Soaring natural gas prices point to an energy shortage across the globe, from the United States to Europe and China. The crunch has the potential to turn into a crisis if not managed, and has already caused industrial and residential power outages, threatened economic growth and jeopardized climate goals.
Behind the surging prices are a prolonged underinvestment in production, a focus by producers on free cash flow and the impact of energy transition efforts.
Natural gas prices are rallying around the world, a stark contrast to the low-cost, abundant supplies of recent years. The Henry Hub natural gas spot price, a benchmark based on a delivery hub in Louisiana, closed at $5.03 per million BTU last Friday, a 47% increase from the same date in 2019.
Behind the surging prices are a prolonged underinvestment in production, a focus by producers on free cash flow and the impact of energy transition efforts.
Investors, burned by anemic returns amid low prices in recent years, have pressured producers to focus on improving their free cash flow. This has led to reduced capital spending, which in turn has curtailed production, even as prices have soared. Adding to the concern is the expectation for a cold winter and the lingering memories of the Texas power grid failure during the winter storm in February.
Beyond the United States
The problem extends beyond United States. Natural gas prices in Europe and Asia are surging as well, not only because of rising recovery-related demand coupled with supply constraints, but also because of unusually cold temperatures last winter that depleted storage.
In fact, gas stockpiles are 5% below pre-pandemic levels in the United States and 15% below average in Europe, according to Reuters. Supply chain issues are exacerbating the problem, with Russia slowing its delivery of gas to Europe, among other complications.
European natural gas prices have surged nearly 500% in the past year, according to Bloomberg. China has not been spared and is experiencing industrial and residential power shortages as the power crunch ripples through the economy.
Another major repercussion of high gas prices is the impact on climate goals. With high natural gas prices and concerns around wind output in the UK, the next step may be to turn to less environmentally friendly options to meet demand. As the shortages continue, keeping the lights on may begin to take priority over the energy transition agenda.
The takeaway
Outages that halt production will affect manufacturing globally as key suppliers will be slow or unable to deliver to their customers. We also expect industrial metals prices to continue to rise as production is disrupted by power outages.
This means that consumers, including middle market industrial companies, may experience supply chain shortages from China and a surge in prices of key components. Organizations reliant on international suppliers should be prepared to look to alternative sources.
Additionally, commodity price spikes mean that the cost of doing business will increase, creating budget constraints. Finally, it is important that organizations not lose sight of their climate change-related goals as they cope with rising prices.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
