With today’s high oil prices and record gas prices, it is easy to forget that the situation was reversed as recently as two years ago. At the end of 2019, an over-supply of fossil fuels had left producers concerned about low prices. Saudi Arabia and Russia fell out over the need for further production cuts to support prices. Then the scale and impact of the pandemic became apparent, economies locked down, and energy demand plummeted – most significantly for oil, given its links to transport.
The average price for a barrel of Brent crude oil duly fell from US$64 (£47) in 2019 to US$42 in 2020. It has since rallied to an average of US$71 in 2021. This strengthening reflects the success of oil-producer cartel Opec+ in managing production against rebounding global demand, helped also by only modest rates of recovery in supplies from the US shale industry.
The same cannot be said of the gas market, where prices vary significantly by region. North America is self-sufficient and has been enjoying relatively low prices, but consumers in Europe and Asia have to compete for marginal supplies on the global market.
Using the UK’s spot price as a European benchmark, gas was trading at around £0.35 to £0.40 per therm in early 2020, but by May 2020 it had fallen to £0.084. In the thick of the pandemic, liquefied natural gas (LNG) cargoes in the US were being cancelled due to a lack of demand and Gazprom in Russia was having to scale back production from its fields in Siberia.
Natural gas price (UK spot, pence per therm)
But in early 2021, a cold snap in Asia warned of what was to come as demand for gas started rising. A global gas-price crisis unfolded, with European consumers having to out-compete Asian buyers to attract LNG deliveries. UK spot prices reached a record £4.50 per therm just before Christmas, representing a ninefold increase on 12 months previously.
Prices have since fallen back as LNG deliveries have been diverted from Asia. But storage remains low, and a prolonged cold snap in Europe and/or Asia could see prices skyrocketing again (and indeed they have been on the increase in early January).
Against this backdrop, politicians on both sides of the Atlantic have called for increased oil and gas production as a way of lowering prices. In the UK there have been calls to reduce taxation on gas and electricity; remove the green levies from bills that subsidise renewable energy; support new exploration in the North Sea; and even try and resuscitate shale gas development.
Fossil fuel producers have used this crisis to warn against a messy energy transition and a rapid move away from fossil fuels. For environmentalists, on the other hand, the crisis highlights the need to accelerate the move away from expensive and volatile fossil fuels. There is truth in both positions.
Challenges with the green transition
The environmental consequences of fossil fuel consumption are ever more apparent. The IPCC (Intergovernmental Panel on Climate Change) physical science report of 2021, described as code-red for humanity, made clear the severity of the situation. Analyses by academics, international organisations and think-tanks have made clear that we are planning to invest in future oil and gas production way beyond the constraints of the Paris Agreement of 2015, which committed to keeping global warming to well below 2℃ and as close to 1.5℃ as possible.
When the world’s politicians and climate change negotiators met in Glasgow at the COP26 climate conference in November, the scale of the challenge was acknowledged and commitments and pledges were made, but they still fall way short of what is needed. Equally, greenhouse gas emissions are rebounding and the opportunity to build back better through a green recovery has been missed as most government financial support is towards maintaining the fossil-fuelled status quo.
The good news is that the cost of clean energy and low carbon technologies continues to fall. At the same time, investments in fossil fuel production are declining as the financial community has less appetite to invest.
But here’s the rub: how do you ensure an adequate supply of fossil fuels to meet global demand in the short-term, while reducing production in the long-term? At present, far more green investment is required to ensure the future falling fossil fuel production is compensated for by improvements in energy efficiency and rapid growth in clean power generation.
This lack of commitment helps to explain why demand for fossil fuels has driven prices back up. With governments apparently less willing to lock down in the face of the omicron variant, oil demand will likely continue to recover at least in the short term.
At the same time, Opec+ is hesitant to increase production significantly. Equally, the US shale industry is demonstrating financial discipline and may never again reach 2019 production levels. Other risks such as the Russia-Ukraine situation could further drive up prices if Russian oil were removed from the world market because of sanctions.
Brent crude price (US$) 2012-22
The gas situation is more unpredictable. Ordinarily, demand and prices fall when the winter heating period ends in the northern hemisphere. But storage will require re-filling because facilities in many countries were not full even before this winter. And growing global demand, as economies switch away from coal to gas, may stretch supply.
In Europe, the challenge is to ensure adequate supply in the short-term as climate policy drives down demand in the long term. Relations with Russia, which exports gas to Europe via several pipelines, will remain critical to avoid expensive competition with Asia for LNG supply.
Aside from this possibility of Europe contributing to higher demand, it is higher LNG demand in emerging markets that will promote an expansion of natural gas production in the medium to long term. One potential issue is that higher gas prices may dissuade potential new importers like Vietnam from investing in import infrastructure, potentially lowering global demand.
The production problem
Yet in general, few significant oil and gas producing economies are going to stop investing in new production anytime soon. The problem is the credibility gap that exists between ambition and action in importing economies. The producers simply do not believe that demand is going to disappear, that prices are going to fall permanently, or that their assets are going to get stranded.
It is true that financial markets are doing their bit to curb extra fossil fuel production by turning away from financing the sector, but the net result may simply be to hand market share to national oil companies. The real answer lies in fossil-fuel-importing nations – the largest of which are China and India – demonstrating credible plans to decarbonise their economies and delivering on them. At present, they are doing just the opposite.
The current energy crisis will eventually pass as more supply comes on the market. For now, governments in those countries impacted by high prices must hold their nerve and press on with decarbonisation. At the same time, fossil fuel producers should not be fooled into thinking that the good times are here to stay. What the current crisis does highlight is that the challenge of phasing down fossil fuels in an affordable and equitable manner is just as great as that of building up clean energy capacity.
Wholesale energy prices (the price that suppliers pay to buy the energy they sell to their customers) are very unlikely to go down in 2022 – in fact, they will almost definitely be going up. Russia's invasion of Ukraine is largely to blame for this.What will happen with electricity prices in 2022? ›
If you're on a fixed tariff and currently paying a higher unit rate for electricity and gas than the new price freeze maximums, you will see your unit prices reduced by 17p/kWh for electricity and 4.2p/kWh for gas from 1 October 2022.Are energy prices likely to go down soon? ›
When will my energy bills go down? Some estimates suggest that energy bills could remain high until 2024. It's difficult to know exactly when energy bills will go down, as international gas prices are continuing to fluctuate.Why are energy prices going up 2022? ›
This increase is because the energy price cap, set by energy regulator Ofgem , is set to jump by 80 per cent to reflect rising wholesale energy costs for energy suppliers.Is it better to go fixed or variable energy 2022? ›
However, fixed tariffs can be more expensive and often come with large exit fees and other contractual conditions. Variable tariffs offer more flexibility but you need to watch energy prices closely and find new deals if your supplier announces an energy price increase.Should I fix my energy prices until 2023? ›
You should only fix your energy prices until 2023 if you can source a cheaper fixed tariff than that of the October 2022 price cap increase.How long will energy prices stay high? ›
Your energy bill will be adjusted from 1 October and remain that way until 2024 if you are on a standard variable tariff. If you are on a fixed tariff, your supplier will discount it to bring your rate in line with the new rate - so you could see your prices come down.What is causing energy prices to rise? ›
Why is there an energy crisis? As countries began to recover from the pandemic, demand for gas started to increase again and could not be met due to a shortage in supply, causing gas prices to increase in 2021.Is it cheaper to use gas or electricity 2022? ›
When it comes to using energy, gas is typically cheaper than electricity. Looking Ofgem's price cap rates, gas has gone up to 10.3p per kWh from October 1, 2022 from 7p and electricity up to 34p per kWh, from 28p.Are energy prices worth fixing? ›
Right now it is best not to take any action when it comes to your energy bills. If you're on a fixed-price tariff that it coming to an end, you will be moved onto your supplier's default tariff, which means you will benefit from the Energy Price Guarantee when it comes into effect.
The primary cause of the crisis is a rebound from an economic slowdown during the COVID-19 pandemic. Power generators that had been shut down could not ramp up in time to meet renewed demand, says Jonathan Stern, who studies natural gas at the Oxford Institute for Energy Studies.Why is electricity so expensive compared to gas? ›
For electricity, it's mainly the environmental taxes that make it more expensive, despite it being the more environmentally friendly option for customers to use. Since electricity uses renewable technology, such as wind and solar, those charges are applied to it instead of to gas.Will UK energy prices come down in 2023? ›
The energy price for 2023 and 2024 will remain the same as the energy price cap is in place from 1 October to October 2024. This means it will replace any further increases by Ofgem in that time period.Are electricity prices expected to fall? ›
Higher prices will encourage fuel economy and reduce demand, so higher output and lower demand will lead to falling prices. About one third of electricity supply is at market prices and two thirds under contracts, usually for three years. The reason for this arrangement is that prices are expected to fall over time.Will gas prices Go Down in 2022 UK? ›
The price of gas in the United Kingdom is forecast to amount to 2.8 British pounds pence per therm in 2022/23, a large increase when compared with 2020/21. While prices are expected to remain high in 2023/24, it is anticipated they will fall to lower levels by 2024/25.How long will energy prices stay high? ›
Energy prices are expected to soar again in October, and could remain high until at least 2024.