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‘Disastrous’: The European chill that could cause shockwaves down under

This is how a harsh winter could send the energy sector into crisis. (Images: Getty).
This is how a harsh winter could send the energy sector into crisis. (Images: Getty).

A brutal winter is approaching for the northern hemisphere, and it could have major ramifications for the global economy, experts are warning.

Northern America usually experiences a slight respite from the cold in January, but this won’t occur for several more weeks due to the periodic cooling cycle known as La Niña.

A typical northern hemisphere La Niña means colder temperatures, more snow in some regions and a greater need for heating.

The problem is COVID-19 tied knots in the global energy supply chain, meaning suppliers are having to find new ways to keep people warm.

At the same time, oil and gas prices have climbed to multi-year highs as a reopening planet increases demand.

One of the main oil benchmarks, US West Texas Intermediate oil crossed the US$80-per-barrel threshold on Friday for the first time since November 2014. And earlier in the month, the world’s biggest company, oil firm Saudi Aramco, reached a US$2 trillion valuation as Brent crude oil prices hit highs not seen since 2018.

The approaching bad weather across Europe, North America and north-east Asia is also prompting China and Russia to stockpile supplies, resulting in soaring gas prices around the world.

This could have cascading global effects, Macquarie University senior finance lecturer and energy economist Dr Lurion De Mello told Yahoo Finance.

Here’s how we got here.

Basics first: What are coal, oil and gas used for?

  • Coal

Coal is a type of fossil fuel, which means it’s made of decomposed plants and animals. It can be burned for energy.

It supplies around a third of all energy worldwide and is primarily used to generate electricity.

It also creates around 44 per cent of the world’s carbon dioxide emissions and is the single biggest source driving global temperature increases.

  • Oil

Crude oil is another type of fossil fuel found between layers of sedimentary rock like shale, and is uncovered as a solid.

Crude oil is made mainly of carbon and hydrogen.

It’s then heated to produce the thick oil that goes into petrol, and diesel. Oil is also used to make plastic, tyres and even anaesthetics.

China’s demand for oil has nearly tripled over the past 20 years and now accounts for one-third of global oil demand growth.

  • Natural gas

Gas is found in pockets above oil deposits and is made mainly of methane. While it’s considered cleaner than coal and oil, it still accounts for a fifth of the world’s total greenhouse gas emissions.

Gas is also used for heating, and has become the preferred choice for electricity generation in the US and Europe, with coal losing ground. It’s expected to become China’s top fossil fuel resource by 2050.

In 2019, emissions from natural gas accounted for two-thirds of the world’s emissions increase.

Liquefied natural gas (LNG) is gas that has been cooled into liquid form for transport and storage.

How did COVID-19 change the global energy supply chain?

In early March 2020, global oil prices plummeted 30 per cent within minutes. Oil had been in crisis since the COVID-19 pandemic trapped planes on the ground, and sent demand skydiving.

An agreement between the world’s biggest oil-producing countries - that was meant to deliver production cuts - failed, triggering a massive price war.

By April 2020, oil prices were officially in the negative. That meant suppliers were paying others simply to store the oil, as there was nowhere else to put it.

The problem today, according to De Mello, is that the oil industry never fully recovered.

“The whole oil industry almost got destroyed,” he said.

“A lot of companies in the US … went bankrupt. A lot of the oil rigs were shut down. A lot of capital has left the industry, and for it to start to come back online, that’s a big challenge.”

Now that the world needs more energy from oil, it’s not as simple as turning the taps back on, De Mello said.

China bans Australian coal

In late 2020, China imposed import restrictions on around $14 billion worth of Australian coal exports.

According to the Global Times, this was to prioritise imports from Indonesia, Russia and Mongolia.

At the same time, it began stockpiling oil and LNG in preparation for La Niña winters.

“Australia is one of the biggest suppliers of coal, China is one of the biggest consumers,” De Mello said.

He suspects China will soon be forced to soften its stance on Australian coal, as Asian producers struggle to keep up with demand and heavy flooding hamstrings China’s ability to mine its own coal.

As it stands, thermal coal prices on the Zhengzhou Commodity Exchange are up 12 per cent, and have more than doubled this year..

Back home, the price of Australian Newcastle coal is also up 250 per cent, and nearly at its 2008 peak.

Countries stockpile gas, oil

The 2020-21 winter was a cold one. Japan experienced a power crisis while northern Europe saw spiking electricity costs.

The following northern hemisphere summer was marked by uncharacteristically low winds for the UK, meaning it couldn’t draw as heavily on its renewable energy reserves.

Now, large parts of the world are preparing for the oncoming 2021-22 winter by holding onto their gas and oil reserves.

Germany largely imports its gas from Russia, while the UK tends to get its gas from Norway.

However, Russia is only supplying around 10 per cent of its domestic reserves due to the “super cold” winter ahead. It means countries are more likely to buy oil, pushing the oil price up.

“It’s going to put resources out of whack,” De Mello summarised.

Another gas pipeline coming out of Russia’s Siberia is expected to deliver gas to eastern China.

The problem is that LNG is becoming too expensive for countries like Bangladesh and Pakistan. And in Europe, gas prices are about four times higher than they were in January.

“It’s going to bring economies to a grinding halt,” De Mello said.

What does it mean for Australia?

Coal, oil and gas prices are all increasing at the same time, due to a combination of tight supply and high demand.

Australia’s gas industry is predominantly driven by exporting LNG to Japan, South Korea and Taiwan, under contracts signed around 25 years ago, which are approaching their expiry.

But if Russia begins exporting more oil and gas, these contracts could run into trouble.

“[For now] the crisis that’s happening is mostly in the UK and China,” De Mello said.

“For Australia, at the end of the day, if LNG exports continue to increase, it’s a good thing. But at the same time, overall, if this energy crisis leads into an inflation crisis, we’re all going to suffer, so the gas prices need to stabilise.”

Ultimately, it could trigger a crisis to rival the 1973 oil crisis, which saw the price of oil rise nearly 300 per cent after OPEC declared an oil embargo on countries seen to be supporting Israel, including Canada, the UK and the US.

This resulted in double-digit inflation. But in a 2021 resources crisis, it won’t be oil at the centre, but LNG, De Mello said.

And it all comes down to just how severe this northern winter is.

“If the weather is really going to be cold, energy demand is going to keep on increasing. Otherwise people are just going to freeze - it’s disastrous,: De Mello said.

“The next three months are going to be crucial, but if the winter isn’t going to be as cold as expected, then I would expect the gas prices to correct themselves dramatically.”

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