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What Is Behind Soaring Energy Prices And What Happens Next

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In this commentary, we discuss the primary causes of the current price increases and their immediate effects.

Many fuel prices fell to their lowest levels in decades as a result of the historic drop in global energy consumption during the early months of the COVID-19 crisis last year. However, they have rebounded strongly since then, primarily as a result of a cold and prolonged winter in the Northern Hemisphere, a slower-than-anticipated increase in supply, and an exceptionally rapid global economic recovery (this year is on track for the fastest post-recession growth in 80 years).

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The largest increase in prices has been for natural gas, with benchmark prices in Europe and Asia last week surpassing all-time highs by approximately ten times. Since October 2020, US month-ahead natural gas prices have more than tripled, reaching their highest level since 2008. Coal power plants in China and India, the world’s two largest coal consumers, have very low stocks ahead of the winter season, and international coal prices are approximately five times higher than they were a year ago.

In important markets like the United States, Europe, and Asia, significant switching to the use of coal rather than natural gas to generate electricity has occurred as a result of sharp increases in natural gas prices. The expanded utilization of coal is thus is driving up CO2 discharges from power age around the world.

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