Global economy survives on supply chains which, in turn, consume substantial amount of energy. The non-renewable resources used for production of energy are diminishing owing to various reasons, threatening survival of supply chains like never before. This feature analyses the situation.

The term ‘energy crisis’ represents any significant bottleneck in the supply of energy resources such as coal, oil, gas, electricity etc to an economy. If explained in more explicit manner, it is the concern that the world’s limited non-renewable resources that are used to power industries and societies are diminishing as their demand keeps rising. Although these resources occur naturally, it takes hundreds of thousands of years to replenish them limiting their renewal in a foreseeable time frame. The fact is most people do not feel pinch of this crisis unless they queue up in long lines at gas stations or start paying surging fuel prices more frequently or face regular power cuts. For all the spoilers, the energy crisis is something that is real, ongoing and getting worse despite many efforts. It is a growing concern for both the developing as well as the developed worlds. So, what is causing this energy crisis besides limited availability of energy sources?

Natural Cause

From close to 1 billion persons in 1800, UN predicts the world’s population to increase by 2 billion persons in the next few decades – from 8 billion on November 15, 2022 to 9.7 billion in 2050. This population could further peak at nearly 11 billion around 2100. Growing at a CAGR of almost 1 per cent every year since 1800, the steady rise in the world’s population has led to increased demand for fuel and products related directly or indirectly to our energy resources. Till few centuries ago, humans were cutting trees and extracting coal for their fuel needs. Later on, the discovery of oil and gas began fuelling our industries and transport. With increased urbanisation and electrification of homes and commercial spaces, the additional fuel requirement to produce electricity contributed to overconsumption of fossil fuels such as coal. Today, coal is the most highly used source hence depleting much faster and that too not without leaving pollution footprint which additionally strains our water and oxygen resources. Fast depletion and pollution aspect of non-renewable sources means we need serious attention to explore more renewable sources, reducing greenhouse gas emission in the process. How soon we can achieve complete switch to renewable sources is still unknown, till then the silent energy crisis due to increasing population will keep mounting.

Climate Factor

Climate change and environmental aspect are other key contributors to this silent crisis. For instance, coal mining and their subsequent supplies are affected when large coal producing areas receive more than generous rainfalls. On the other side are some countries which, at times, are forced to close their coal fields due to environmental concerns. This disrupts coal supplies which, in turn, impact energy production in various domestic and overseas plants thereby pilling on the energy woes. Similarly, cold places like Europe are characterised by regular harsh winters adversely affecting the transport systems deployed for importing gas in the region.

Demand-Supply Imbalance

In spite of exploiting energy sources for over a century we are still unable to plug demand-supply gap owing to various factors. The problem is more prominent in developing countries though some developed ones too struggle with disproportionate distribution of energy sources. Running for many years, the power generating equipment and related infrastructure is now also aging fast. Outdated equipment restricts the energy production. The old plants come under huge stress to meet the daily demand for power. In the situation of supply not meeting demand or due to poor distribution systems there are acute load-shedding and breakdowns. In few countries, significant delay in commissioning of new power plants adds to the problem. Add to it, a large number of people not complying to basic energy saving practices results in wastage of energy and the sources consumed in its production.

Geopolitics

In today’s modern world, geopolitics is emerging as the most impacting cause in already ailing energy sector. Wars between countries supplying energy or providing energy source or located at strategic locations in energy supply chain, do hamper the supplies and fuel prices. The Middle East region hosting Saudi Arabia, Iraq, Iran, Kuwait, UAE or Qatar – the top oil producing nations, is one such geography in this context. It was seen during the Gulf war in 1990 when price of oil reached its peak causing global shortage, creating major problem for energy consumers. Currently, we have a similar situation in Europe, where the Russia-Ukraine war is escalating the global energy crisis with each day as the war prolongs.

Crosslink Between Energy and Supply Chains

Supply chain is the lifeline of global economy. When the world experiences problems with the supplies or price of energy, it affects interconnected supply chains worldwide. For instance, there has been a recent shortage of magnesium required in the production of aluminium compounds that are essential for automotive industry to make vehicle frames. Owing to its power outages, China decided to limit its production of the element despite its importance for the European metal industry. Such abruption in production and supply leads to shortage of products-in-demand resulting in price rise. In such cases, the end-consumers have to face the consequences as they have to deal with higher prices and long delays for goods. Under such interdependency, it becomes imperative to understand what energy crisis means for global supply chains across various sectors. But before that, it is important to understand some recent developments since 2020 which are aggravating the crisis.

Covid-19 Impact

When the pandemic of 2020 confined people at home, oil and fuel demand nosedived with transport vanishing from the road and industries coming to abrupt halt. This turned out to be the year that oil demand experienced its biggest ever decline, dropping 8.8 per cent. With lockdown restrictions on commercial and industrial activities, the global demand for electricity also declined. In Europe, the weekly demand in UK, Germany and France dropped by over 15 per cent. Coal also experienced a 4.4 per cent drop – the largest ever decline. Even electricity generation from nuclear reactors fell by 4 per cent. Additionally, global natural gas consumption decreased by 1.9 per cent year-on-year though not impacted as badly as oil and coal. Nevertheless, this helped the use of renewable energy to increase by 3 per cent as the demand for all other fuels declined and electricity generation shifted to these resources.

However, the unexpected recovery rate from the pandemic across the world in 2021 led to sudden and rapid increase in energy and fuel demands. This sudden spike in demand doubled coal and crude oil prices. As the companies and countries began racing to meet the hiked demand, the global scenario got negatively affected by the supply side crunch and high prices.

The turbulent pandemic period stretched from 2020 to 2021-end. Post that, when temperatures began dropping in Europe, the prices of oil and gas reached all-time high leading to emergency power rationing, exposing both homes and factories to sub-zero temperatures. While crisis in Europe was awaiting a more worsened phase in 2022 as the year was to progress, world’s factory China was also inching towards unexpected acute electricity shortage.

China’s Power Cut

The global manufacturing hub China faced its worst ever heatwave and drought in six decades, hitting its hydroelectricity hard – its second biggest source of power. The country’s crucial Yangtze river dried up in parts due to extreme heat and scant rainfall. Six provinces along the river were impacted affecting water supply to people and forcing the closure of factories in some provinces to preserve electricity supplies. Sichuan province, accounting for 21 per cent of China’s hydropower, had its hydroelectricity capacity drop by 50 per cent in the month of August. Raging heatwave resulted in unprecedented power demand pushing the region’s electricity grid to the brink. Most factories were ordered to close for 11 days in response to the power crunch. The power rationing shook the supply chains and affected the production of major companies such as Toyota, Foxconn and Tesla in Shanghai. The hydropower shortage in the province also affected multiple cities in the east of China.

To ease the power crunch, China fell back on its domestic coal output and imports to generate electricity. As per National Development and Reform Commission, power plants across the country burnt 8.16 million tonnes of thermal coal daily for the first two weeks of August. Particularly on August 3, the daily consumption peaked at record 8.5 million tonnes. The heightened monthly consumption was 15 per cent more than previous year, turning China more coal-reliant for power. Earlier in July, the coal-generated electricity increased 22 per cent from June accounting for 69 per cent of China’s total electricity, a share which was 67.4 per cent in 2021. Sichuan’s largest coal miner, Sichuan Coal Industry Group, has more than doubled its thermal coal production to nearly 15,000 tonnes per day since mid-August. Sichuan Guang’an Power Generation – the biggest coal-fired power plant in the region, has also boosted its electricity generation by 170 per cent in August 2022 compared to August 2021. By month-end, the province opened its first national coal reserve in Guang’an city which, when fully operational, is expected to supply six million metric tonnes of coal per year. Additionally, the country is buying more coal from other countries, especially Russia. Despite western countries isolating Moscow for invading Ukraine, China bought 7.42 million tonnes of coal from Russia in July – the highest monthly figure since comparable statistics began in 2017, up 14 per cent from the same period last year.

Ukraine War

The simmering tension between east European neighbours – Ukraine and Russia, culminated into a war on February 24, 2022, making geopolitics raise its ugly head yet once again. In addition to its military aggression, Russia is accused of cutting-off its Nord Stream 1 pipeline, leading to 89 per cent drop in its gas shipments from last year’s numbers. This left most of Europe to seek other energy sources in order to save businesses from going bankrupt due to exorbitant prices.

Along with small businesses many large European producers experienced disrupted production including Germany-based large producer Hakel and Arcelor Mittal – Europe’s largest steel maker; Norway’s aluminium producer Alcoa; and the Netherlands-based zinc producer Nyrstar. Many such companies produce necessary global products for businesses worldwide. The war, still going on while this is being written, is feared to end many businesses and lead to a global supply chain disaster for an already struggling system.

Various factors behind energy crisis that are discussed here are impacting supply chains in one way or the other but not as strongly as the ongoing Russia- Ukraine war. NATO’s embargo on Russia has catalysed the energy crisis. The war has highlighted EU’s utmost dependency on the Russian gas. While the US and UK were quick in banning imports of Russian oil and gas, the EU, understandably, took a less harsh approach by cutting its gas imports only by two-thirds within a year to try and protect its economy. Since the 1960s, natural gas markets have developed in Europe with large pipelines built to connect Russia and other producers such as Norway with the main European markets. This led to Europe’s strong dependence on Russian natural gas supplies. Since Russian imports account for around 40 per cent of the EU’s gas supply, disruptions to gas flows have the power to intensify energy shortages and lead to even higher prices for European consumers who are already experiencing a cost-of-living crisis. According to European Central Banks’ estimates, a 10 per cent reduction in gas supply reduces Euro zone’s GDP by around three quarters of a percentage point.

The embargo and higher oil prices in the international market have filtered through the entire Europe’s economy including fertilisers, transportation and the prices at gas pumps; causing a collapse of production and supply chains in many sectors; and immense shortages putting people’s jobs at risk. There is an interesting case of Russian oil-dependent Bulgaria which agreed with embargo inviting a massive blow to its economy and supply chains. The country is now scrambling for solutions including seeking an exception from the embargo and considering alternatives such as renewable energy sources. Thus, the ongoing war has caused major issues in supply chains across various sectors.

Maritime Fuel Prices

The fuel price for commercial ships spiked after the Ukraine war, hitting all-time highs in May and June. But in July and August the prices fell back to roughly pre-war levels. According to Ship & Bunker – a marine fuel-focused publication, the average price for Very Low Sulphur Fuel Oil (VLSFO) at the world’s top 20 refuelling hubs was $800 per ton in August – 29 per cent down from all-time high of $1,125.5 on May 14. Before war, it was averaging around $750 per ton. At the same time, High Sulphur Fuel Oil (HSFO) average price was trailing at $571.5 per ton – 26 per cent down from record of $769.5 per ton on May 5 and few dollars below the HSFO average immediately prior to Russia’s invasion of Ukraine. While the war upside (in prices) was largely gone by August, VLSFO prices still remained higher than at any point in history prior to 2022. The other variable is Liquefied Natural Gas (LNG) – a cleaner option than VLSFO which is used as bunker fuel. The Ukraine war increased LNG cost too and unlike traditional marine fuels, there has been no price reversal in this case. On the contrary, LNG commodity prices hit fresh highs in mid-August. Data from the Port of Rotterdam in the Netherlands revealed a drop in buying of LNG for bunker fuel in Q2, 2022. Volume sank to 63,497 cubic metres, down 60 per cent from Q2, 2022 and 43 per cent from the first quarter of this year. In August, the price of LNG bunker fuel in Rotterdam was running 4.8 higher per ton than VLSFO and 6.6 times higher than HSFO.

Semiconductors Supply

While the geopolitical situation does not affect the metals directly required in semiconductor production, neon gas can be an issue since it is a by-product of steel manufacturing in Ukraine. Most semiconductor vendors, nevertheless, had found a second source since the annexation of Crimea in 2014. The more significant issue for the semiconductor sector lies in its end-markets, namely the supply of palladium to the auto industry and nickel to the battery makers. The autos end-market is key for European semis (semi-trucks), with major device companies having 30-45 per cent exposure. Currently, semiconductor supply is a major bottleneck for the industry and as a result, volume have struggled to recover. Here also, J.P. Morgan Research believes that the semiconductor supply crisis will begin to resolve in the first half of 2023.

Technology

China is world’s major tech spare parts’ manufacturer and supplier. This is why industry-wide silicon chip shortage and disruptions related to COVID-19 lockdowns in China have left the technology sector facing renewed supply constraints. The situation is aptly mirrored by performance of tech giants. Take the case of technology giant Apple whose main focus is still on supply despite concerns about inflation affecting consumer purchases and the pausing of sales in Russia which is estimated to impact its year-on-year growth by around 150 basis points. In the first quarter of 2022, Apple saw a 26 per cent quarter-over-quarter drop in product sales, with worse still to come. Apple expected the impact on revenue in the second quarter of 2022 to be $4-8 billion, substantially larger than the loss seen in the first quarter of the year.

Retail Profitability

The global retail market is estimated to grow from $23.65 trillion in 2021 to $26.33 trillion in 2022, growing at a CAGR of 11.3 per cent. Retail combined with wholesale is a significant sector that uses energy in cooling, heating, ventilation and refrigeration while providing essential services to its customers. The sector works on low net margin especially in food segment (1-3 per cent). The impending energy crisis is further denting its already low margins by a combination of high energy and logistics costs, pressure from suppliers to raise prices for their products and at the same time, consumers experiencing a massive cost-of-living crisis and unable or unwilling to pay more. Specifically, in Europe the large number of stores and warehouses consume altogether 220-240 TWh of energy per year which is much more than many energy- or electro-intensive sectors. Since the sector is dependent on energy, its low margins are making it extremely difficult to pay its bills amidst skyrocketing energy prices. In this context, industry stakeholders called on EU and national governments to rethink the sector-specific strategies and provide urgent help. The EU retail is demanding access to funding through EU temporary framework to compensate at least partially for the huge cost increases; ensuring that retailers and wholesalers benefit from the funding available under the Emergency Instrument approved in September-end; seeking to redirect some of the Recovery and Resilience facility funds to investments in alternative energy provisions; lowest possible tax rates on energy products; and temporary incentives for saving energy. The industry proudly claims to have saved energy by adopting measures like reducing in-store temperature, turning lights off at night and keeping heat in stores. Retail needs to remain relevant in the long run and will require to invest in large resources in its digitalisation, meeting the sustainability goals, attracting and retaining talents – increasingly in the generation of alternative sources of energy. All of these may vanish if industry’s issues related to energy crisis are not addressed on time. In case of prolonged or continued energy crisis, hundreds of thousands of stores providing daily essentials to citizens all over the EU, millions of jobs in urban and rural areas, the supply chains that work with the sector and the life of local communities will be at stake.

Paradoxes Of Crisis

Fossil fuel has limited availability. Its usage begets environmental and pollution problems too, forcing a recent major shift from fossil fuel to more sustainable source of energy i.e., natural gas. However, even natural gas is limited, and its increasing demand is resulting in massive price rises, causing ‘greenflation’. Various restrictions put by many governments on traditional energy sources is also adding to the greenflation, suggesting that even switching to sustainable option will have its own challenges.

Similarly, world is now looking at other natural (renewable) resources like solar and wind powers to replace depleting non-renewable sources. Both are abundantly available over most of our planet’s surface and for relatively longer tenure too but presently, they lack adequate infrastructure and investments that are required to meet current energy demand, making them unreliable option as of today and, to an extent, even for a long time.

The other paradox in procuring energy sources is existence of limited sourcing points. Utmost dependence of Europe on Russia for gas supplies has exposed the vulnerability of single supply source. The simple solution to such problem could have been the broadening of sourcing options akin ‘China Plus One’ strategy. However, in case of natural resources even this is not possible as it is not man but nature that decides what source will be available where and that too eons before their availability is discovered in a particular geography. Even having multiple energy sources cannot guarantee their uninterrupted and regular supply since not all suppliers may have required capacities to deliver.

Thus, the only immediate and practical option is to find ways to mitigate energy crisis and sustain supply chains till we discover and implement more sustainable solutions.

Mitigating Energy Crisis

The approach needs a global effort with both developed and developing nations adopting a common stand on energy creation, distribution, preservation and re-generation. Reduction of greenhouse gases to half or, if possible, even more of current level by 2050 should be key focus area driven by cross-border mechanism. Since global supply chains depend heavily on fuel and energy encompassing warehousing, transportation, shipping and storage; the energy conservation and seeking its alternatives is of utmost importance in today’s world. Power conservation through using energy-efficient products like CFLs and LEDs, and adapting new technologies such as pre-set lighting controls, slide lighting, touch dimmers, integrated lighting controls, etc to control lightings is another way to conserve energy and save cash in the long run.

On the policy front, subsidy on solar panels and windmills will encourage stakeholders to switch to renewable alternatives. Many companies have now started using energy simulation software to redesign their building units and reduce energy costs thereby reducing carbon footprint. More frequent energy audits need to be carried out to identify energy loss in the supply chains and corrective measures be implemented. Since energy transition to other resources can effectively mitigate energy crisis the sufficient availability and supply of critical energy transition materials such as copper, lithium and others along with stable raw material supply chains, sufficient manufacturing capacities and adequate infrastructure need to be strengthened ahead of energy transition.