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Commodities

Column: Big freeze exposes Asia's underlying energy crisis

LONDON (Reuters) - Northeast Asia has been hit by a midwinter energy crisis as an extended period of much lower than normal temperatures across the region has strained supplies of coal, gas and electricity to breaking point.

FILE PHOTO: A boy tries to catch falling snow as he lies on the ground during a heavy snowfall, amid the coronavirus disease (COVID-19) pandemic in Seoul, South Korea, January 12, 2021. REUTERS/Kim Hong-Ji/File Photo

China has been forced to restrict power in multiple provinces, Japan has appealed for voluntary restraint, and liquefied natural gas (LNG) prices have hit record highs as generators and utilities scramble for spot cargoes.

While freezing temperatures triggered the crisis, they have also exposed an underlying lack of resilience in regional energy systems caused by the rapid transition to gas for space heating and power generation.

Japan has failed to restart or replace nuclear generation a decade after the Fukushima disaster, which has left the country short of generation capacity and excessively reliant on imported gas.

China’s rapid transition from coal to gas for urban heating systems has tightened gas supplies while the rapid rise in household and industrial electricity consumption strains the electrical grid.

More broadly across Asia, economic growth, rising incomes and surging electricity demand is stretching generation systems and the ability to import enough LNG at peak times.

Every energy crisis has four elements: 1) pre-crisis erosion of spare production capacity and/or inventories in the face of rapidly increasingly consumption; 2) failure to appreciate the increasing risk and take timely preventive action; 3) a short-term trigger that turns potential shortage into actual shortage; and 4) panicked over-reaction when the shortages arrive.

The energy crisis that has hit Asia in 2020/21 exhibits many of the characteristics of crises that hit Britain in 1946/47 and the United States in 1973/74.

The common thread in all three is that abnormal weather or a supply disruption aggravated an underlying energy shortage and brought the crisis to a head; signs of a crisis had been evident months earlier but were not acted upon with sufficient urgency.

THE BLEAK MIDWINTER 1947

In 1947, Britain was hit by a prolonged period of below-normal temperatures and a series of blizzards between late January and early March.

“Snow fell every day somewhere in the UK for a run of 55 days,” the UK Meteorological Office said. “February 1947 was the coldest February on record in many places.”

Demand for coal, gas and electricity surged as the country struggled to keep warm and maintain industrial production.

But coal movements by road, rail and along the coast were disrupted by heavy snowfall and ice in rivers and estuaries, causing stocks at power plants, factories and homes to run dangerously low.

Even when fuel was available, the country’s ageing generator fleet, much of which needed replacing after World War Two, was unable to meet the rapidly growing load.

Facing a possible collapse of the grid, the government first reduced and then ended power supplies to industrial users causing many business to close and unemployment to surge, from 400,000 in the middle of January to 1.75 million by late February.

Radio and television transmissions were cut and newspapers were suspended or forced to publish in smaller formats to save electricity. As the crisis worsened, power was cut to homes for several hours each day.

The immediate cause of the energy crisis the long period of exceptionally bad weather, but it was an accident waiting to happen (“The Bleak Midwinter, 1947”, Robertson, 1987).

Before the crisis, power demand had been growing rapidly as industrial output recovered after the end of the war and more households used more electricity.

Electrical generation had increased from 25 Terawatt-hours in 1939 to 39 TWh in 1946 and had risen by almost 11% in 1946 alone.

But coal production had been falling consistently since the start of the war as a result of a shrinking and ageing workforce, increasing absenteeism, and falling productivity.

The result was persistent downward pressure on coal stocks, which declined from 23 million tonnes at the end of 1943 and 21 million at end-1944 to 16 million at end-1945 and 11 million at end-1946.

With electricity demand growing fast, and so little coal on hand, the country was on the brink of an energy crisis at the end of 1946 even before the record-shattering cold weather hit.

THE ENERGY CRISIS OF 1973

In the final quarter of 1973 and early 1974 oil prices surged after Arab countries imposed an embargo on exports to the United States and the Netherlands to protest their support for Israel during the Yom Kippur war.

The embargo is often blamed for causing the price crisis, which became known as the first oil shock, and is commonly remembered for queues at filling stations.

But shortages of crude, heating oil, gasoline and natural gas had started to emerge much earlier in 1973 and even 1972 as supplies failed to keep pace with rapidly rising demand.

Between the late 1950s and the early 1970s, Texas and neighbouring states had a large surplus of oil production capacity which was shut in by order of the Texas Railroad Commission to support prices.

However, after a long period of low prices throughout the 1960s, which fuelled rapid consumption growth while inhibiting investment in production, the last of the spare capacity disappeared in March 1972.

From that moment, the United States became increasingly vulnerable to any disruption in imports, and a rise in prices had become inevitable sooner or later.

In the winter of 1972, heating oil supplies came under pressure. Refiners responded by ramping up distillate production, but that left a shortage of gasoline the following spring and summer.

In March 1973, local newspapers warned of possible gasoline shortages in Pennsylvania. Trucking firms and airlines began to complain about the difficulty of obtaining fuel.

By May 1973, the Joint Economic Committee of the U.S. Congress and the Senate Banking Committee were holding multi-day hearings on the gasoline and fuel oil shortages.

“We are faced with a major problem of short supplies of fuel oil in winter, and gasoline in winter and summer, Senator Hubert Humphrey warned the Joint Economic Committee on May 1.

“We were saved from catastrophe by unusually moderate weather. The problem we face now is preparing adequately for the coming fall and winter.”

“The energy problem is rapidly overtaking inflation as the nation’s No. 1 economic and political issue,” Senator Donald Riegle told the Banking Committee on May 22, almost five months before the embargo.

On Oct. 5, the day before war broke out, the U.S. Treasury appealed to all consumers to lower their thermostats by three degrees to avert a shortage of heating oil and gas in the coming winter.

“We will have to increase imports of heating oil this winter to meet our normal demand, but it may not be possible to increase import as fast and in the amount needed to meet substantially increased demand,” the Treasury secretary said.

“Our fuel demands are increasing,” he said, “because of more homes built, higher industrial demand, and because some utilities have switched from coal to oil as a means of reducing air pollution.”

The intensifying energy crisis may have encouraged Arab exporters to think an embargo could alter U.S. foreign policy, but energy shortages would likely have pushed up prices significantly and soon even without it.

NORTHEAST ASIA BIG FREEZE

Asia’s energy crisis started to emerge in the fourth quarter of 2020, with reports that some countries, including Pakistan, were struggling to source enough LNG cargoes to meet rapidly increasing consumption.

Reuters reported on Oct. 5 that Pakistan’s petroleum minister had warned the country was headed towards a major gas shortfall in December and January, and blamed dwindling indigenous gas supply and rising demand.

Across the whole of South and East Asia, power supplies are being strained by rapid consumption growth, which was only briefly interrupted by the coronavirus epidemic earlier in 2020.

The region’s surging demand for power and imported LNG has not been accompanied by a sufficient increase in generation reserves or gas storage.

The entire energy system, including power, gas and coal has been left without the flexibility needed to respond unusual weather or an interruption in supplies.

By the fourth quarter of 2020, the region was already in an incipient energy crisis; all it needed was a long spell of cold weather to push it over the edge.

John Kemp is a Reuters market analyst. The views expressed are his own.

Editing by Barbara Lewis

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