The Economic Cost Of Soaring Energy Prices

1. Skyrocketing Energy Costs Weigh on Economic Recovery

- Energy costs are expected to hit an all-time high of 13% of global gross domestic product this year, adding to the inflationary pressure across the globe.

- Despite soaring natural gas prices last year, with Europe seeing a 500% year-on-year hike in spot prices, fossil fuels prices have continued to rise this year.

- Coal witnessed the most marked appreciation so far this year, with both Europe’s API2 and Asia’s Newcastle benchmark up by some 250% from the beginning of the year.

- Global inflation is expected to reach 5% this year, denting hopes of a comprehensive economic recovery in 2022.

2. India Becomes Main Buyer of Distressed Russian Crude

- India has emerged as the key buyer of Russia’s distressed Urals cargoes, having landed some 7 million barrels already in public tenders and probably even more in undisclosed deals.

- This month’s Urals departures to India are four times higher than last year’s average of 80,000 b/d as India traditionally relies on a mix of Middle Eastern medium sour grades.

- Steep discounts for Russian crude, with recent tenders assumed to close at -$20/-$25 per barrel to Dated Brent, combined with rupee payment options, make further Indian buying very likely.

- Meanwhile, coal departures from Russia to India reached their highest level in 2 years in February, averaging 0.9 million tons last month.

3. CCS Investment Set to Soar This Decade

- Europe and North America will spearhead global spending on carbon capture and storage (CCS) projects, with cumulative investments surpassing 50 billion by 2025, according to Rystad Energy.

- Three-quarters of upcoming CCS projects are concentrated in Europe and North America, namely 63 out of 84, supplementing the 56 commercial projects that are already operational.

- The current global carbon capturing capacity stands at 41 million tons of CO2 per year, a tally expected to quadruple by 2025 if all projects move ahead as planned.

- Onshore carbon storage remains the dominant option currently but Europe will see a string of offshore projects coming onstream – a more expensive option as it requires additional expenditures for laying subsea pipelines.

4. US Crude Supply Fails to Impress in 2022

- Weekly US crude production numbers reported by the EIA indicate that American output has been stagnating for months, coming in at 11.6 million b/d in six consecutive readings.

- Disruptions in supply chains, labor shortages, and lack of fracking sand exacerbate US producers’ inability to bring production higher.

- The costs of drilling are simultaneously going up - to take the example of fracking sand, a metric ton now costs almost triple of what it did a year ago ($70-75/mt now vs $25-30/mt in early 2021).

- Concurrently, the White House lamented this week that too many oil and gas companies were increasing stock buybacks instead of increasing production.

5. Rooftop Solar Installations Will Double by 2025, Led by China

- Rooftop solar installations are expected to see robust growth over the upcoming years, with total installed capacity set to reach a little less than 95GW by 2025, Rystad Energy argues.

- Rooftop installations currently account for 30% of global solar capacity, a growth primarily coming from China where aggregate capacity rose more than sixfold between 2016 and 2021, to reach 27GW by end-2021.

- In per-capita terms, Australia tops the global ranking with PV installations averaging 746 watts per person, closely followed by Germany and Japan.

- The main factor underlying the success of photovoltaic solar installations has been the promotion of feed-in tariffs that guarantee an above-market price for power producers.

6. Chinese Teapots Feel the Looming Stranglehold

- The refinery throughputs of China’s so-called independent refiners, also called ‘teapots’, have fallen for the fourth consecutive month in February, settling at a mere 8 million tons (2 million b/d).

- Confronted by a sweeping drive to shut less sophisticated teapots, Beijing’s preference for the ramping up of state-owned refining could be seen from the first batch of 2022 import quotas, 10% lower year-on-year at 107 million tons.

- Adding insult to injury, the shutting down of Shanghai and Shenzhen has already depressed road traffic by some 30% in the impacted cities, implying March demand for products will remain subdued.

- According to most recent data, operational rates in Shandong province have fallen to as low as 57%, equivalent to intake levels seen in the first weeks of the COVID-19 pandemic in 2020.

7. Could China Stop Importing Coal?

- After hitting a six-year low of monthly coal exports to China in January, February and March see a continuation of weak Chinese coal amidst ever-increasing domestic production.

- Domestic coal production trended above 12 million tons per day since February, hitting record levels of 12.6 million tons per day over the past weeks amidst a strong government mandate to produce more.

- Restrictions placed on movement in various regions of China will keep thermal coal demand subdued over the upcoming weeks, potentially allowing for further coal inventory build-ups.

- The only exception to the anticipation of lower coal buying is Russia as discounted coal cargoes from ports in the Far East are too profitable to dodge.