Benchmark U.S. crude oil prices punched through US$75 a barrel earlier this week and are expected to head higher.
At the same time, natural gas prices have shot up to record levels in Europe and have been climbing in North America.
With all of the talk about the transition away from fossil fuels, it’s easy to overlook the fact that oil and natural gas will be needed for decades to come, and concerns about having adequate supplies — and the investment required to make that happen — can affect consumers today.
“Suddenly, from abundant supplies, you’ve now gone to a very tight market,” Daniel Yergin, vice-chair of energy consultancy IHS Markit, said in a recent interview.
“A year from now, the situation will probably look a lot better. But right now, with gas and oil prices as much as five times higher than what had been recent averages, whether you want to call it an energy crisis or an energy crunch — whatever it is — it’s a big hit.”
Indeed, it is.
After languishing below US$63 a barrel just six weeks ago, oil markets have been on an upswing. West Texas Intermediate crude pushed through $75 a barrel on Monday, before closing Wednesday at $74.83.
Many experts are calling for higher prices in the weeks ahead.
“We are in the early innings of a strong oil market cycle,” said Michael Tran, RBC’s managing director of global energy strategy.
And what does this tell us about the future for oil and gas in an era of decarbonization and an energy transition?
“The narrative of the energy transition has, over the course of the past several years, ran at a pace that is faster than is economically feasible,” Tran added.
“We certainly believe the transition is the path forward, but I want to emphasize the pace at which this is playing out is what’s most important.”
For oil markets, analysts expect more switching from natural gas to crude this winter in some parts of the world. Rystad Energy says oil demand could increase by almost a million barrels per day in December, half for power generation in Asia.
It’s not just oil markets that are under pressure.
In the U.S., natural gas prices earlier this week hit their highest point since 2014, before dipping Wednesday to close at US$5.48 per million British thermal units (mmBTU).
As Reuters reported Wednesday, with European natural gas prices trading at record levels of $28 per mmBTU — and at $29 in Asia — traders expect LNG buyers will snap up all the product they can from American suppliers.
The escalation of natural gas prices in Europe, which is partially triggered by supply disruptions, has already led to some businesses halting operations due to soaring energy costs.
“Europe’s energy supply crisis has spread, not only geographically but also across the energy complex,” Rystad Energy’s head of oil markets, Bjornar Tonhaugen, said Wednesday in a note.
It’s often said the cure for high energy prices is, in fact, high prices.
Yet, with rising ESG considerations and energy transition policies on the horizon, as well as demands from investors that companies return more capital, will gas producers open up their pocketbooks to boost output?
“We haven’t really seen supply response with the higher prices,” said ARC Energy Research Institute executive director Jackie Forrest.
U.S. benchmark gas prices this winter are forecast to average US$4.40 per mmBTU, while in Alberta, the AECO winter price is projected at $3.49 — the strongest since 2014 — according to Ian Archer, associate director of North American natural gas for IHS Markit.
He noted Western Canada production should grow within the next year or two, but pointed out LNG exports from the U.S. are now pulling about 10 per cent of gas production off the continent.
“North America is also in a tight market situation and there are concerns there is not going to be an adequate supply for winter, so we’re in a period of elevated prices here as well,” Archer added.
For Canadian oil and gas producers, the upswing in energy prices underscores the volatility in the market today as the world comes out of the pandemic and demand recovers.
“The energy crisis happening in Europe is real, it may get much worse as we get into the colder months. But we are not immune to energy policies that can affect consumers and have devastating effects on North America, either,” said Tim McMillan, president of the Canadian Association of Petroleum Producers.
Dale Nally, Alberta’s associate minister of natural gas and electricity, said Wednesday there are lessons to be gleaned from the problems in Europe.
“It’s those punishing carbon taxes that (are) pushing the industry away from fossil fuels at a pace which we just simply can’t handle, and that’s what we are seeing — we are seeing that in Europe right now,” Nally said.
“It is contributing to, unfortunately, an energy crisis.”
However, Greenpeace Canada’s senior energy strategist Keith Stewart points out that energy price spikes and supply challenges aren’t new.
“The transition is going to be bumpy at points, but also let’s not forget that climate change makes things bumpy as well,” said Stewart, noting extreme weather in Texas earlier this year disrupted gas supplies.
Rory Johnston, a managing director and market economist at Price Street, said other commodities are seeing a “COVID bullwhip effect” that has affected prices, while some extreme weather has jolted energy demand.
But he also believes the push for energy transition, government policies and the ESG focus of investors are playing a part in rising energy prices by reducing overall supply.
“It just increases the probability of these types of crises emerging because . . . normally we would have more of a buffer,” Johnston said.
“We will still need lots of production on the road to the energy transition. The energy transition will definitely be fuelled in part by fossil fuels. It will need to be. It’s just the way our current energy system is designed to work.”
Chris Varcoe is a Calgary Herald columnist.
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