The Energy Crisis Is Here. But What Is It, and Where Did It Come From?

Oracle Energy and Water Team

The phrase "energy crisis" is everywhere right now–from headlines to conferences, consumer forums to this very blog. Yet the topic’s prevalence is unsurprising, as the challenge it describes spans the globe. Unpicking its origins, understanding its impact, and agreeing a roadmap forward highlights the complexity of this global challenge.

One crisis, many causes

At its simplest, the energy crisis results from a global energy shortage. This scarcity has driven up prices, contributing to the climbing cost of living already felt by many nations. But the complex causes of this energy shortage require further unraveling.

While the effects of the crisis are being felt more intensely as time goes on, the causes have been brewing for some time. Although the overarching theme is humans’ ongoing dependence on fossil fuels, we can find the crisis in the aftershocks of the pandemic, recent geopolitical events, unfavorable weather conditions, and underinvestment in green energy sources. Let’s unpack those one-by-one, starting with COVID-19.

How did the COVID-19 pandemic impact energy? Energy demand dropped dramatically as the pandemic spread across the globe in 2020–21.1 Lockdowns, travel restrictions, and other initiatives designed to curb the spread of the virus had the knock-on effect of reducing total energy use. As demand dropped, so did fuel prices. In fact, the prices of many fuels fell to their lowest in decades.2 With less fuel needed, the supply dwindled too.3

As countries released their restrictions on the road to COVID-recovery, energy demand returned. But while use increased, supplies continued to trail behind.4 In the electricity market, the gas price typically determines the power price.5 As demand grew for the limited supplies available, gas prices mounted in 2021.6 The result: higher energy costs.

During 2022, the impact of the Russia-Ukraine conflict disrupted supplies further.7 As one of the planet’s largest oil and gas suppliers, Russia is a major player in world energy markets, as the International Energy Agency has highlighted.8 For example, Russia provided 40% of the EU’s gas in 2021.9 Sanctions imposed following the start of the conflict included phasing-out imports of oil from Russia (in the EU) or banning them outright (in the USA).10 This has further reduced the amount of fuel on the market, causing a sharp rise in prices.11

As noted, natural gas prices influence energy costs. Unfortunately, these have seen the biggest increase. Demand for liquified natural gas as an alternative to coal has contributed further towards inflated prices.12 With large reserves of LNG bound for China last December, the wholesale price of gas almost doubled in Europe in a single week.13 While European and Asian benchmark prices for natural gas hit an all-time record in October 2022, reaching ten times those of the year prior, US month-ahead figures had tripled since October 2020.14 Other fossil fuels also followed suit too. International coal prices year-on-year increased fivefold, as stocks at coal power plants in the world’s two highest coal-consuming nations, China and India, were low in the run-up to winter 2022.15 With the price of fossil fuels mounting, turning to alternative energy sources seems an obvious solution. Sadly, investment in infrastructure has lagged behind countries’ carbon commitments.

While oil and natural gas investments have fallen in recent years, this has not been offset by equivalent action from governments to introduce clean alternatives.16 While many countries have made public pledges to reach net zero emissions by 2030, in many cases, this fails to be supported by government spending.17 In fact, since 2015, investment in primary energy infrastructure–such as solar panels and wind turbines–has plateaued.18

Meanwhile, many of the existing alternatives to fossil fuels in place are intermittent energy sources, reliant on wind, sun, or water to generate energy. Adverse weather events across the globe have limited the output of these energy sources. For instance, droughts affected hydropower output in Brazil and elsewhere, while Europe experienced lower-than-expected wind generation.19 A shortfall of energy from these sources puts pressure back on fossil fuel reserves, fueling further price hikes. As everyone needs energy, these price increases are felt almost universally.

The impact on individuals and industries

As fossil fuel prices have leaped, the cost of the energy they are used to produce has rocketed too.20 Throughout the world, these costs have been passed onto consumers in higher energy bills. This has been a key contributor to the cost-of-living crisis, felt across the world.21

According to an analysis by Carbon Brief, gas prices will have propelled 96% of the increase in household energy bills anticipated between summer 2021 and spring 2023.22 And higher bills are squeezing the incomes of households worldwide.

In October 2021, energy prices in Germany reached record highs at six-times the previous year.23 Meanwhile, in the UK, energy costs are forecast to account for 11% of household spending in winter 2022.24 According to research at the University of York, England, fuel poverty will be faced by nearly two-thirds of the UK by January 2023–up from under a fifth in 2019.25 For a fifth of households, energy bills will consume 25% or more of their net income.26

In the US, prices are already 7.5% higher than in 2021, according to the Energy Information Administration.27 Faced with climbing costs, over 20 million families have already fallen behind on their utility bills, says the National Energy Assistance Directors Association (NEADA).28 According to NEADA figures released in August, the average amount owed has almost doubled from around $403 to $792.29 And the crisis is deepening; the federal government anticipates electricity prices will continue to rise into 2023.30

While home energy use is front-of-mind for many, industries rely on energy too. And the impact is being felt throughout the business world. Many energy companies themselves have been forced to fold, as they purchased energy at higher costs, while contracted or capped prices limited the amount they could recoup from customers. In 2022, around 30 energy providers collapsed in the UK alone.31

As fuel costs bite deeper into consumers’ paychecks, businesses beyond the energy sector will bear the brunt too. Retailers and hospitality venues are bracing themselves for the double impact of rising running costs and a drop in takings as households cut back on discretionary spending to cover their own energy bills.32

While this could see high-street businesses fighting to keep the lights on, the impact on energy-hungry industries like manufacturing and construction may be drastic too. For instance, in China–where rolling blackouts have already taken place in two-thirds of provinces–some heavy industries have been instructed to scale down manufacturing products like steel and cement.33

Without intervention or innovation to cut costs, the economic impact on individuals, organizations, and nations could be untold. So, what can be done?

What now? Immediate and aspirational solutions

Just as multiple factors have contributed to rising energy costs, several solutions can be employed to lessen their impact. These span from immediate cost-cutting to long-term investment and must be taken at several levels of society, from individual households to government. Rather than a single route forward, many paths can be explored in parallel to arrive at a shared destination.

Many governments around the world have already intervened with attempts to contain or curtail the impact of energy costs on household bills, especially for vulnerable consumers. Many of these have taken the form of subsidies for low-income households. Meanwhile, many utilities are offering support for struggling customers through affordability tariffs, discounts, or grants to aid those in danger of falling behind on their bills. However, beyond financial intervention, consumer behavior can help too.

The most immediate way for households to lower their bills is to use less energy. Although this may sound easier said than done, simple behavior changes can yield instant savings–some common examples include turning down boiler settings, unplugging devices on standby, and depleting batteries before recharging them. But bigger savings would be possible with better-equipped homes.

Home improvements, such as better insulation, can reduce the amount of energy needed to heat a house. Meanwhile, solar panels and heat pumps can bring down energy bills.34 However, each of these brings upfront costs. Scaling these to benefit an entire society may require government initiatives, such as grants or loans, to improve the energy efficiency of homes. However, this is not the only pressure on governments.

In the long term, nations must reduce their reliance on fossil fuels, so they are no longer at the mercy of these markets. Investing in renewable energy sources will help them achieve energy independence, a protective factor against future energy crises,35 and work towards a clean and affordable energy future for everyone.

1, 3, 4, 7, 8, 9, 10, 11, 12, 13, 17, 18, 21, 31: Why energy prices are so high right now | MoneyWeek
2, 14, 15, 16, 19, 20, 23, 33: What is behind soaring energy prices and what happens next? – Analysis - IEA
5, 22, 24, 25, 26, 32, 34: Analysis: Why UK energy bills are soaring to record highs –and how to cut them - Carbon Brief
6, 35: Why are energy bills going up? - Energy Saving Trust
27, 28, 29, 30: Retail electricity prices continue rapid rise; US homes could pay more than 15 cents/kWh next year: EIA | Utility Dive