An idiot's guide to the energy crisis
We're in the midst of a global energy crisis, but what is really going on and what are the ramifications?
I’m finally back after a ~3-month hiatus. Going forward I won’t even try to release this newsletter on a consistent basis. It will be sent out whenever I’ve scraped together enough 👌 content. Sometimes that will be once a week, sometimes that will be once every other month. It is what it is.
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In today’s:
The world is in the midst of an energy crisis, but what is really going on and why is this happening? I present an idiot’s guide to the energy crisis.
I follow up a (not so) recent newsletter on TikTok’s disrupting impact on the music industry. It truly is fascinating how much they’ve changed pop culture in such a short amount of time.
Enjoy.
An idiot’s guide to the energy crisis
No one can have missed that we’re in the midst of an energy crisis that is affecting the entire planet. But why is it happening and how will it affect us going forward? This is an idiot’s guide to what’s going on.
The short story: We’ve aggressively divested from our main energy sources, but not invested nearly enough in other sources of energy to pick up the slack.
Does that make sense? No? Ok, here’s the long story:
Over the last decade(s), there has been a global push to stop relying on coal as an energy source and move toward energy sources that emit less carbon. Many countries have also pushed to stop extracting fossil fuels locally and are relying on buying fuel from abroad to meet energy needs. This has resulted in Western economies becoming very reliant on natural gas for electricity and heating.
The problem is that this year there just hasn’t been enough natural gas available to both meet demands of the post-pandemic recovery and also refill depleting energy stocks.
Pure bad luck and unusual weather have drastically increased the demand for natural gas this year. Brazil, a country that heavily relies on hydroelectric power, has been hit by severe droughts resulting in the country needing to import more gas than ever before to meet the nation's electricity demands. There has also been less wind than expected in Europe this summer leading to a big drop in wind-generated power. Unusual weather in Texas and California has also led to less power being generated from renewable sources.
As supply is drying up, countries are trying to outbid each other for energy. However, many exporters, like Russia, have reduced exports to meet their own domestic demand so there really isn’t an abundance of gas to buy. This has resulted in prices increasing drastically - European gas prices are now trading near record highs.
There are some countries, like the United States, that produce more natural gas than is needed domestically. The problem is that they don’t have sufficient infrastructure to compress and export it to meet international demand. Still, U.S. gas inventories are running below their five-year seasonal average and trading at the highest level since 2014. On top of that, the effects of the pandemic can still be felt in the global supply chain which makes it more difficult and more expensive to transport gas.
We must have other fuel sources available, right?
Yes, but we currently don’t have the infrastructure to pick up the slack of the gas shortage.
Germany is working toward shutting down their last remaining power stations next year which currently produce 10% of Germany’s electricity. Most of Europe’s nuclear reactors are aging fast, reducing output and requiring increased maintenance to keep them running. Electricity from nuclear power in France has dropped from 80% a few years ago to 67% last year. A trend that is expected to continue. The UK will be shutting down its two remaining Drax coal-fired power plants in a year’s time in accordance with the government’s 2025 deadline to ban all coal-fired electricity in the UK.
Exploration and production CAPEX is down dramatically among major oil companies, partly due to the transition toward renewable energies and partly in an attempt to increase profitability. Global crude oil producers have cut back on capital spending by roughly 50% over the last 10 years and have been hesitant to increase spending even though the oil prices have nearly doubled.
Many US shale drillers have also been hesitant to fund new drilling to boost production. In general, the US government has been restricting oil production while asking OPEC to increase its output. OPEC has kindly declined to follow the US’ instructions.
It seems likely that we will see continued upward pressure on oil in the near term as increased demand is met by little new supply and few alternatives.
So what? We have Renewable Energy™ now?!
No, because we haven’t invested enough in renewable energy infrastructure to pick up the slack for the gas shortage. One reason is that we just don’t have enough available material.
Copper and aluminum are two of the most important metals for green electrification. Solar and wind power plants use up to six times more copper than conventional power stations simply because there is a lot more wiring and stuff that goes into green power plants.
In itself, that’s not really a problem. The problem is that while demand for these metals is increasing due to many governments' plans to go green, investments in the production of these metals have been reduced because of ESG issues, such as blocking new mines due to how it impacts local communities.
So at the same time that we are reducing traditional (fossil) fuel sources in an attempt to move toward renewable resources, we are hindering ourselves from actually building out the infrastructure to create renewable energy - effectively halting the change to green electrification. Good job team!
According to the international energy agency, there is a “looming mismatch” between climate goals and the availability of critical minerals such as copper, nickel, lithium, and cobalt.
This means that we are currently in a bit of a stalemate. Turns out that changing our entire electrical infrastructure is extremely complex and our system is very fragile for disruption. Simultaneously as we are shutting down our old ways of getting energy, we are not actually replacing it with enough alternative energy which has led to a bit of a mess.
Bad times ahead
The added strain of increased fuel prices in addition to the reeling effects of the pandemic means that many economies could grind to a halt. India is on the brink of an unprecedented power crisis as India’s power stations have had to cut back on coal imports in recent months as international demand has pushed prices up. This severe power crisis now threatens to undermine its` recovery from the pandemic.
But I know what you’re thinking: “Who really cares about poor countries anyway?”.
Remember the French Gilet Juanes protests of 2018? That was over fuel price hikes. When people are hit by drastic disruption in their way of living, it can lead to populist revolts. And this might happen sooner rather than later.
In Italy, where the unemployment rate is above 9%, poorer families are forced to give up basic needs to pay the rising energy costs. UK factories are days from shutting down as a result of the surge in electricity prices. Countries are warning about blackouts. And the crunch could get a lot worse in Europe if there is another cold winter this year.
It’s “Greenflation” time, baby
The thing about increased energy prices is that it doesn’t just increase the price of the fuel you need to drive your car or the cost of heating your shitty 1-bed room apartment in central London (thanks for the 300% increase HomeLet). It also increases the cost of every product that you buy, because every product that you buy needs energy to be produced.
For example, you can expect higher food prices because high gas prices mean lower output from fertilizer producers which results in increased costs of farming and/or reduced farming yields. On top of that, shipping costs will rise since the cost of shipping is positively correlated with energy prices. And if you choose to buy locally produced goods instead, you can expect to pay more for them.
In his book “How to Avoid a Climate Disaster”, Bill Gates describes a concept called “the green premium”. The green premium is the price difference between a product that emits carbon and a product that doesn’t, with the former often being less expensive than the latter. In essence, it’s the “Whole Foods Effect” - Whole Foods is more sustainable, yet more expensive than Wal-Mart which is less sustainable, but dirt cheap.
Manufacturers and producers will need to change both the types of goods they make and how they make them as an effect of “going green”. This means technical hurdles and investments that drive up the cost of goods.
It turns out that it’s very expensive to replace coal, oil, and gas with renewable energy and meet new green requirements. So as both governments and consumers are becoming increasingly interested in moving toward green energy and sustainable products - prices can be expected to rise. In short, the green premium will hit many items we use in our day-to-day lives.
TikTok really is changing pop culture
Before I end this, I’m doing a follow-up on a (not so) recent newsletter where I discussed TikTok’s disrupting impact on the music industry. I’ll keep this short since most of my TikTok-related posts tend to not be overly popular (which is beyond me, it’s one of the most cleverly designed apps that has ever been built).
In a recent survey, 75% of TikTok users said that they discover new artists on the platform and 63% say it’s a source for music they’ve not heard before. But not only do users find music on TikTok, 67% of TikTok’s users now go to streaming services to play songs that they originally heard on TikTok. That’s what some call “leverage”.
Additionally, several of today’s most popular artists: Lil Nas X, Olivia Rodrigo, Megan Thee Stallion, and Doja Cat have cited that TikTok was a key building block to propel their careers. But TikTok is not only good for music discovery and musicians - a large majority of users also prefer brands and experiences that they’ve found through TikTok.
TikTok has recently hit some big milestones: it’s been downloaded over three billion times around the globe, a feat only Facebook has been able to pull off before, and it has 1 billion monthly active users. I guess it’s not just a Vine knock off.
End
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Fabian.