U.S. Energy Crunch disrupts fuel and power markets, driving natural gas price spikes, coal resurgence, utility mix shifts, supply chain strains for EV batteries, and inflation pressures, complicating climate policy, OPEC outreach and LNG trade
Key Points
Supply-demand gaps raise fuel costs, revive coal, strain EV materials, and complicate U.S. climate policy and plans.
✅ Natural gas spikes shift generation from gas to coal
✅ Supply chain shortages hit nickel, silicon, and chips
✅ Policy tensions between price relief and decarbonization
A global energy crunch is creating pain for people struggling to fill their tanks and heat their homes, as well as roiling the utility industry’s plans to change its mix of generation and complicating the Biden administration’s plans to tackle climate change.
The ripple effects of a surge in natural gas prices include a spike in coal use and emissions that counter clean energy targets. High fossil fuel prices also are translating into high prices and a supply crunch for key minerals like silicon used in clean energy projects. On a call with investors yesterday, a Tesla Inc. executive said the company is having a hard time finding enough nickel for batteries.
The crisis could pose political problems for the Biden administration, which spent the last few months fending off criticism about rising fuel prices and inflation (Energywire, Oct. 14).
“Energy issues at this moment are as salient to the American public as they have been in quite some time,” said Christopher Borick, who directs the Muhlenberg College Institute of Public Opinion in Pennsylvania, where Biden stopped yesterday to pitch his infrastructure plan.
While gasoline prices have gotten headlines all summer, natural gas prices have risen faster than motor fuels, more than doubling from an average $1.92 per thousand cubic feet in September 2020 to $5.16 last month. By comparison, gasoline prices have risen about 55 percent in the last year, to $3.36 per gallon nationwide this week, according to AAA.
The roots of the problem go back to the beginning of the pandemic and the recession in 2020. Oil and gas prices fell so fast then that many producers, particularly in the U.S., simply stopped drilling.
Oil companies began predicting a few months later that the abrupt shutdown would eventually lead to shortages and price spikes when the economy recovered. Those predictions turned out to be accurate.
With the economy beginning to recover, demand for gas has gone up, but there’s not enough supply to go around.
While the U.S. energy crunch isn’t as severe as Europe’s energy crisis today, and analysts predict that gas prices will gradually fall next year, consumers could be in for a rough couple of months.
Here’s four ways the global energy crisis is impacting the United States, from the electricity sector to the political landscape:
What are the political repercussions?
For the Biden administration, the energy price hikes come amid fears of rising inflation and persistent supply bottlenecks at the nation’s ports as its climate ambitions face headwinds in Congress.
“The confluence of energy prices, logistical challenges and the need to move on climate have raised this to the top tier,” said Borick, who in the past has polled on energy and environmental issues in Pennsylvania.
Borick noted the administration is facing counterpressures: Even as it pushes to decarbonize the nation’s electric system, it wants to keep gas prices in check. High gasoline prices have been linked to declining political approval ratings, including for presidents, even if much of the price hikes are beyond their control.
White House press secretary Jen Psaki said earlier this month that the administration can take steps to address what it called “short-term supply issues,” but also needs to focus on the long term — and climate.
In hopes of capping prices, the White House has spoken with members of OPEC about increasing oil production — though OPEC has little control over natural gas prices. And earlier this month, the administration talked to U.S. oil and gas producers about helping to bring down prices.
That comes even as environmentalists have pushed Biden to ban federal fossil fuel leasing and drilling and stop new projects.
The moves to curb prices have prompted ridicule from Republicans, who have accused Biden of declaring war on U.S. energy by canceling the Keystone XL pipeline.
“The Biden administration won’t say it out loud, yet let’s admit it: There is a crisis,” Sen. John Barrasso (R-Wyo.) said this week on the Senate floor. “It is one that Joe Biden and his administration has created. It is a crisis of Joe Biden’s own making.”
The situation has also resurfaced comparisons to former President Carter, who struggled politically in the 1970s with gasoline shortages and other energy pressures. Some political scientists say, though, the comparison between the two isn’t apples to apples.
"In 1979, the crisis began with the Iranian Revolution, producing a supply shortage. In the USA, some states rationed the supply. That’s not occurring now. Oil prices were also regulated, another difference, “ said Terry Madonna, a senior fellow in residence for political affairs at Millersville University.
A Morning Consult poll released yesterday carried warning signs for Democrats with worries about the economy on the rise across the political spectrum.
Voters, however, were evenly split on how Biden is handling energy. Forty-two percent of respondents approve of Biden’s energy policy, compared with 45 percent who disapproved. The margin of error is 2 percentage points.
Will the electricity mix change?
Higher gas prices are giving coal a boost in some markets.
Atlanta-based Southern Co. told CNBC earlier this week, for instance, that coal was about 17 percent of the company’s power mix last year. That has changed in 2021.
“The unintended consequence of high gas prices is that coal becomes more economic, and so my sense is … our coal production has bumped up above 20 percent,” Southern CEO Tom Fanning said. “Now, how long that’ll persist, I don’t know.”
Fanning said “what we’re seeing right now, and the real challenge in America, is this notion of energy in transition.”
But the U.S. power sector has been evolving for years, with more renewables and less coal on the grid, and experts say the current energy crunch won’t change long-term utility trends in the industry.
“In general, I wouldn’t place too much emphasis on short-term fluctuations,” Jay Apt, a professor at Carnegie Mellon University, said in an email. “There is still a robust supply chain for most components needed for low-pollution power, including renewables.”
In fact, elevated fossil fuel prices, and high natural gas prices in particular, could accelerate the move toward wind, solar and batteries in some areas. That’s because power plants that run on coal and natural gas can be affected by rising and volatile fuel prices, as illustrated by the recent move in commodities globally. That means higher costs to run the facilities, even if power prices often climb along with gas prices.
“If I were a utility planner, this would cause me to double down on new generation from [wind] and solar and storage as opposed to building additional natural gas plants where, you know, I could be having these super high and volatile operating costs,” said Bri-Mathias Hodge, an associate professor in the Department of Electrical, Computer and Energy Engineering at the University of Colorado, Boulder.
Ed Hirs, an energy fellow at the University of Houston, said the current global situation doesn’t change the U.S. power sector’s overall move toward generation with lower operating costs.
For example, he said nuclear and coal plants can require hundreds of employees, and both have fuel costs. Hirs said a gas facility also needs fuel and may need dozens of employees. Wind and solar facilities often need a smaller number of workers and don’t require fuel in their operations, he noted.
“Eventually the cheap wins out,” Hirs said.
That isn’t even factoring in climate change — the reason world leaders are seeking to slash greenhouse gas emissions. Indeed, lowering emissions remains a priority among many states and big companies in the U.S.
Over the next 10 to 15 years, Hirs said, a key question will be whether battery technology can compete economically in terms of backing up renewables. He said a national carbon price, if enacted, would aid renewables and enhance returns on batteries.
“The real battle is going to be between natural gas and battery storage,” Hirs said.
Apt and M. Granger Morgan, who’s also a Carnegie Mellon professor, noted in a Hill piece last month that the U.S. gets about 40 percent of its power from carbon-free sources, including nuclear.
“Modelers and many power system operators agree that it is possible that renewables can cost-effectively make up roughly 80% of electricity generation,” the professors wrote, adding that other sources could include “storage and gas turbines powered with hydrogen, synfuels, or natural gas with carbon capture.”
What about EVs and renewables?
As for electric vehicles, executives with Tesla said on a call yesterday that supply-chain problems are the major brake on production for both vehicles and batteries.
Chief Financial Officer Zachary Kirkhorn said that the company’s factories aren’t running at full capacity because of an ongoing shortage of semiconductor chips. Customers are waiting longer for vehicles, he said, and wait lists are growing.
The challenges extend to raw materials. In batteries, Kirkhorn said, the company is having trouble finding enough nickel, and in vehicles, it is scrounging for aluminum. He said the problem is "not small," and that prices may rise as supply contracts come up for renewal.
The supply problems are creating "cost headwinds," he said, and so are rising labor costs. Tesla is not immune from the worker shortages that are plaguing the entire U.S. economy.
The production woes aren’t limited to Tesla: Automakers around the world have have had their output crimped by the chip shortage that accompanied the economic rebound after pandemic lockdowns. Unlike many other automakers, Tesla hasn’t been forced to pause its factory lines.
Tesla said it is poised to greatly expand its production of batteries for the electric grid — with a caveat.
Last month, Tesla broke ground on a new California factory to make Megapack, its 3 megawatt-per-hour lithium-ion batteries for use by power companies. That future factory’s capacity, 40 gigawatt per hour a year, is vastly more than the 3 GWh it made in the last calendar year.
However, today’s supply-chain problems are braking the making of both Megapack and Powerwall, Tesla’s battery for homes, Kirkhorn said. He added that production will increase "as soon as parts allow us."
Other advocates for EVs and renewable power expressed little concern about the supply crunch’s meaning for their industries, noting that higher prices alone don’t automatically trigger a broader green revolution on their own.
Those problems likely wouldn’t change the immediate course of the energy transition, researchers said.
"Short-term trends, week to week or even month to month, don’t matter much for investors or policy makers," wrote John Graham, a former budget official with the Bush administration and professor at Indiana University’s O’Neill School of Public and Environmental Affairs, in an email to E&E News.
The crunch may give policymakers a glimpse of the future, however, according to one minerals analyst.
"This isn’t going to be an outlier. I think increasingly you’re going to see pockets of the world start to feel these strains," said Andrew Miller, product director at Benchmark Mineral Intelligence, which focuses its research on battery minerals and battery supply chains.
The U.S. and its allies are only now beginning to develop their own supply chains for batteries and other key clean energy technologies, he noted. "The issue you’re facing, and this is one coming over time, is to have the platform in place. You have to have the supply chain of raw materials," he said.
"I think you’re going to see the most turbulence over the coming decade. … It’s not going to be a smooth transition,” added Miller.
How long will gas prices stay high?
The gap between natural gas demand and supply has led to severe price spikes in Europe, where utilities and other gas buyers have to compete against China for cargoes of liquefied natural gas, according to a research note from IHS Markit Ltd.
Here in the U.S., the causes are the same, but the results aren’t as extreme. Less than 10 percent of domestic gas production is exported as LNG, so American customers don’t have to compete as much against overseas buyers.
Instead, gas-hungry sectors of the economy have run into another problem, IHS analyst Matthew Palmer said in an interview. Gas producers have been cautious about increasing their output, largely because of pressure from investors to limit their spending.
“That theme has really put a governor on production,” he said.
The disconnect will likely mean higher home gas bills and higher electric prices this winter, although deep freeze events or warm weather could disrupt the trend, he said. The U.S. Energy Information Administration is predicting that average heating bills for homes that use gas furnaces will rise 30 percent this winter.
This comes as U.S. gas supply remains high, according to a biennial assessment from the Potential Gas Committee, a group of volunteer geoscientists, engineers and other experts.
Including reserves, future gas supply in the U.S. stands at a record 3,863 trillion cubic feet, up 25 tcf from levels reported in 2019, the group said Tuesday at an event co-hosted with the American Gas Association.
Of that total, so-called technically recoverable resources — or those in the ground but not yet recovered — are 3,368 tcf, the PGC said, down less than 0.2 percent from the last assessment.
The amount of technically recoverable gas went relatively unchanged from year-end 2018 for several reasons, including a lack of company activity in exploration efforts last year due to COVID, said Alexei Milkov, the group’s executive director.
Another factor is that basins mature and shale plays “cannot increase in resources forever,” said Milkov, also a professor of geology and geological engineering at the Colorado School of Mines.
Still, Milkov added, “We cannot tell you right now if we are on a new plateau, or if we are going to start seeing more growth in gas resources again, right, because it’s a complex issue.”
The EIA predicts that gas production will increase and prices will begin to drop in 2022.
David Flaherty, CEO of the Republican polling firm Magellan Strategies in Colorado, said prices could particularly hit seniors. But he said he expected the energy crunch to ease in the U.S. well before the election.
“By early summer, this is likely to be behind us,” he said.
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