<figure><img src="https://superdesk-pro-c.s3.amazonaws.com/sd-nepalitimes/2022111413118/637230519c7e80680e0c255ejpeg.jpg" alt="" width="1360" height="680"/><figcaption>Photo credit: PROJECT SYNDICATE</figcaption></figure>Today’s energy crisis is potentially worse than similar previous ones – particularly the 1970s oil shocks.Consumers around the world are hit by high prices, businesses worried about energy supplies, political leaders and central bankers struggling with inflation, and countries confronting balance-of-payments pressures.In the 1970s, only oil was involved, whereas this crisis encompasses natural gas, coal, and food. In addition to stoking <a href="https://www.cnbc.com/2022/06/10/consumer-price-index-may-2022.html">inflation</a>, today’s crisis is transforming a previously global market into one that is fragmented and more vulnerable to disruption, crimping economic growth. And, together with the geopolitical crisis arising from the war in Ukraine, it is further deepening the world’s great-power rivalries.This crisis did not begin with Russia’s invasion of Ukraine, but started last year when <a href="https://www.iea.org/news/surging-electricity-demand-is-putting-power-systems-under-strain-around-the-world">energy demand</a> surged as the world emerged from the Covid-19 pandemic. That is when China <a href="https://www.bloomberg.com/news/articles/2021-09-28/china-s-coal-shortage-means-higher-prices-for-the-whole-world">ran short</a> of coal and prices shot up. The global market for liquefied natural gas (LNG) then tightened, with prices <a href="https://www.mckinsey.com/industries/oil-and-gas/our-insights/petroleum-blog/reflecting-on-2021-global-lng-and-european-pipeline-flows">skyrocketing</a>, and <a href="https://oilprice.com/oil-price-charts/">oil prices</a> rose as well.Normally, with rising energy prices, a country like Russia would have increased its natural-gas sales to its main customer, Europe, above the minimum contracted volumes.Instead, it stuck to its contracts, even though it could have produced considerably more. At the time, it appeared that Russia was trying to force prices up. But, instead, the Kremlin was preparing for war.Because Europe <a href="https://www.reuters.com/business/energy/why-russia-drives-european-gas-prices-2022-01-21/">depended</a> on Russia for 35-40% of its oil and natural gas, Putin assumed that the Europeans would protest the invasion, but ultimately stand aside. Fixated on his self-appointed mission of <a href="https://edition.cnn.com/2022/06/10/europe/russia-putin-empire-restoration-endgame-intl-cmd/index.html">restoring</a> what he views as Russia’s historic empire, he did not anticipate how they would respond to an unprovoked war next door.Looking ahead, five factors could make today’s energy crisis even worse. First, Putin has opened a second front in the conflict by <a href="https://www.bloomberg.com/news/articles/2022-05-31/russia-to-cut-gas-exports-to-shell-orsted-over-rubles-dispute">cutting back</a> on the contracted volumes of natural gas that Russia supplies to Europe. The goal is to prevent Europeans from <a href="https://www.euronews.com/my-europe/2022/05/19/historic-day-as-eu-sets-mandatory-gas-storage-level-for-winter-supplies">storing enough supplies</a> for next winter, and to drive prices higher, creating economic hardship and political discord.In his <a href="http://en.kremlin.ru/events/president/news/68669">speech</a> in June at the St. Petersburg International Economic Forum, Putin made his reasoning clear: “Social and economic problems worsening in Europe” will “split their societies” and “inevitably lead to populism … and a change of the elites in the short term.”As it is, Germany is now anticipating the need for gas rationing, and Minister for Economic Affairs Robert Habeck, <a href="https://www.businessinsider.com/germany-says-energy-crisis-may-trigger-lehman-like-contagion-2022-6">warns</a> of a “Lehman-style contagion” (referring to the 2008 financial crisis) if Europe cannot manage today’s energy-induced economic disruptions.Second, a new or revived nuclear deal with Iran is <a href="https://www.reuters.com/world/french-source-pessimistic-us-iran-can-quickly-resolve-nuclear-deal-differences-2022-05-12/">unlikely</a>. Thus, sanctions on the country will not be lifted – and that means Iranian oil will not be flowing into world markets anytime soon.Third, although Saudi Arabia may step up its oil production to help stabilise oil markets after US President Joe Biden’s visit, no gusher is likely to follow, because there does not appear to be a large amount of <a href="https://www.cnbc.com/2022/06/03/oil-markets-opec-has-limited-spare-capacity-russia-is-less-relevant.html">extra oil</a> in Saudi Arabia (or in the United Arab Emirates) that can be produced on short notice.Meanwhile, many other oil-exporting countries cannot even return to their <a href="https://qz.com/2115735/opec-countries-are-producing-less-oil-than-they-said-they-would/">previous levels of production</a>, owing to a lack of investment and maintenance since the pandemic.Fourth, <a href="https://www.aa.com.tr/en/energy/oil/oil-up-despite-low-china-demand-over-covid-19-lockdowns/35208">China’s demand for oil</a> has been significantly reduced by its “zero-Covid” lockdowns, which have sharply curtailed economic activity. But if it lifts many restrictions, a big increase in oil consumption and demand will follow.Lastly, however tight the market for crude oil, there is even more tightness in the <a href="https://www.vortexa.com/insights/products/global-refining-industry-struggles-to-stem-growing-market-tightness/">refining sector</a> that produces the gasoline, diesel, and jet fuel that people actually use. This has developed into a complex, highly interconnected worldwide system. Russia was refining products that it was shipping to Europe, while Europe was sending gasoline that it did not need to the US East Coast, and so forth.In some places, the system is going all out, with US refineries already operating at about <a href="https://www.marketplace.org/2022/05/23/u-s-oil-refiners-margins-smash-records-but-few-plan-to-build-more-plants/">95% capacity</a>. But the system overall still cannot keep up with demand. Russian refineries are functioning <a href="https://www.reuters.com/business/energy/russian-oil-refiners-signal-deeper-cuts-refinery-runs-amid-overstocking-2022-03-31/">only partly</a>, depriving Europe of oil products; and not enough European gasoline is reaching North America.Chinese refineries are operating at less than <a href="https://www.bloomberg.com/news/articles/2022-06-19/massive-oil-refining-capacity-idle-in-china-even-as-prices-soar">70%</a> capacity. Some four million barrels per day of refining capacity have been <a href="https://www.reuters.com/markets/commodities/why-is-there-worldwide-oil-refining-crunch-2022-06-22/">shut down worldwide</a>, owing to the pandemic, new regulations, and challenging economics. Add in the risk of accidents, poor policy decisions, and a hurricane knocking out refineries on the US Gulf Coast, and the situation could get even worse.That said, a few countries could still boost production. Canada – the world’s <a href="https://www.aljazeera.com/news/2022/3/24/canada-to-increase-oil-gas-exports-amid-push-to-displace-russia">fourth-largest oil producer</a>, after the US, Saudi Arabia, and Russia – could provide extra barrels in collaboration with its major market, the US.And US shale oil production is back in gear and could add 800,000 to <a href="https://www.bloomberg.com/news/articles/2022-02-04/shale-seen-adding-a-million-barrels-a-day-is-back-to-booming">one million barrels</a> per day of new production this year – far more additional production than the rest of the world combined.Other factors that could mitigate the crisis include price changes and how consumers respond. In May, US gasoline <a href="https://www.bloomberg.com/news/articles/2022-05-25/us-drivers-begin-to-balk-at-record-gas-prices-stifling-demand">demand</a> was 7% less than in May 2019, before the pandemic. Some of that, however, may be the result of more people working from home.An economic slowdown could also dampen prices. S&amp;P’s latest global <a href="https://www.pmi.spglobal.com/Public/Home/PressRelease/bafed008810e4de0814abc612ca32706">purchasing managers’ index</a> points to a weakening of economic growth, with US manufacturing activity “slipping into a decline … to a degree only exceeded twice” – at the height of the pandemic lockdown and during the 2008 financial crisis.Likewise, European growth has <a href="https://www.reuters.com/markets/europe/euro-zone-business-growth-slowed-sharply-june-pmi-2022-07-05/">slowed</a> sharply to a 16-month low. Such slowdowns could reduce demand and lower energy prices. But, of course, they also will strain the Western alliance.The next six months will be critical, testing whether Europe can maneuver its way through the coming winter. In what Habeck <a href="https://news.sky.com/story/bitter-but-necessary-germany-turns-to-coal-to-replace-russian-gas-12636775">called</a> a “bitter” but “necessary” decision, Europe will need to burn more coal.In the difficult months ahead, there will need to be more informed collaboration between government and industry that manages the energy flows on which modern economies depend.© <a href="https://www.project-syndicate.org/">Project Syndicate</a>Daniel Yergin, Vice Chairman of S&amp;P Global, is the author of <a href="https://www.penguin.co.uk/books/320756/the-new-map-by-yergin-daniel/9780141994635">The New Map: Energy, Climate, and the Clash of Nations</a> (Penguin, 2021) and <a href="https://www.simonandschuster.com/books/The-Prize/Daniel-Yergin/9781439110126">The Prize: The Epic Quest for Oil, Money, and Power</a>, for which he won the Pulitzer Prize.Read more: <a href="https://www.nepalitimes.com/banner/fueling-nepals-economic-crisis/">Fueling Nepal’s economic crisis</a>, Sonia Awale

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5 reasons the energy crisis could deepen

<figure><img src="https://superdesk-pro-c.s3.amazonaws.com/sd-nepalitimes/2022111413114/63722ef39c7e80680e0c24edjpeg.jpg" alt="" width="1280" height="852"/><figcaption>Photo: NEPALI TIMES ARCHIVE</figcaption></figure>Prime Minister Sher Bahadur Deuba was forced to sack Janardan Sharma this week, but only after his finance minister became a political liability because of sinking neck-deep in scandals.Instead of trying to resolve Nepal’s growing economic crisis, Sharma inducted yes-men with no finance background into the ministry, and ousted the Rastra Bank governor for blocking a money-laundering scam. He then involved an unauthorised ‘expert’ at a late-night budget drafting meeting to change tax rates, and later alleged deleted CCTV footage implicating him.Much of the credit for exposing Janardan Sharma goes to Nepal’s mainstream media which investigated his wrongdoings, as well as exposing corporate houses including the Chaudhary Group, Shanker Group, Saurabh Group and Jagadamba that stood to benefit directly from Sharma’s tax rebates.Deuba coddled his finance minister till the end despite growing criticism from within his Nepali Congress, as well as pressure from Sharma’s Maoist Centre party. All this meant that the prime minister and his finance minister took their eyes off the ball as Nepal’s economy started going into free-fall.This week Sri Lanka declared it did not have cash to import any more fuel, and officially declared bankruptcy. Nepal’s officials have said the country is not in the same debt trap, but there are many indications that the crisis is deepening.The clearest yet was Nepal Oil Corporation (NOC) asking the government this week to implement 10 austerity measures to reduce petroleum consumption, including by reimposing the two-day weekend, odd-even traffic rule, quota at filling stations, discouraging vehicle use, car pooling, and a ban on import of petrol and diesel vehicles.<figure><img src="https://superdesk-pro-c.s3.amazonaws.com/sd-nepalitimes/2022111413114/63722ef69c7e80680e0c24eejpeg.jpg" alt="" width="800" height="565"></figure>Illustration: RABINDRALast week, the government reduced the tax on petroleum imports to reduce petroleum prices, but the NOC warned of “dire consequences” because it was running out of money.“Reducing gas prices by reducing taxes was absolutely of no use in the long run. They could have instead used tax money to promote and invest in sustainable measures,” says climate negotiator Manjeet Dhakal.He adds: “By reducing the tax the government is essentially abusing democracy by claiming to reduce the burden to the people in the guise of improving its chances in elections.”It is because of such short-sightedness that Nepal’s economy was in trouble long before Covid and Ukraine. The banking sector had a liquidity crisis because it had over-extended loans to real estate speculators. Stagnant overseas remittance, falling exports and a jump in imports had led to a growing trade deficit, and depleted foreign exchange reserves.However, some experts still believe that Nepal’s macroeconomic picture is sound, a healthy monsoon so far could mean a good rice harvest, and the INR-NPR peg cushions Nepal from the worst impact of the global crisis.They also say the fuel crisis provides Nepal with the perfect opportunity to accelerate the shift away from fossil fuels in transport, industry and households. Nepal needs to wean itself off petroleum not just to reduce its per capita carbon footprint, but to cut consumption of fossil fuels which now make up 20% of the total import bill.<figure><img src="https://superdesk-pro-c.s3.amazonaws.com/sd-nepalitimes/2022111413114/63722ef89c7e80680e0c24efjpeg.jpg" alt="" width="1150" height="1488"></figure>In the last nine months, Nepal spent Rs218 billion importing petroleum products, which is 82% higher compared to the same period last year. This is nearly 20% of the country’s total imports, and is worth nearly double the income from all exports.Switching to electric public transport and battery vehicles to reduce the petroleum import bill by just 10% would save the county at least Rs21 billion a year.However, from July-December 2021, Bagmati Province alone saw the registration of 81,227 new vehicles, 75,573 of which were motorcycles and scooters. If they had been electric two-wheelers, fuel costs would have been reduced.“At this rate, we maybe fast approaching the fate of Sri Lanka and the only way ahead is maximising the use of domestically generated electricity primarily in the transport sector,” says Bhushan Tuladhar, board member of Sajha Yatayat which is starting electric buses in Kathmandu starting this week.“We have policies in place, but crucial details are missing such as how to incentivise electric buses, dedicated charging stations and coordinated management of public transport,” Tuladhar adds.Electric mass transit has long been identified as a cost-effective solution, and the government needs to facilitate loans for electric buses which are about five times more expensive than diesel ones, or subsidise them so that the private sector can invest in them.Industry experts are reworking Nepal’s Nationally Determined Contribution target submitted to the UNFCCC (Framework Convention on Climate Change) in 2021 with a particular focus on electric public transport.<figure><img src="https://superdesk-pro-c.s3.amazonaws.com/sd-nepalitimes/2022111413114/63722efb9c7e80680e0c24f0jpeg.jpg" alt="" width="3214" height="2143"></figure>Photo: AMIT MACHAMASI/NEPALI TIMESThey have proposed an increase in sales of electric public transport to 60% by 2030, reduction in custom and excise duties for electric buses, grants and soft loans to procure them, and ensuring at least three provinces operate electric public transport by 2025.The other low-hanging fruit is a shift from LPG to electricity in households and restaurants, but transmission lines and distribution need to be upgraded so the grid can handle the load.In the Tarai, electric rickshaws are becoming popular, and municipal biodegradable garbage and crop residue can all be turned into compost to reduce imports of chemical fertiliser.All of this will also help Nepal meet its global climate targets set at Glasgow during the COP26 last year to achieve net-zero by 2040, and 45% forest cover by 2030.Nepal therefore needs to do its bit to reduce its petroleum imports to save both the economy and ecology. But that needs political will, which is sorely lacking during this election year.Says Bhushan Tuladhar: “If we don’t act even now, it will be too late. We need to work on energy, economy and environment simultaneously by involving both the government and the private sector.”Read more: <a href="https://www.nepalitimes.com/latest/sky-high-fuel-price-hits-nepals-tourism-airlines/">Sky high fuel price hits Nepal’s tourism</a>, airlines, Nepali Times

fuel-crisis

5 reasons the energy crisis could deepen

Fueling Nepal’s economic crisis