Six defining questions of the energy crisis

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Welcome to another Energy Source. I’m back from a stint reporting on Russia’s war in Ukraine — and back on the energy crisis beat. There’s lots of news.

In oil, petrol prices remain historically high, reports Myles, but have come down a bit, offering temporary relief to a White House that remains fixated on trying to curb rampant economic inflation. But crude is up again, with Brent now back above $100 a barrel, despite the Biden-MBS detente over the weekend.

In Europe, meanwhile, the crisis is deepening. Brussels has told EU countries to cut gas consumption “immediately”. German companies are preparing for the worst.

My column today is about how this energy crisis will unfold. It’s not just a question of Europe’s exposure to Russian energy risks. It’s also about the other big themes — from climate to Opec’s true supply capacity to the threat of imminent recession — that are coming to a boil. They will shape the energy world, in ways that are still hard to predict.

Amanda’s Data Drill is on crypto and power prices. The scam is still making money for some people, provided they can get electricity cheaply enough to waste it on mining new digital coins. Don’t @ me.


When it rains it pours . . .

In the spring of 2008, I was in Somalia reporting on pirates threatening ships sailing through the Gulf of Aden — another factor pushing crude prices towards their historic peak. In Bosaso, I read a news story about a bank called Bear Stearns running into trouble. Wall Street shenanigans and subprime mortgages felt distant from the Horn of Africa. But eight months later, oil markets had begun to collapse.

During global energy crises, everything is related — and everything seems to happen at once. In 2008, relentless turmoil in oil producing countries, from Nigeria to Iraq, was coupled with unstoppable demand growth in China. It was a time of mounting climate anxiety and speculation about peak oil supply. Looking back, the crash seemed inevitable. Then came the US financial meltdown. Oil prices were submerged alongside the American economy. The rest of us were sucked down too.

Not to be too alarmist, but the news flow this year feels similarly portentous. Big stuff is suddenly happening all at once. Is another historic inflection point in energy upon us? Consider my list of questions below. The answers — all due this year — have the potential to reshape global energy. Let me know what I missed.

1. Will Europe’s heatwave change anything?

Tell me as often as you want that weather isn’t related to climate. But please — 40C in London? Wildfires across southern France and Spain? Policymakers are doing their best to ignore their climate promises. But at some point, a breaking point in public perceptions is inevitable. Maybe it’s when rich northern Europeans’ summer holidays become intolerable.

2. Has Manchin killed Biden’s climate plan?

The irony is that it is happening just as Joe Manchin, the Democratic senator from West Virginia, delivers what may be the death blow to Joe Biden’s sweeping clean energy revolution. Let’s be frank: the Biden administration was more fixated in recent months on making petrol cheaper than the climate cleaner. But as long as Build Back Better limped on, America had a chance of meeting its climate targets. Biden will try to use executive orders to do the job. But the legislative route is closing fast.

3. Will Europe cope with a Kremlin-induced energy crisis?

Europe’s hot summer may give way to a brutally cold winter. We’ll know this week if Russia is going to reopen the Nord Stream 1 gas pipeline to Germany. But Gazprom has already declared force majeure on some shipments. The EU said it wanted to wean itself off Russian energy — Vladimir Putin is about to do the job on his terms. The big question isn’t whether this will hurt Europe. It will: rationing and economic recession are on the cards. The issue is whether European politicians have the political will to push through the pain barrier, continue supporting Ukraine, and stick with their clean energy plans. A reversion to coal would damage EU credibility on climate for years.

4. Is the west about to cave on Russian oil?

This is hardly a moment of Churchillian leadership on energy and foreign policy. A few months ago, the world was going to stop using Russian energy to deny Putin the money to wage war in Ukraine. But as my colleague Martin Sandbu explained last week, the US is trying to water down an EU ban on insuring vessels carrying Russian oil. Its method is a price cap that almost all oil analysts have roundly rubbished as being unworkable and easily abused. Are western countries serious about halting Russian oil income or not? “You can either bring Russian revenues down or bring inflation down and avoid a recession,” said Amrita Sen, chief oil analyst at Energy Aspects. “You can’t do both.” Russia earned about $1bn a day in fossil fuel export revenue during the first 100 days of its war. Let’s see how much it’s earning by the end of the year.

5. Can Opec pump more oil?

Biden said after his fist-bump with Saudi Crown Prince Mohammed bin Salman on Friday that the kingdom would take “further steps” to bring down oil prices. Saudi officials seemed less certain. Either way, Opec’s own analysts think the world will need another 900,000 barrels a day of oil next year from a group that is already struggling to meet its own production quotas. Saudi Arabia and the UAE can add more supply. Can others? Betting against Opec supply has always been a fool’s game. But the market is starting to get worried.

6. What will the recession do?

But maybe we won’t need all that energy anyway, given that a global recession now looks unavoidable, according to Robert Armstrong, author of the Unhedged newsletter, who sits opposite me in the FT’s New York office. (You should read it, he says.) It seems hard to believe that inflation could run at more than 9 per cent and the Federal Reserve be talking of a 100 basis-point interest rate rise without some collateral damage to the economy. Falling gasoline demand in the US may be a leading indicator. A recession would be painful, especially for the poor. But by driving down demand for fossil fuels, it would also cut emissions, cut prices, and cut Putin’s income. Let’s see.

Data Drill

Texas remains an attractive spot for cryptocurrency miners as crashing prices and soaring electricity costs bite into digital asset earnings across the globe.

According to data from S&P Global Commodity Insights, German cryptocurrency miners lost $90.02 per megawatt hour of electricity used for crypto mining on July 17, while Texas miners made a profit of $85.94 per MWh.

The nascent cryptocurrency market is in the middle of one of its worst crashes, having lost $2tn in market capitalisation since last year.

While Texas operators have been largely shielded from the crash, record heat and electricity demand have raised concerns over whether the state’s tight power grid has the capacity to accommodate crypto’s massive electricity footprint.

“This is really kind of the first interplay between tight grid conditions and cryptomining that we’ve seen in Texas,” said Joshua Rhodes, a researcher at University of Texas at Austin.

The state emerged as a global crypto hub last year after China banned mining and sent operators scrambling for places with cheap electricity and lean regulation.

Last week, the Electric Reliability Council of Texas asked the state’s businesses, including cryptominers, to voluntarily conserve power to avoid rolling blackouts.

Texas has recorded multiple records for electricity demand this summer. Wholesale natural gas prices, a crucial driver for electricity prices, are averaging five times higher than last July, according to Ercot.

“The coming week is probably going to be worse than last week. We could be in for an even harder test of the system this week,” Rhodes said. (Amanda Chu)

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Line chart of Earnings per megawatt of power used for mining ($/MWh) showing Texas Bitcoin miners continue to profit as high electricity prices hurt Germany's operators

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Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.

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