LNG supplied by Russia with gas from the US. Also, US natural gas producers are estimated to increase production by 25% by 2050, as published by the US Energy information administration.
US reaction to the energy crisis in Europe
The increasing pressures in prices in Europe have been answered by the US by redirecting exports of LNG from Asia to Europe. US global exports of natural gas have increased by 42% in 2021 in comparison to 2021 and Europe accounted for 37% of US exports in January 2022. The Ukrainian war is raising the necessity to decrease the dependency of the EU on Russian natural gas, the reason for which agreements are being stipulated to divert the 50 billion cm of LNG supplied by Russia with gas from the US. Also, US natural gas producers are estimated to increase production by 25% by 2050, as published by the US Energy information administration.
Source: Financial Times
Source: ING
Although most LNG is sold through long term contracts with fixed destinations, major contractors have been allowing the redirection of gas to Europe to curb the prices and the emergency situation. This however did not provide a decrease in prices given that the redirection is performed due to the premium on European gas prices. The increase in the supply of LNG is unlikely to solve the energy crisis in the short term also because of the infrastructure requirements that are needed to export and import LNG. Europe today has 29 large scale LNG import terminals, which deal with the regasification of liquid natural gas. Collectively in a year, they can process 237 billion cubic meters of gas, which is enough to cover 40% of Europe’s requirement for natural gas. Other Russian regasification terminals exist but they only operate with Russian gas so they cannot be considered while estimating the potential increase in LNG carriers that Europe can receive. The large-scale investments required to increase the capacity of LNG reception in Europe, therefore, demonstrate that the increase in US LNG will be unlikely to solve the energy crisis. In the long run, however, this gas import could help substitute Russian natural gas without causing even greater disruptions in the market.
How can the EU take inspiration from the US market and production sources?
In conclusion, the differences by which the EU and the US use their existing frameworks to extract their natural gas offer a confirming explanation as to why the EU energy crisis is more pronounced than it is in the US. In the short run, this poses a clear threat to EU energy security. However, a likely convergence of energy systems in the medium and long-run as fiscal policy, in addition to capital and lending markets, become more hostile to traditional energy implies that the current energy crisis will be looked back on as a point of reference for the much-needed transformation of energy systems worldwide rather than their re-configurations.
Sources
How can the EU take inspiration from the US market and production sources?
In conclusion, the differences by which the EU and the US use their existing frameworks to extract their natural gas offer a confirming explanation as to why the EU energy crisis is more pronounced than it is in the US. In the short run, this poses a clear threat to EU energy security. However, a likely convergence of energy systems in the medium and long-run as fiscal policy, in addition to capital and lending markets, become more hostile to traditional energy implies that the current energy crisis will be looked back on as a point of reference for the much-needed transformation of energy systems worldwide rather than their re-configurations.
Sources
- International Energy Agency
- Eurostat
- Financial Times
- European Commission
- The National Law review
- Statista
- Reuters
- Washington Post
- Bloomberg
- Wall Street Journal
By Sofia Frasson and Ruben Van Der Lebbe