Your Questions Answered: Why are Energy Prices High and How Can They be Reduced?
ADB Principal Energy Specialist Kelly Hewitt answers questions about why energy costs are so high and what consumers and governments can do to bring them down.
Global energy prices increased by more than 26% in the early months of 2022. This has implications that spread across the economies of Asia and the Pacific, with electricity bills expected to rise by 27% by 2025 if the region’s energy supply mix remains unchanged. The impacts are being felt across the region. Energy price increases have caused public enthusiasm for a clean-energy future to temporarily wane. Countries have revised coal power plant closing targets, and short-term tax holidays are being considered for at-the-pump petroleum products.
The causes of higher energy prices have been directly linked to three circumstances: Russia’s invasion of Ukraine; global consumer demand rebound from COVID-19; and insufficient crude oil and natural gas supply.
Russia’s invasion of Ukraine in late February 2022 led to global embargoes of Russian crude oil and natural gas imports. With global consumer demand rebounding from the pandemic, and after the depletion during winter months of stored fuel, inventories around the world are low and in need of replenishment.
In addition, natural gas, the world’s low-carbon transition fuel, is currently constrained by lack of sufficient storage and transportation. There is also a shortage of crude oil and refineries that feed transportation and industrial technologies throughout the world.
Fuels such as wind, air and water are important and necessary but they are intermittent; they lack firm reliability and sufficient storage devices in global energy production markets. Supply and demand are driving energy market price increases, and the global energy market is currently comprised of fossil fuels, including crude oil, natural gas, and coal.
Forward contracts, futures, and spot buys and sells, as well as energy transportation and storage markets, all play into the rising prices.
Gasoline prices are a direct result of rising crude oil prices. Crude oil is the base for petroleum products, including gasoline, diesel fuel, heating oil, jet fuel, and other refined products.
Since early September 2021, the crude oil price has moved from just over $70 per barrel to well over $100 per barrel on both West Texas Intermediate and Brent. The underlying problem is a shortage of oil and of refineries that produce gasoline.
Most regulators allow energy utilities to add a utility fuel charge to consumers’ bills. Transportation and storage shortages are causing premium natural gas (including liquified natural gas) prices, and higher fuel charges for natural gas power plants.
Also, higher liquified natural gas contract pricing in Europe, due to the embargo on Russian gas imports, has shifted shipments away from Asia, going instead to Europe. This has increased the prices in Asia.
Absent sufficient forward contracting for storage and transportation, supply is limited. Subsequently, natural gas inventories are low, including in Asia. This also has climate change implications. Countries that previously set targets to accelerate the phase-out of coal are allowing a temporary extension of coal as feedstock for industrial processing and power generation.
During the energy crises in the 1970s, the world experienced similar geopolitical conflict and energy production problems. That crisis led to cutting-edge energy efficiency, conservation measures, and renewable technologies not previously contemplated. Yet after the crises, the world continued to rely on fossil fuel production to maintain and grow economies. Over five decades later, we now have another energy crisis. It’s important that we observe past global lessons learned and act more aggressively to change regional and global trajectories to a no-carbon future.
This energy crisis, like that of the 1970s, is temporary. Now more than ever is the time for cutting-edge and alternative energy – more energy efficiency, conservation measures, and renewable technologies. Increased focus on the low-carbon transition and no-carbon future is the best insurance against future energy crises and against a repeat of the high energy prices that the world is experiencing today.
In the throes of an energy crisis and accompanying energy price increases, countries across the globe are finding it difficult to place climate change at the top of their action agenda. This is a mistake, as the world counts down to the 27th Climate Change COP in Cairo, Egypt, this November.
Energy prices are high, but this is expected to be short-term. We have survived global energy crises and price increases before. Our best way forward is through clean energy innovation and firm low-carbon pathways to a no-carbon future.