By Ian Verrender
There are likely to be some awkward moments when world leaders gather in Glasgow in a fortnight for what could be the most important powwow for the future of the planet.
And the ire won’t all be focused on Prime Minister Scott Morrison who, after months of dithering over an emissions target and whether to actually attend, late on Friday finally agreed to front his contemporaries.
For at a time when even arch rivals can agree on just one issue — reducing our reliance on fossil fuels and coal in particular — demand for the dirty, black energy source is soaring and consumption is roaring back to life.
In what must be the ultimate irony, given US President Joe Biden is leading the push for lower carbon emissions and to remove coal from electricity generation, American power plants are on track to burn 23 per cent more coal than last year.
According to Bloomberg data, it’s the first rise in eight years.
It’s a feat his predecessor Donald Trump couldn’t deliver on. Despite years of promises and pledges to return coal to its former glory, Mr Trump presided over a 36 per cent decline in coal-fired electricity generation.
Coal has never been hotter. Prices are at record levels. And demand for its fossil fuel companions, liquified natural gas and oil, is soaring.
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The talk has gone well beyond mere mentions of a boom. From New York and London to Bahrain and Bermuda, the great fear is that the globe is in the early stages of a full-blown energy crisis.
The signs are everywhere, with large-scale blackouts across China, motorists queuing for fuel through Europe and everyone paying through the nose for basic goods and services.
The reasons for this unusual and unexpected spike are many and varied. Some relate to climate change and extreme weather, others to government actions and subterfuge. And then there are the investment shifts that have taken place in the past decade as cash has flowed out of fossil fuels and into renewables.
The crisis, if it really is one, is likely to have two effects. It will deliver ammunition to those wishing to slow the pace of climate change reforms. And it could reignite a long-forgotten economic phenomenon: the dreaded return of stagflation.
What has caused this?
Where to start?
First, the extreme weather. Last year’s northern hemisphere winter was long and harsh, followed by an unusually hot summer. That drove up demand for energy, and particularly gas.
But it occurred at a time when the global economy was tanking as the first and second waves of COVID-19 infections swamped hospital systems and fuel production was curtailed as activity ground to a halt.
More recently, Hurricane Ida swept wreaked havoc in the Gulf of Mexico, disrupting up to 95 per cent of the region’s oil and gas production.
Then there’s the politics.
China’s ban on Australian coal was an own goal of stupendous proportions. Bureaucrats, even those in a command economy like China, might easily believe that coal is a generic product. But it isn’t. Australian coal is extremely high in energy and excluding it from the mix has been a major cause of blackouts and energy shortages across the country since January.
Beijing desperately tried to fill the breach with imports from Indonesia, Russia and Mongolia, but supply bottlenecks have left inventories at a 10-year low. That’s sent coal prices soaring
With winter approaching, the situation increasingly is becoming chaotic, so much so that a fortnight ago Chinese authorities were forced to release Australian coal held in bond.
In addition, Beijing has ordered industry to reduce carbon emissions. As a result, there has been a grab for liquified natural gas from Russia, which partly explains the shortages in Europe.
Just as we witnessed with our very own toilet paper crisis last year, whenever the prospect of shortages looms, buyers start behaving irrationally. Right now, China is attempting to secure LNG and any form of energy “at any cost” as other buyers begin hoarding supplies.
Lastly, investment has been ramping up in renewables for the best part of a decade and flowing out of coal, oil and, to a lesser extent, gas.
Regardless of what politicians think and say, investors and even energy businesses have seen the future and put their money where they can earn a return. Who would want to invest billions of dollars in something that may not be saleable in a decade’s time?
What is stagflation and how do you fix it?
We haven’t seen anything like this since the 1970s, when oil-producing nations led by Saudi Arabia formed themselves into a cartel and jacked up the price of fuel.
It led to what is known as stagflation. That’s when inflation takes off in a period when economic growth is slowing. Soaring fuel prices added to the cost of pretty much everything. But they also acted as a tax, as everyone was forced to spend more on necessities.
Normally, inflation begins to gallop as the economy builds up a head of steam and demand begins to outstrip supply. That’s when there’s too much money chasing goods and services.
There’s an easy fix to that. Central banks slow down the creation of cash by raising interest rates. And governments can cut spending.
But with stagflation, there’s no easy solution. Raise rates and you’ll choke growth altogether. And given the price rises are being generated by something other than excess demand, higher rates may not fix the problem anyway.
Until just a few months ago, central banks globally were insisting that the cost pressures being felt across the globe were temporary. Demand from last year’s terrible recession, they argued, recovered much faster than supply. Everything would return to normal next year and rate hikes were off the table for years.
Now they’re not so sure.
China in the crosshairs
China is a big part of the problem. Since the global financial crisis, its phenomenal growth and its huge stimulus programs have kept the global economy forging ahead. As it became the world’s factory, producing vast amounts of manufactured goods, it also kept prices down.
That’s now come to a grinding halt. China’s overblown property market is teetering, threatening a serious financial crisis and credit squeeze. Chinese real estate group Evergrande’s slow implosion is now spreading through the entire mainland property sector.
That’s hit just as the country may be forced to drastically wind back its industrial production.
According to Citigroup, the coal and power crunch is likely to persist through the northern hemisphere winter, forcing the government to order at least a 12 per cent cut in industrial power use in the next few months. If the winter is particularly harsh, the cuts could be greater just to ensure there’s enough fuel for basic heating.
“This would increase stagflation risks and growth pressures on the Chinese and global economy over the coming winter [and] push energy prices higher,” it told clients last week.
If that happens, it warns, there will be “large-scale curtailments” in industries that use commodities like iron ore.
Growth is slowing, but prices are rising
A broad slowdown in China will hit global growth. So, the economy is getting worse, as evidenced in recent weeks in everything from downgrades to corporate earnings to surveys from the International Monetary Fund (IMF).
In its latest assessment of the global economy, released early this month, the IMF notes that the recovery has weakened and uncertainty has increased.
Much of the study was completed before the sudden surge in energy prices when the biggest concern was supply disruptions and soaring shipping costs.
Right now, there is furious debate about how to deal with this. Money markets again are convinced central banks will be forced to raise interest rates much sooner than expected.
But that could spell disaster. As government debt has soared with pandemic support and developed world household debt shooting for the Moon as property values escalate, central banks may well find they have their hands tied. There’s no point raising interest rates if everyone is going to be bankrupted.
As for the 1970s fix — selling off government businesses and deregulating everything you can — that ship has sailed. There’s nothing much more to sell. And wages have been depressed for so long, it has become a problem in itself. There’s little room to cut them further.
About the only thing to hope for is that the energy situation sorts itself out sooner rather than later and that Glasgow comes up with a workable solution for an orderly transition to renewables.
*Ian Verrender is the ABC’s Business Editor. A journalist for more than 30 years, Verrender began working in print in 1981 as assistant economist for Rural Press and later freelanced for The Bulletin before moving to AAP-Reuters.
*This article first appeared on the abc.net.au website