Dealing with soaring energy costs

Of late, energy prices have gone through the roof. Prices of natural gas and coal in recent weeks have risen to a level that is the highest in decades. Consequently, electricity prices in some parts of the world, especially in Europe, North America, and some parts of Asia have skyrocketed.

According to the World Bank's latest Commodity Markets Outlook report, on average, energy prices are expected to be 80 per cent higher in 2021 compared to that of last year. The report also forecasts that it will remain at high levels in the first half of 2022. Energy prices are expected to decline in the second half of next year as supply constraints ease.

Brent crude oil price recently reached a seven-year high above $85 per barrel. Experts in this field anticipate that the oil price will jump further as stock drawdowns deepen.

According to Goldman Sachs, prices could hit $90 this year, while Bank of America thinks oil prices might reach up to $100 a barrel in the upcoming winter. However, according to an analysis done by the World Bank, the average crude oil price would be $70 in 2021, an increase of 70 per cent from last year. The price will hover around $74 a barrel in 2022 as oil demand strengthens as the world economy is expected to get back to pre-pandemic levels. 

The price of natural gas in Europe and Asia is at record highs, while the US prices have doubled this year. According to a Deutsche Bank report, natural gas prices are up by five-fold in Europe, and prices are about 1.5 times higher in the US and Asia.

Latest data showed US natural gas futures rose to above $5.5 per million British thermal units (BTU). JP Morgan forecasts that the price in 2022 would remain high, at around $5/MBTU.

Coal price has also reached a new height. Prices for Australian thermal coal has reached an all-time high in early October. The average price in October this year has been around $235 per tonne, which is 192 per cent higher than that of last year.

Coal price in China has also exploded as demand has surged worldwide. The current price in China is around $260 per tonne, which is 200 per cent higher compared to the previous year's price.

Now, the natural question is: why will the world have to pay such exorbitant energy prices this year?

The jump in energy prices has been caused by a number of factors. As the covid-19 pandemic hit the world in the beginning of last year, economic activities around the globe had halted, driving the prices of many fuels to their lowest levels in decades.

However, to the surprise of many, the resilient human beings bounced back strongly since the third quarter of 2020. Economic activities rebounded strongly, causing the demand for fuels to rise. Rising industrial production, which accounts for about 20 per cent of final natural gas consumption, contributed to the rise in the demand of natural gas. 

The weather has also exacerbated the demand and supply imbalance of energy requirements. The Northern Hemisphere's severe winter cold and summer heat increased heating and cooling demand, respectively.

As the demand for power has been increasing, the supply situation was unable to keep pace with the demand.

The major reasons are maintenance backlogs, longer lead times to deliver new projects, and lack of new investments in the oil and natural gas sector in recent years as a result of two commodity price collapses.

The maintenance backlogs were mainly caused by the shortages of labours during the pandemic last year. Labour shortages also caused natural gas production in the US to remain below pre-crisis levels. Production in the Netherlands and Norway was also down. Russia's Gazprom, which is the biggest natural gas supplier to Europe, has recently slowed its shipments to the continent.

The supply situation has aggravated further as renewable power generation has declined in the US and Brazil by droughts, which curbed hydropower output as reservoirs ran low. In Northern Europe, wind generation was below average this summer caused lesser electricity production.

Let's now focus on how these soaring energy prices would impact Bangladesh. Some of Bangladesh's strong trading partners, such as China, the UK, the European Union, and the US, are badly hit by the energy crunch. In some cases, factories are closed or running with a limited capacity. Consequently, there will be huge disruptions in supply chains.

There are a few sectors in Bangladesh that would face immediate pressure. They are LNG (liquified natural gas), fertilizers, garments accessories, and coal-based electricity production. As Bangladesh depends on importing fuel, the increased price of crude oil would put stress on government spending.

The government has two alternatives: increase subsidy or pass on the additional costs to consumers. Increased subsidy means the government has to curb its spending from other areas that might impact the growth or social safety net initiatives. If the government decides to increase the price at the consumer level, it will most likely fuel inflation.

Analysts suggest this crisis would continue till the first half of 2022. Our businesses should plan their activities considering this ongoing constraint.

The immediate focus is to build an inventory of raw materials and intermediate goods for this volatile period. This would definitely put pressure on working capital. However, this will pave the way for uninterrupted production and supply of finished goods. Undoubtedly, the cost of goods will go up for which the price of finished products needs to be raised wherever possible.

Government intervention in terms of adjusting the import duty for essential goods will ease the inflationary pressure. Both the government and businesses should join hands together to face the global energy crisis, which has widespread impacts on our overall economy.

The author is chairman, and managing director of BASF Bangladesh Ltd. Views are personal.