Market Musings 270822:
Energy crisis forces radical behaviour change
Is the current energy crisis Europe’s “Lehman moment”?
Europe in the grip of an energy crisis
As everyone returns from their summer holidays (me included), news headlines are dominated by the relentless march higher in European natural gas and electricity prices. The sources of this energy price surge are well-known in the form of heavily reduced Russian natural gas exports towards Europe on the one hand, and the effects of the current heatwave on the other.
With benchmark Dutch natural gas prices today around 15 times higher than the average for the first half of 2021, European gas demand is naturally starting to fall as companies cut back energy-intensive production and services.
European natural gas, electricity prices hit record highs
Source: Bloomberg
Global energy demand just keeps rising…
While this price development is clearly very unwelcome for both companies and households, it will inevitably drive a radical change in behaviour as we all learn to adapt to this new energy environment. Efforts to reduce the carbon intensity of the global economy up to now have been insufficient to arrest rising temperatures around the world. Put bluntly, we still consume far too much energy and too many goods, which then result in a carbon footprint which the world simply cannot sustain over the longer term. Indeed, according to BP, the world saw its largest ever increase in primary energy demand in 2021, driven largely by non-OECD countries like China and India..
These record energy prices are a huge drag on the European (and global) economy, with Europe paying a huge energy “tax” to oil and natural gas exporters after years of benefiting from relatively cheap energy. Both businesses and households will continue to adapt to this new environment by trying simply to consume less energy, one way or another.
Renewable energy on the bounce
On the energy supply side, we can expect to see accelerated investment in low- and zero-carbon energy production through renewable energy sources (principally solar and wind as well as geothermal) and nuclear power (for baseload electricity generation).
Solar energy stocks have outperformed since May
Source: Bloomberg
Secondly, in order to reduce the volatility of energy supply as the world transitions to using more renewable…
