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Europe is currently experiencing an extreme energy crisis. The 27 countries that comprise the European Union (EU) are scrambling to access enough resources to make it through the upcoming winter. While the EU recognizes the necessity to shift to clean energy in the future, it will take decades to get there.

The situation in Europe reads like many other explanations of what is happening in the global economy, and it goes like this: COVID-19 shutdowns stalled production, demand outpaced supply when production was reinstated, and then Russia invaded Ukraine, resulting in immediate fears while also complicating the overall issue and recovery. How does this impact the United States in the short term and down the road?

EXPORTS AND IMPORTS

According to the U.S. Energy Administration, the U.S. produced most of the energy consumed domestically until the early 1950s. It was then that we started to import more crude oil and petroleum products to match our consumption to production. These imports increased annually for the most part until they peaked in 2007. Since then, we have increased our energy production, invested in renewable sources, and looked to alternative fuels, making us a net exporter rather than importer. Even as a net exporter, the U.S. still imported petroleum from 73 different countries in 2021— underscoring just how reliant we are on the global economy and supply chain regardless of our domestic production.

Russia provides 45% of Europe’s oil and gas, and they have greatly reduced their pipeline supply in recent months. Russia states this is retaliation for the economic sanctions imposed on them after invading Ukraine. The reduction is causing more supply chain delays, driving up the price of goods, and sending energy bills upward. The EU fears that this will result in a rationing situation through the most bitter parts of the winter. While our reliance on Russian imports is minimal (3% of our crude oil and 8% of our petroleum), our involvement in the global supply chain makes us a secondary object of Russia’s control.

GAS PRICES

Like so many other essential goods that Americans rely on every day, the price of gasoline has experienced significant volatility in 2022. Due to production shortfalls and demand increases, U.S. gasoline prices had an unusually steep runup from January to June. In July, prices began to tumble thanks to recession fears, including anticipation of lower future demand as people lose their jobs > no longer need to drive to work > consumers no longer have the disposable income to spend on shopping trips or travel. This rationale drove down oil prices just as we were entering the seasonal downshift in gas demand as summer vacations wound down.

At the same time, the Biden administration released additional oil supply from the Strategic Petroleum Reserve, helping pull down costs to a small degree. In September, prices began to rise, likely due to the normal swings of market correction. However, at the beginning of October, the Organization of the Petroleum Exporting Countries (OPEC+) announced supply cuts—or rather a decrease in the limit they self-impose on their cartel. The practical effect of the move will probably be small, as most of the oil producers were already below the previous production limit and will remain below the newly imposed limit as well.

Still, the announcement led to a temporary price rally. We have since seen prices come down slightly in late October, but this amount of movement helps underscore how sensitive and volatile our global economy is today. Domestically, the EIA forecasts retail gas prices to be an average of $3.80 per gallon in 2022’s 4th quarter and predicts they will drop to an average of $3.57 per gallon in 2023.

While gasoline prices are predicted to come down, the EIA is warning consumers to prepare for steep home heating costs. They project the following increases this winter:

We continue to research and examine the environmental, cost, and schedule standpoints of alternative energy sources for our clients. We plan to present an in-depth look at the Total Cost of Ownership for renewable and alternative energy in an upcoming issue.

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