• Demand for gas is rising as economic activity recovers from the pandemic.
  • But supplies are limited and prices are being pushed ever higher.
  • Gas can help to decarbonize electricity but it is also a source of emissions.

Europeans are bracing themselves for what could be a long, cold and expensive winter. Rising energy costs are likely to push up fuel bills and increase the price of many other everyday purchases, including food.

The reasons behind the European energy crisis are far from straightforward and illustrate how complex and interconnected the global energy market is. Here are five key points to help explain some of the issues fueling the energy crisis.

1. Global demand is recovering strongly

In 2020, demand for natural gas fell by 1.9%. That was partly because of changes in energy use during the worst periods of pandemic disruption. But it was also the result of a mild winter in the northern hemisphere.

In its Global Gas Security Review, the International Energy Agency (IEA) says gas demand is likely to rebound by 3.6% across 2021. If left unchecked, by 2024 global gas consumption could have grown 7% higher than pre-pandemic levels.

Although gas demand growth is expected to slow - despite a switch from coal to gas - the IEA says governments may need to legislate to ensure gas-related emissions growth does not become a problem. “More ambitious policies are needed to shift to a net-zero path,” the organization says.

Global natural gas demand by region, 2008-2024
Gas demand is expected to fully recover in 2021 from its drop in 2020.
Image: IEA

2. Europe is reliant on gas imports

European gas production is in decline. Several North Sea gas deposits are running dry, as are a number of gas fields in the Netherlands, such as Groningen which is due to close in mid-2022.

This leaves Europe increasingly dependent on gas imports, primarily from Russia and Norway.

What's the World Economic Forum doing about the transition to clean energy?

Moving to clean energy is key to combating climate change, yet in the past five years, the energy transition has stagnated.

Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018 energy intensity improved by 1.2%, the slowest rate since 2010.

Effective policies, private-sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.

Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index, which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the world’s largest emitters, including US, China, India and Russia. The 10 countries that score the highest in terms of readiness account for only 2.6% of global annual emissions.

To future-proof the global energy system, the Forum’s Shaping the Future of Energy and Materials Platform is working on initiatives including, Systemic Efficiency, Innovation and Clean Energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.

Additionally, the Mission Possible Platform (MPP) is working to assemble public and private partners to further the industry transition to set heavy industry and mobility sectors on the pathway towards net-zero emissions. MPP is an initiative created by the World Economic Forum and the Energy Transitions Commission.

Is your organisation interested in working with the World Economic Forum? Find out more here.

The IEA has called for Russia to send more gas to Europe to help alleviate the crisis, with concerns being raised that Russian-controlled underground gas storage facilities in Europe are stocked lower than in previous years.

“Based on the available information, Russia is fulfilling its long-term contracts with European counterparts – but its exports to Europe are down from their 2019 level. The IEA believes that Russia could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season. This is also an opportunity for Russia to underscore its credentials as a reliable supplier to the European market,” the IEA said.

Global natural gas demand by region, 2008-2024
Forecasts predict a modest growth in gas production
Image: IEA

3. Prices are high and could go higher

There has been a 600% increase in European gas prices so far in 2021.

At one point in early October there was a 37% spike in UK wholesale gas prices in just 24 hours. Surging prices prompted a lobby group representing steel, chemical and fertilizer businesses to call on the UK government to provide help against spiralling costs.

The price of wholesale gas has caused several smaller energy providers in the UK market to collapse, and has halted production in some industries. The UK’s Secretary of State for Business, Energy and Industrial Strategy, Kwasi Kwarteng, said: "Our exposure to volatile global gas prices underscores the importance of our plan to build a strong, home-grown renewable energy sector to further reduce our reliance on fossil fuels."

Change in global energy prices.
Global energy prices are heading up
Image: Fortune/Bloomberg/Bank of America

4. Winter is coming – again

In the northern hemisphere the start of 2021 was punctuated by a series of very cold extreme weather events. Swathes of the US were affected by a polar vortex that brought snow, ice and freezing temperatures as far south as Texas.

Another very cold northern winter would put additional pressure on a gas system that is already stretched and struggling.

Responding to rising demand during cold weather won’t only be challenged by low gas stocks. Chartering ships to transport LNG around the world has been affected by a lack of shipping capacity, making responses to spikes in demand both difficult and expensive. “Daily spot LNG vessel charter rates have spiked above $100,000 in each of the last three northern hemisphere winters,” the IEA says. “And hit an all time high of well above $200,000 during the unexpected cold spell in northeast Asia in January 2021 – amid physical shortages of available shipping capacity.”

Winter land surface temperatures compared to the 20th century average.
Winters have been getting warmer on average – but extreme cold snaps are also present.
Image: NOAA

5. The energy transition: it’s complicated

Gas burns cleaner than oil or coal, and is used widely as a substitute for both in the production of electricity. Although it is playing a role in helping decarbonize electricity generation, gas is still a source of greenhouse gas (GHG) emissions.

The International Energy Agency (IEA) describes gas as: “A major source of emissions that needs to be reduced – especially in mature markets where much of the growth and substitution potential has already been tapped.”

Natural gas is predominantly made up of methane, which is a strong GHG. The US Energy Information Administration says that almost one-third of methane emissions are caused by “natural gas and petroleum systems and from abandoned oil and natural gas wells.”

Although the overall increase in global demand for gas between 2020 and 2024 is expected to be “rather modest”, the IEA says, it will be too high to meet key environmental objectives.

The IEA forecasts a 9% increase in annual gas demand between 2020 and 2024, significantly higher than the demand growth that would need to be maintained to stay in line with the target of net-zero emissions by 2070.

Decarbonizing the gas system will need to be a priority to hit net zero emissions targets by 2050, the IEA says, involving the widespread use of low-carbon gases: “This deployment must be supported by policies enacted in the short to medium term to prepare for such a massive transition for gas systems and industry. In this regard, policy makers should take into consideration new security of supply challenges that are likely to emerge in this transition.”