The current energy crisis at the end of 2021 is expected to extend into 2022. It has already had far-reaching impacts on the economy, the environment and security. This essay examines some of the tensions that arise for government policy, investors and consumers. The crisis has three distinct elements: COVID-19 and supply chain disruptions, greater interconnection of natural gas markets and signs of energy price volatility during the energy transition away from fossil fuels.

As the global economy pursues a hesitant recovery from the COVID-19 pandemic, energy prices and availability threaten to derail it. The pandemic has resulted in a historic decline in demand and prices for energy, but the recovery in demand is now straining markets for fossil fuels for oil and gas, and even coal. Prices are skyrocketing as demand continues to supply fuel that has yet to recover from the fall of the pandemic.

Past global supply crises have generally been confined to oil, but the rapidly evolving natural gas markets are also in crisis. A growing and more flexible liquefied natural gas (LNG) market allowed global competition for gas supply, a situation that was not possible when gas was supplied by pipeline or LNG under long-term contracts. term. Europe and Asia are competing for the same LNG supply, driving up prices in both markets and expanding the current tight market to the United States. In a sense, natural gas is a victim of its own success: the shift from power generation to coal for economic or environmental reasons has been a major source of gas demand. However, with the decline in coal-fired production in the United States, a major buffer for gas demand and prices is being lost. With less ability to use coal for power generation when demand for natural gas is high, demand for gas becomes less elastic and prices more volatile.

Energy markets are naturally price inelastic and therefore volatile. Nonetheless, the recent emphasis on the environment and affordability during the first part of the energy transition may have led to less attention to energy security. The new interconnection of energy markets across fuels and geographies has also changed the way crises spread. Measures such as strategic reserves and demand response may need more attention, as well as programs to help low-income consumers, who are always affected the most when energy prices are high. Diversifying the energy supply with renewables will also help, as once built, these sources are not subject to the vagaries of global markets.