Global natural gas prices have climbed to record highs amid soaring demand fueled by the reopening of the economy and tight supplies.
As power outages halt manufacturing and threaten climate commitments, businesses and consumers should brace themselves for a difficult winter.
For middle market businesses, diversification is key to weathering the challenging times.
Middle market firms should anticipate higher energy prices lasting into next year. Not only will import prices rise, but shortages will intensify in the wake of the energy crisis plaguing China’s economy.
But as challenging as this winter will be, the price hike will be temporary. The crunch will be alleviated by gas companies ramping up production and countries turning to alternative energy sources.
It’s all part of what will continue to be a long and bumpy economic recovery from the pandemic. For middle market businesses, diversification is key to weathering the challenging times.
The Canada question
While sky-high gas prices are indeed a global issue, the energy supply in Canada, unlike Europe and China, remains healthy. Middle market firms in Canada should embrace the home advantage and look for domestic suppliers to avoid the shortage in inventory.
Investment in energy-efficient infrastructure and productivity-enhancing technologies will also help ease the power bills this winter.
While these investments might seem costly at first, companies will reap the returns on investment in technology and efficiency boosters for years to come. Businesses that are more energy-efficient, and those that have access to a diverse portfolio of energy sources and domestic suppliers will feel less of the shock.
In the long run, diversification toward alternative energy sources will provide middle market businesses with a buffer against future gas price shocks.
An energy crisis going global
The gas price shock began in Europe and quickly spread throughout the world. In Europe, natural gas prices have been climbing since the beginning of September, eventually climbing seven-fold over what they were a year ago.
At the same time, in China, an unprecedented energy shortage has led to nationwide blackouts and forced factory shutdowns. At an emergency meeting recently, the central government ordered state-owned energy companies to secure supplies, Bloomberg reported.
Canada, by contrast, is in a relatively good position, thanks to its healthy natural gas reserves. While Canadian natural gas producers will benefit from the highest gas prices since 2014, middle market firms will still feel the pinch in their power bills.
How we got here
The seeds of this energy shock can be traced to the beginning of the pandemic, when suppliers, nervous about being stuck with too much production, cut back on drilling and reduced inventories.
But the reopening of the world’s economies has led to an unexpectedly high demand for energy. This is essentially the same story as the global supply chain issue that has caused shortages in consumer goods, construction materials and everything in between for much of the year.
Adding to the squeeze, countries like China are phasing out of coal toward natural gas, which has only pushed demand higher. Taken together, a perfect storm has formed in the energy sector.
If anything, this crunch highlights the global economy’s continued dependence on fossil fuels, which make up more than 80% of energy consumption. A quarter of that consumption comes from natural gas, which has shown the biggest increase among fossil fuels, rising by 500% since 1965 as countries transition away from coal.
Natural gas plays an even a bigger role in Canada, accounting for 30% of the country’s total consumption.
What’s next?
Prices will continue to increase as demand for heating rises in the winter. This is good news for the energy sector in Canada, which makes up almost 10% of Canada’s gross domestic product.
But higher gas prices mean challenging times ahead for middle market businesses that are energy-intensive like those in manufacturing or agriculture. In addition, if the energy crisis in China continues, prices of imports will rise even more, intensifying the global supply issue.
Consumers will also be hurt by the increase, especially as working-from-home and COVID restrictions translate into higher energy usage, which might lead to reduced consumption in other goods and services as households tighten their budgets.
In China, there are discussions on securing coal from Russia, Mongolia and Indonesia to fuel the economy. Europe, despite being at the forefront of climate commitments, is now feeling the hit when gas from Russia does not flow.
Even though the transition from fossil fuels is rockier than anticipated, it is more important than ever to have a long-term plan to diversify and weather future shocks.
The takeaway
Natural gas prices will stay high for the rest of the year, the effects cascading throughout the economy. Consumers and businesses will face hefty energy bills.
Middle market businesses should prepare for this increase in their expenses and invest in alternative energy sources and energy-saving technologies.
Businesses that are ahead of the energy curve will see their investments pay off. In the long run, climate-resilient investments like those in alternative energy sources will provide protection against gas price volatility.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
