Looking Beyond European Energy Crisis

Dr. Hiranmoy Roy Dec 14, 2022

Nearly 60 per cent of the Indian population is expected to join the ranks of the middle class in the next 20 years as per a study by a research think tank PRICE (People Research on India’s Consumer Economy). Which is much more than the entire population of the United States and other economically developed nations combined. Private consumption in India is almost 60 per cent of the gross domestic product (GDP), and the same consumption growth has accounted for 70 per cent of Indian growth since 2000. The Indian middle class has a big role to play in the said growth pattern due to its size. However, the current global energy crisis could play a spoilsport not only in India but could also lead to global repercussions. A slump in consumption by the Indian middle class and weaker exports of raw materials to international markets due to higher energy costs could lead to disruption in the international supply chain as well. The middle class in Africa is simultaneously expanding exponentially. Any steep inflation in energy costs may considerably impact the consumer demands in these regions and therefore affecting the global market and resultant global economy. Therefore, it would not be wrong to assume that the future of the world economy is hanging in balance over the Indian and African middle classes, their consumption pattern and inflation in energy costs.

Global Energy Crisis

Faith Birol, the executive director of the International Energy Agency (IEA) has predicted very recently the tightening of the LNG market in 2023 due to increased demand from China and rising imports of LNG to Europe amid the Ukraine crisis. Recently a decision taken by OPEC + countries to cut 2 million barrels of oil per day (bpd) of output is a risky decision due to rising global prices of oil, natural gas, and coal hitting consumers as they are facing rising food and services inflation. The rise in the oil price usually leads to a rise in transportation costs of food and many other essential goods thereby distressing inflation. Currently, European consumers will be the worst affected now as they are preparing to enter winter. As per a recent report by the Economist, there could be a loss of extra 1,47,0000 lives in Europe if energy costs are further hiked.

The Cause

The current energy crisis has a root in the covid pandemic. During the pandemic phase, there was a considerably low demand for transportation oil so the oil producers cut down on production. After the pandemic and just before the Ukraine war, demand recovered very quickly than supply leading to a supply shortage. The European energy crisis for gas is rooted in European countries’ dependence on Russian natural gas as a part of their energy transition to phase out coal and bring in more renewables. Ukraine’s war has further worsened the situation. Russian gas had a dominant role in Europe’s energy system due to a decrease in Europe’s indigenous natural gas production.

The Effect

Due to the present energy crisis, energy costs in India are rising and if this trend continues then it will hit hard Indian consumers. The government will also not be able to provide further energy subsidies due to budget constraints. Since India is a net energy importing country, payments for energy imports will further rise thereby reducing India’s foreign exchange. Other important ramifications of rising energy prices will accelerate the Consumers Price Index (CPI) based inflation and rise the overall cost of living including transportation fares. The hardest hit to the lower-income groups will be the rising LPG price. Moreover, this crisis will also hamper India’s Intended Nationally Determined (INDCs) Commitments to reduce CO2 emissions.

As per the International Energy Agency (IEA) report – 2022, demand for energy services in Africa is set to grow rapidly; therefore, maintaining affordability remains an urgent priority. Africa has one of the world’s lowest levels of per capita energy use. As Africa’s population and incomes grow, the demand for modern energy increases one third between 2022 and 2030 in the Sustainable Africa Scenario (SAS). However, under existing subsidy schemes, current price spikes increase the risk of doubling energy subsidy burdens in African countries - an unsustainable outcome for many African countries facing debt burden. Some countries, including Egypt, Ethiopia and Uganda, are being driven to reduce subsidies or to restore fuel taxes due to growing financial burdens. Thus, international support must play a role in the near term to manage prices, but better targeting of subsidies to the households in dire need is also essential.

The price signal for energy is a very powerful way to influence demand for energy. However, there are affordability issues in different parts of the world especially developing and poorer countries, as the purchasing power of the masses in such countries is much lower than in developed nations. Though Europe is in the highlight because they are facing gas shortages due to supply cuts from Russia, the developing world is also not in a very comfortable position as far as the supply of energy is concerned. Current higher fuel prices are unaffordable for lower-income countries. It is also very difficult on the part of the Governments in developing countries to subsidize energy for large parts of their populations. Thus, there are resultant mass protests. We have already seen large-scale protests against inflation in Argentina, Ecuador, Sri Lanka and India and if this continues then there may be more unrest. The energy crisis will slow the low-carbon energy transition in developing countries and many countries may again require to ramp up thermal power generation. Most importantly, every form of energy is expensive and this leaves poorer countries in a very difficult situation.

Political Equations

There are new alliances formed towards the energy market while others are alienated. Thus, the energy market is fragmented now and it is less secure for all. As we move forward toward the energy transition, there is already an emphasis on reducing the demand for fossil fuels. This is also because the Russian supply of energy is seen as politically governed and thus not market-reliable hence, there is an urgent call for a reduction in energy dependence on Russia. Such a move will certainly affect Russia, as its economy is highly dependent on energy exports thus furthering global political escalations.

There is a very clear message for the nations that if their economy and energy systems are less dependent on fossil fuels, they will be able to address such energy scarcity from importing sources. Thus, there are three important contexts in this energy crisis – energy security, energy transition and low-carbon energy system. One needs to optimize the low-carbon energy system keeping in mind the requirement of energy security and energy transition. The same would certainly govern the near future of global politics.

The Road Ahead

Since the energy transition to alternatives will take some time, countries like India and African nations must continue with the traditional energy systems currently available i.e. go back to coal-based power generation and use gas for other uses. This is needed to save the growth rate of the middle class in the developing economies of India and African countries, which will further stabilize consumption patterns and the global economy. Therefore, emissions may go up due to the increased use of coal however to keep the economy functioning, it is needed now.

At present energy prices are at a 14-year high, so Europe might be lurking into a tense winter ahead however energy costs ramifications in India and Africa could be catastrophic to the global economy as well. Therefore, in the context of global energy consumption, looking beyond Europe is necessary for global political networks and the global media. Lastly, the larger question is why households and especially the organically growing middle class in India and Africa, which is shaping the global economy, suffer the ramifications of the Russia – Ukraine war. The war should end.

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Authors

Dr Hiranmoy Roy is an economist, who teaches Economics and International Business at the University of Petroleum & Energy Studies, Dehradun.

Dr Devanjan Khuntia is a Sociologist, who teaches New Media at the University of Petroleum & Energy Studies, Dehradun.