Biggest financial story of the week is about skyrocketing energy prices off the charts in Europe and Asia. The prices of natural gas and coal there “have just reached their highest levels on record”, as Tom Friedman Remarks in The New York Times, while “oil prices in America are at a seven-year high and gasoline prices in the United States are up $ 1 per gallon from a year ago.” If the markets do not stabilize quickly, especially as the northern hemisphere is heading into colder months, we could be facing a very harsh winter.
The surge in prices is due to several factors. Energy supplies were cut during the COVID-19 pandemic due to lower demand, but demand rebounded faster than expected. Suppliers have not been able to keep up, in part because Europe has moved away from fossil fuels so aggressively, in many cases before clean and renewable sources reached sufficient capacity to replace them.
The consequences could be dire. Europe may be facing a winter of energy shortages that are making people shudder and struggling to pay their heating bills. Meanwhile, soaring energy prices will likely add further inflationary pressures to the global economy as rising shipping and travel costs trickle down to consumers around the world. Then there are the geopolitical implications, as energy exporters (Russia, the oil-producing countries of the Middle East) find themselves on a wave of high prices to increase their economic and political power and influence.
The pain should be less severe in the United States than elsewhere. Yes, Americans will also have to put up with higher energy prices and possibly shortages. But the United States also produces a lot of natural gas, which makes us less dependent on foreign energy supplies. This self-sufficiency should protect us from the world’s worst energy turmoil, at least for a while, even if already high inflation could still end up dragging the economy more broadly.
But perhaps the greatest danger, at home and abroad, is that the world’s worst energy crisis since the early 1970s will spark a populist backlash against governments holding the sack. It could boost the GOP’s confidence as the 2022 midterm elections approach and disrupt politics around the world well beyond the coming winter.