10 lessons from energy markets in 2022
by Scott McKnight, PhD
The year 2022 brought a serious energy crisis (but it could’ve been worse). From the war in Ukraine, price spikes and collapses, where Russia’s fossil fuels now go, our (way-too-slow) decarbonization efforts — here are 10 lessons from a turbulent year
#1 Price shocks bring volatility (and only sometimes price spikes)
The biggest drivers behind price volatility were Russia’s invasion of Ukraine in late February 2022, how that war would evolve, and how Europe would find enough energy while also sanctioning Russia
The volatility was also caused by the global economy roaring back from the pandemic, nagging supply chain issues in basically every sector, as well as years of energy underinvestment and some unexpected weather
Prices for oil, but especially coal and natural gas, all hit multi-year highs soon after the war, but came down sharply through the year
Brent slingshotted $44 per barrel in 2022, from a peak of $123 per barrel in early March to just under $80 by Christmas
#2 - Everything costs too much (and energy is the big reason why)
High energy prices shook the consumer basket, whether for food (through inputs like fertilizers or diesel) or fuel (gasoline, diesel, or natural gas for heating or cooking). Households everywhere were squeezed, but especially poor ones that spent a large share of their incomes on food and energy.
The knee-jerk reaction of governments was to spend, pouring out some $500bn to protect consumers from high energy bills, with most of that spent on European consumers and businesses.
Outside of Europe, it was a setback year for the Sustainable Development Goal (SDG 7)’s goal of universal electricity access by 2030. The IEA estimates that 75 million people who recently gained access to electricity likely lost the ability to pay for it due to high energy prices.
“The OPEC+ arrangement that Saudi Arabia and Russia have co-led since 2016 has proven to be surprisingly durable”
#3 - The world isn’t unipolar anymore (but it’s not multipolar either)
Much of the Global South was indifferent—and in some cases opposed—to the sanctions that the G7 imposed on Russia following its invasion of Ukraine.
This fracture played out when OPEC announced production cuts in September. Not only did the cuts surprise and anger the Biden administration, they also showed that the OPEC+ arrangement that Saudi Arabia and Russia have co-led since 2016 is surprisingly durable.
OPEC+ continues to play up its influence over global oil markets and each member’s commitment to the cause. (Why wouldn’t they?). In reality, most OPEC+ countries couldn’t produce more if they wanted to, hobbled by capacity constraints and years of underinvestment. The group’s members together underproduce 3.7m barrels per day.
The Iran drama proved to be a dud. Since nuclear talks stalled, Iran’s expected 100,000 barrels per day didn’t hit the markets, and so didn’t provide any relief to global oil markets.
#4 – The world still needs what Russia is selling (but Russia & Europe aren’t getting back together)
The year 2022 witnessed the nasty tit-for-tat divorce play out. Russia first cut natural gas to Europe. Then the EU stopped buying Russian coal by August. The US and UK picked sides early on by stopping their purchases of Russian oil right after the invasion.
A world where Europe returns to buying Russian gas is hard to imagine—and impossible with Russian forces still in Ukraine and Putin in the Kremlin.
No one wants to hear how Russia is still needed, but we’re seeing it playing out in various commodities.
The global middle distillate market is in crisis. The diesel crack in 2022 reached $43 per barrel, with global inventories about 50 million barrels less than where they were for the 2015-19 period. These shortages will only get worse when the EU bans Russian refined products in February 2023.
Despite the sanctions and statements from the West, Russia’s oil production and exports remain near pre-war levels, thanks to India, China and Turkey. These countries together bought 1.3m bpd more of knocked-down Russian crude exports.
Russia more than doubled its seaborne exports, adding some 100 million barrels to sea transport. This has created a new supply chain where previously none existed (to India) or transformed a middleweight supply chain into a heavyweight one (to China).
“How much more Russian energy can go east? Russia will need an armada of 250 tankers to shift all crude exports east, about 2.5 times what was at work before the invasion.”
#5 – Oil and gas companies want cash (not more oil and gas)
Oil and gas companies saw a windfall in 2022, and so did their investors.
US oil and gas companies were flush with nearly $158bn in free cash in 2022. Despite calls from the US president to increase production to help ease pump prices and Europe’s energy crunch, these companies instead turned a lot of this back to pay shareholders (a group that also includes the companies’ own execs).
Upstream capex in 2022 hit US$500bn—a gigantic sum in absolute terms—but only the highest level since 2014. It almost certainly won’t be enough in the short term. Expect more tight oil and gas markets.
Corporate greed explains a lot of this behaviour, but there’s more. While US O&G execs howl about licensing, policy flip-flops and the price of workers, there is a crippling fear across the sector: they don’t know how long their product will be desired. And that’s enough to hold back from spending on big capital-intensive projects.
“There is a crippling fear across the sector: they don’t know how long their product will be desired. And that’s enough to hold back from spending on big capital-intensive projects.”
#6 - Climate competition sells in politics (not the existential crisis of climate change)
The green energy transition is now sold as geostrategic and industrial policy. That framing gets legislation passed, but it’ll likely mean less cooperation between China and the US—and perhaps even between the US and the EU, too.
Governments across the G20 seized this year’s energy crisis to launch big climate legislation and major plans for a clean energy transition, from Japan’s Green Transformation (GX) plan to India’s efforts to boost energy efficiency in buildings and appliances. Meanwhile, China continues to break records in renewables deployed and EVs added to its roads.
The Biden administration committed $370bn for energy security and climate change investments in its landmark Inflation Reduction Act, winning bipartisan support by backing domestic industry against a green-focused China.
The clean energy transition is increasingly framed on economic and geopolitical grounds, and less on worries about the catastrophic effects of climate change.
The green energy transition is now sold as geostrategic and industrial policy.
#7 - We’re talking too much and not doing enough (when it comes to decarbonization)
Net-zero emission pledges haven’t actually reduced global spending on fossil fuels.
Five years since the historic Paris climate agreement was signed, investment in the energy transition has stayed flat at about US$1 trillion per year. Experts say we’ll need at least five times that amount to get to carbon neutrality by 2050.
Meanwhile, the costs of clean energy technologies keep falling—though slower than before—and that’s what accounts for year-on-year increases in deployment.
The EU along with 68 countries have made net-zero pledges, but almost none has any specific plans to make that happen.
The process to get approval for a single overhead transmission line—crucial to the vast expansion of our electrical grids as we attempt to ‘electrify everything’—takes about 13 years in most OECD countries.
Electric-vehicle (EV) deployment—vital to reducing our demand for fossil fuels like gasoline and diesel—needs to increase sevenfold by 2030. EVs today make up about 1% of the global fleet.
Virtually every ‘critical mineral’—raw materials like cobalt and graphite that go into our solar panels, wind turbines and expanded grid—will need to be mined in much larger quantities than today. But governments take about 12 years to approve a mine, and companies need another 3-4 years for the actual extraction process.
#8 - China swings energy markets (but not always for the bulls)
China’s draconian ‘zero-Covid’ policy that locked down dozens of cities and tens of millions of people at different points during 2022 kept global energy markets on edge, with everyone anxious to see which cities would opened or locked down next.
Ghost airports, empty roads and shuttered factories in many parts of China wreaked havoc on global supply chains, but China’s tempered energy demand freed about half a million barrels of oil per day for global markets as well as tankers of liquified natural gas (LNG) for shipment to Europe—one reason why oil and natural gas prices softened over the year (back to #1).
#9 - Global energy markets are more flexible than we thought (and why the energy crisis wasn’t worse)
This was the worst global energy crisis in five decades, exposing vulnerable parts of the global energy system, but also how flexible the system can be on the whole. And the crisis could’ve been much worse.
The global energy market proved resilient to the shocks and uncertainty, and actually impressively flexible.
Russia’s crude exports really didn’t fall in 2022, despite sanctioning and self-sanctioning of Russia’s trading partners, meaning that supplies (and shortages) weren’t the issue, but matching suppliers with new buyers at the volumes needed.
Governments did a decent job, too, releasing strategic reserves and extending the lives of coal and nuclear plants to make sure their citizens didn’t go without energy.
Amid this reshuffling, the US emerged as a major oil and gas exporter.
#10 - We don’t know what happens next (but that won’t stop us from guessing)
On the roulette wheel of uncertainty, the war in Ukraine likely takes up the largest space.
But there are many other slices: how cold will Europe’s winter be in 2022-23 (and 2024)? How much Russian energy can actually reach buyers in Asia? Will consumers really change their consumption habits? Will governments follow up massive announcements with detailed plans to accelerate the energy transition, or will they fall back on fossil fuels to get them through these tough times ahead?
Then there’s longer term questions. Total fossil fuel demand is expected to fall by year 2025. It’ll be the first time since the 18th century when economic growth will separate from energy use. This likely won’t have a huge impact in the year ahead, but it’s weighing heavily on governments, investors and company execs.
