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Winter is coming — brace for energy price hikes

The global economy began firing on all cylinders, then literally ran out of gas.
gasprice
Gasoline prices could be headed for summertime price levels this winter, as oil prices surge.

British Columbians who heat their homes with natural gas will pay 9% more on their next natural gas bills, and drivers here may soon see winter gasoline prices looking more like summer prices — up to $1.75 to $1.80 per litre in Vancouver — if American benchmark oil prices hits US$90 per barrel, according to one analyst.

But that’s nothing compared to what China and Europe are facing right now. And with winter coming, things could get worse before they get better, warns Dan McTeague, president of Canadians for Affordable Energy.

Natural gas and LNG has become the go-to fuel of choice for producing power when wind and solar power fall short, and a sudden demand for it has pushed up prices everywhere. The demand for thermal coal has likewise spiked in China, India and Europe.

American natural gas prices have spiked from US$2.60 per MMBtu one year ago to US$5.87 per MMBtu, according to Oilprice.com, and it’s not even winter yet.

“We are going to see North American Henry Hub spot prices head to $10 or $11,” McTeague said. “No doubt in my mind. And that’s going to happen probably over the next four to eight to 12 weeks.”

Fortunately, for British Columbians, natural gas prices, though rising, remain comparatively low. The BC Utilities Commission (BCUC) recently approved FortisBC’s 9% rate hike application, and prices will be reviewed again in December.

“Even with the current cost of gas rate increase, natural gas prices in British Columbia remain relatively low,” said FortisBC spokesperson Diana Sorace.

Oil prices are also rising, and gasoline prices will follow. And because almost everything that Canadians consume is transported by ship, train, plane and truck, it means escalating global energy prices will likely add to the cost of everything, from food to consumer goods, and there may be more supply chain interruptions coming, as manufacturers in Europe and Asia are forced to shut down due to crippling energy prices or shortages of power, coal and natural gas.

Recent energy price spikes have included:

  • thermal coal futures breaking records, rising from US$56 per tonne one year ago to US$228;
  • Asian LNG prices breaking a record at US$34.47 per MMBtu;
  • European natural gas prices hitting a record US$26 per MMBtu;
  • American Henry Hub natural gas prices more than doubling from US$2.60 per MMBtu a year ago to US$5.87;
  • Brent crude doubing in one year from US$41 per barrel to US$81;
  • Western Canadian Select oil doubling from US$29 per barrel one year ago to US$64 per barrel;

According to GasBuddy, gasoline prices in Vancouver are $0.34 per litre higher than one year ago at this time

Thanks to a recovering global economy, weather, government policies and trade spats, a global energy crisis has blown up, mainly in Europe and China, which will have all kinds of knock-on effects.

China is short on coal, and has had to resort to electricity rationing, brownouts and some of its industries have taken curtailments. India is likewise facing a severe coal shortage.

The shortage in China is partly a self-inflicted injury, since China, which gets nearly 60% of its power from coal, banned Australian thermal coal imports at a time when its economy was racing toward recovery.

In the U.K., which relies on wind power for 25% of its electricity needs, electricity prices soared when the winds were becalmed in recent months, forcing utilities to increase electricity imports and ramp up thermal power (coal and natural gas).

In the U.S., the shale oil and gas sector was crippled by the pandemic and a general drying up of investment capital, and is now unable to respond to a sudden global demand for oil and gas. 

In a word, the world’s economy, in recovery from a pandemic, began firing on all cylinders, and then quite literally started running short of fuel — from wind power to coal and natural gas.

Normally, increased demand for a commodity pushes up the price, and industry responds by producing more of that commodity. But it’s a different world today. The fossil fuel divestment movement now has ESG-minded banks, investors and insurers shying away from fossil fuels, making it harder for producers to capitalize new production.

“Reduced investment as long ago as 2014 is showing up today in a shortage of … projects that they can bring on stream,” said Brad Hayes, president of Petrel Robertson Consulting. “What’s probably more important than the simple divestment is just the access — particularly to bank — capital.

“I was talking to a significant producer here in Alberta a couple of weeks ago, and he said the amount of debt that is available — or equity — it’s difficult to come by new money because of ESG and climate concerns.”

“For those out there who thought the greatest thing to do here was to drive up energy prices so that people would make the transition, they got their wish,” McTeague said. “Unfortunately, they’re driving global economies to their virtual knees."

While some have blamed the current energy crisis on governments moving too aggressively on the transition from fossil fuels (and nuclear power) to intermittent renewable energy, and then finding it wanting, the International Energy Agency (IEA) says it’s a bit more complicated than that.

“Recent increases in global natural gas prices are the result of multiple factors, and it is inaccurate and misleading to lay the responsibility at the door of the clean energy transition,” IEA executive director Fatih Birol said in a news release.

Because of the rising price of oil, McTeague expects Vancouver’s gasoline prices could hit $1.60 per litre in the coming days.

“Make no mistake, it’s going to 90 bucks a barrel, WTI,” McTeague said. “Some are suggesting 100.”

At US$90 per barrel WTI, McTeague estimates Vancouver gasoline prices would rise to between $1.75 and $1.80 per litre.

The shale oil industry in the U.S. was hammered by the pandemic, which saw a dramatic drop in demand for oil. Now that demand is back, McTeague said the U.S. is short about one million barrels of oil, compared to 2019, which is pushing up prices, because there has been little investment in new production.

“We need to catch up on two years of lost activity,” McTeague said. “The demand-supply picture is significantly out of whack.”

Companies could easily start drilling new oil and gas wells in Alberta and B.C., but there are still constraints on pipeline capacity in Canada.

The just-completed expansion of Line 3 between Alberta and Wisconsin will add more than 300,000 barrels per day of capacity. That will take some pressure off, but isn’t enough to spur any major investments in new or expanded oil projects in Alberta.

“If we had TMX built today, it would be full, with a lot more cargoes going to China,” Hayes said. “So that transportation is a big constraint.”

As for how long the current energy crisis could last, Hayes said: “I think we’re going to see it continuously now, because this is what the thinking that a lot of people have had towards an energy transition. This is how it expresses itself.”

Some of the factors contributing to the immediate panic will get resolved, he said. The wind will eventually pick up in Europe, Russia may capitulate to demands for increased natural gas exports to Western Europe, OPEC may open the spigots, and China may relent and allow Australian coal imports to resume.

“But looking longer term, I think that all the fundamentals are still in place that we are going to continue to see these little crises mounted every time something goes out of balance," Hayes said.

“There’s been a big push to shut down pipelines, shut down the exploration and things like that, but the demand for oil and gas is still rising worldwide.”

nbennett@biv.com

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