The global energy crisis has 4 possible paths
through early 2022, says Bank of America
Isabelle
Lee
Oct. 17, 2021, 08:16 AM
The worldwide energy crisis unfolding has thrown
markets into unprecedented turmoil.
In Europe,
natural gas prices are at record highs. And in China, thermal coal futures are
also at all-time highs.
Francisco
Blanch of Bank of America provided Insider with four possible paths through
early 2022.
The
worldwide energy crisis unfolding amid a surge in demand and an ongoing supply
crunch has thrown the oil and gas markets into unprecedented turmoil.
Oil prices
are up more than 60% this year, with West Texas Intermediate crude hitting a
fresh seven-year high on Friday.
Elsewhere,
the situation is even more extreme. In Europe, natural gas prices are at record
highs, with wholesale prices on spot markets tripling this year. In China,
thermal coal futures are also at all-time highs and have tripled this year as
well.
As energy
prices continue to rocket, Francisco Blanch, Bank of America Global Commodities
and Derivatives Research Head, provided Insider with four possible paths he
sees through early 2022. Each one holds the promise of prices cooling off, but
some scenarios are more painful than others.
1. A spike in energy prices will lead to an economic
crash
Francisco
likened the energy crunch today to the run-up in oil prices between 2007 to
2008.
At the
start of 2007, Brent crude was at just $50 a barrel, then nearly doubled to
$95.98 a barrel towards the end of the year. And by July 2008, prices soared to
an all-time high of nearly $150 a barrel. But prices crashed spectacularly as
the Great Recession took hold.
If a
similar spike in oil happens again, Francisco said major industrial firms may
just sharply decrease production activities or shut down altogether, which will
ultimately lead to a recession.
In fact,
surging energy prices have already forced some businesses, especially in Europe
and Asia, to halt manufacturing.
2. More production, substitution
An increase
in the prices of any good will prompt any producer to either ramp up their
production or to find more affordable alternatives, Francisco said.
So far, US
shale companies have indicated they plan to invest more money next year in
domestic production. But they don't appear ready to unleash a flood of oil as
investment remains constrained in favor of bigger shareholder returns.
Meanwhile,
as natural gas and coal prices soar, some companies are shifting to using oil.
That may add around 500,000 barrels a day to global demand, according to the
International Energy Agency.
3. A warm winter that will temporarily cure the
problem
Global
energy prices are rising ahead of winter when demand spikes for natural gas and
coal to heat homes. Buyers across the globe are competing over a limited supply
while energy prices remain high. The US Energy Information Administration on
October 13 warned Americans to brace themselves for a heftier heating bill.
But what if
we suddenly experience a warmer-than-expected winter? Demand will naturally
slide, and the problem, according to Francisco, would have momentarily cured
itself "by chance."
4. A hike in interest rates that will slow down
aggregate demand
Then
there's the possibility that the central bank will slow down aggregate demand,
Francisco said. This means allowing for somewhat higher interest rates and
reduced quantitative easing, which will cool overall growth and energy
consumption.
Federal
Reserve officials have already signaled they will taper bond purchases later
this year and start hiking rates next year, as the economy continues to rebound
and inflation stays elevated.
"Remember,
you can print US dollars, you can print euros, and you can print Philippine
pesos. But you can't print commodities," he said.
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