Your Winter Energy Costs Have Gone Up, Expect More Increases in the Future: Energy Consumption in China and India, as well as Europe Divesting itself from Russian Energy, Matter to Your Pocketbook

January 1, 2023

It is true, the hip bone is connected to the thigh bone.  This connectedness can be seen with energy costs for American households. A publication released by the Federal Reserve Board, Central Bank in November 2022 had an appropriate title, “What Happens in China Does Not Stay in China,” obviously this was a play on the TV ads that push for people to visit Las Vegas, “What Happens in Vegas Stays in Vegas.”  They could have added India to their title since, increasingly, both countries are having an impact on the American economy.  China and India can be added to the effect of the Ukraine War which is driving up energy costs.  Europe’s decision to, essentially, divest itself from Russian oil and natural gas, is a painful decision and will have awful consequences to household energy costs in Europe, as well as, again, the United States.  Just to give a sense of how far Europe has come in a short period of time, one writer noted that after Russia increased gas supplies in October 2021 to combat higher gas prices, the author wrote, “Experts said the move showed Europe is now largely at Russia’s mercy when it comes to energy.”  Cutting the umbilical cord is not an easy thing to do.  Up until last year, about 40 percent of Europe’s natural gas came from Russia.  In the case of Germany, almost half of its natural gas came from Russia.  Overall, in the case of gas, about 25 percent of Europe’s imports came from Russia.  The drastic cut in energy flowing from Russia to Europe, could mean that energy costs in Great Britain could go up as much as four times what they were in 2019. As one writer put it:

[I]n England, and in parts of Europe, the price of gas is literally life-threatening. The Brits rely on gas imported from European countries whose pipeline has been cut off by the producer, Russia, in the wake of the war in Ukraine.

…[I]t’s expected that many people cannot afford to heat their homes and may struggle to get essential items.

…[T]he sobering reality, as I see it, is that the people of England (and Europe) are faced with far greater hardship derived from the war than in the US.

European demand for coal will increase as it seeks to replace what they were getting from Russia. Botswana looks likely to see an increase in European demand for its coal. Turkmenistan could supply natural gas, which is not a new idea but will receive more attention. The exporting of liquefied natural gas (LNG) from the United States increased dramatically between 2015 and 2021. In 2015, less than 28 billion cubic feet was exported, but by 2021, that figure that risen to 3,500 billion cubic feet. In theory, the United States could increase its LNG that goes to Europe, but, at issue, is whether that means cutting back on its exports to South Korea, China, and Japan. One American exporter said approximately 75 percent of its product has gone to Europe since the Ukraine War began. That addresses the here and now, but it may take three to five years to have LNG from the United States reach a sufficient level to supply Europe. Botswana, Turkmenistan, LNG from the United States, all indicate that addressing European energy issues will take time. Overall, it will take Europe three to six years to replace Russia as a source of energy, well, a good guess. 

In the case of the United States, Bloomberg reported a 15.8% rise in electricity costs in September of this past year, as winter was approaching.  The publication noted this was the biggest rise in prices since August 1981.  About half of the households in the United States use natural gas to heat and those prices increased approximately 28 percent.  Heating oil increased 27 percent.  The expectation of a colder winter means more use of energy to heat a home, which could mean disruptions to supply.  If inventories go down, your energy bill could go up.  A Time article stated:

Some 55.3 million Americans struggle to afford their energy bills in 2021, and it’s likely many millions more will face a crunch this year. Experts say the patchwork of assistance programs across the country may not have the funding to deal with an uptick in demand.

The impact of Europe cutting energy ties with Russia, as well as developments in energy consumption, particularly related to coal, will and are already being seen as influencing our energy costs, not just for this winter but, as far as I can imagine, several years to come.  During this readjustment, Russia will have problems easily finding and supplying other markets.  Any readjustment of who supplies which countries and which countries get their energy from where, will add to disruptions in energy markets, which can add to price increases.  One report stated regarding Russia and what happens to them and their energy exports:

While some of Russia’s coal can be redirected to other countries, this will be costly as coal is bulky and expensive to transport. Redirection of natural gas is even more limited due to a lack of transportation infrastructure — 70% of Russia’s exports to Europe are by pipeline.

I expect our politics to be affected by energy cost increases.  The 1992 quote by James Carville, might, again, become relevant, “It’s the economy stupid.”  The Great Recession (2007-2009) had an impact on politics for some years afterwards.  In some ways, the political anger and resentment that came with the aftermath of that recession, contributed to the rise of Donald Trump—a willingness by many people to support a person they thought would somehow shake up the political system in such a way as to make their lives better—they never considered that Trump was only about Trump and what was good for him.  I must wonder what high energy prices might lead to politically.  One winter of higher-than-expected energy costs might be one thing but consider several winters and possible cost increases in 2023-2024 and 2024-2025 over the costs in 2020-2021, before your energy bill started climbing.  One report in analyzing the impact of the Great Recession in 2014 wrote, “American politics has entered a long phase of electoral volatility.”  That statement seems like an understatement, considering what came with Donald Trump in the White House and his ever-presence since.  Another report, this one from 2012, also addressed what were seen as the long-term consequences from the Great Recession, “Given the very large impacts of the recession on employment, income, and wealth documented in the other recession briefs, it wouldn’t be surprising to find that public opinion has shifted, maybe even in lasting ways.”  Economic pain will spill over into politics and several years of energy costs going up and up again, can affect how politics is played out.

One important point to consider is that there is a relationship between coal prices and natural gas prices.  If the price of coal goes up, the demand for natural gas, as less expensive to replace coal goes up, so the price for natural gas can go up.  Sure, there are always statistical studies that address whether there is a very strong relationship between the two markets and whether the two markets can have prices that move up or down somewhat independently of each other, but I will go out on a limb and suggest that with the next few years of expected higher energy costs, particularly high coal prices, we will see a more direct relationship between coal prices and natural gas prices.

In September 2021, Xi Jinping, the Chinese president announced that China planned to stop building new coal power plants in other countries.  China wants to become carbon-neutral by 2060.  Prior to this announcement, China was already beginning to cut back on financing overseas coal power plants, an indication that the Chinese were serious about achieving their goal.  One report stated, “why the Chinese are backing away from supporting coal, whether it’s due to higher costs or a newfound awareness of the environmental impact, the fact is the trend is now well underway.”  One projection expects that by 2035, Chinese coal demand will drop significantly.  However, in 2021, China had its biggest increase in energy consumption and the consumption of coal in a decade.  As one analyst put it, dampening the expectation of any major cut-back in coal consumption, “Energy security trumps decarbonisation ambitions at least in the short to medium term for China and we expect the country's coal demand to keep rising steadily.”  When data is finally in for 2022, the expectation is that Chinese coal consumption will be higher than it was in 2021.  2023, is expected to see a further increase in coal consumption, although some speculation is that there might be a lower increase than was seen in previous years.  Therefore, we will need to jump ahead to 2024, to be able to get a clearer picture of whether China is moving toward becoming carbon-neutral by 2060.  Chinese imports a tremendous amount of coal.  Some of that comes from Russia and more imported Russian coal may be in China’s future.  So, an energy partnership seems to be developing between the two countries.

Assuming the consumption of coal is not going down soon, Chinese importing of coal will increase.  Mining costs in China make coal production more expensive than buying coal on the world market.  To some extent, the degree to which China is fighting to bring COVID-19 under control, has an impact on coal consumption.  The sooner restrictions on the economy are eased, the sooner economic growth can be seen as placing demands on increasing the consumption of energy and specifically coal.  One report that addressed Chinese coal imports stated, “the import of high-quality coking coal that China lacks can promote the development of China's coke and metal smelting industries.”  In 2021, Chinese coal imports reached record highs.  In the period between 2015 and 2017, monthly coal imports fluctuated between 15-25 million tons, jump ahead to the period between 2019 and 2021 and monthly imports fluctuated between 25-35 million tons.  In other words, the demand for coal can be seen as increasing global coal prices. Added to the demand for coal is that China is the world’s leading purchaser of natural gas. As more Russian coal travels to China, the two countries have increased their energy connection with a natural gas pipeline project completed this past December. Russian natural gas will begin flowing to China in 2024. This might reduce the need to receive LNG from the United States.

India is the second largest importer of coal behind China, almost 18 percent of global imports go to India.  In April of last year, the India government pushed to place the country on an aggressive program to increase imported coal until 2025.  Since 2010, India has seen a tripling in its importing of coal, furthermore, the demand for coal is expected to double by 2040.  India, like China, has a reason to seek imported coal; the quality of Indian coal is inferior to the coal that is imported.  Better quality coal is needed for several sectors in the economy that are important for economic growth, such as cement.  India, like China, can be seen as contributing to global coal prices increasing and both countries can affect the demand for natural gas, only serving to drive up its price.

The current concerns about coal prices and what it will do to consumer pocketbooks can be seen from looking at the price of coal on the Newcastle coal index. Coal prices showed a normal fluctuation between 2009 and mid-2021 ranging between roughly $45-$120 a metric ton, then suddenly and continuously the price just kept going up, reaching as high as $445 a metric ton by September 2022.  Even with a drop down to around $400, we cannot expect the price to fall to those during the 2009-mid-2021 years.  Again, high priced coal forces a demand for natural gas and that demand drives up the price of natural gas. There are some predictions that coal prices might fall to the $300 range through 2023 but compare that to what existed between 2009 and mid-2021 and that seems to be an odd form of relief. Admittedly, the Russian invasion of Ukraine had a big impact on driving the price of coal upwards. In early January 2022, coal was priced at $161 a metric ton, then Russia invaded about seven weeks later, and coal jumped to $239 a ton. The Newcastle coal index, however, addresses the Asian market so China and India still need to be taken into account and the impact of their coal consumption has to be factored into the price of coal. China and India account for two-thirds of the global consumption of coal, so the Newcastle coal index affects the price of coal everywhere. In the case of the Newcastle coal index, prices were showing signs of increasing prior to Russia’s invasion of Ukraine in late February of last year. Going back to 2021, coal was priced just under $82 a metric ton in the first week of January and ended the year at $170. As 2022 unfolded, the price quickly rose above $200 before the invasion.

With Europe needing several years to adjust in how it supplies its own energy, as well as where it finds markets to replace Russian energy supplies, together with China and India contributing to pushing coal prices higher, add in China’s natural gas needs and you can expect your energy bills to eat up more of your paycheck. A possible bright spot on the horizon is China increasing its imports of both coal and natural gas from Russia. Will Russian energy imports to China eventually lead to China reducing its imports of both energy sources from elsewhere which might help to reduce demand pressures, bringing the price of coal and natural gas prices down, which can translate into better household energy bills? In the short-term, this will not happen. With Russian not expected to have gas flowing to China until 2024, a year after that may give us a better picture of the Chinese-Russian energy partnership and what it means to the rest of the world. China has also said it wants to become energy independent, the sooner the better but that is not happening anytime soon. Expect high energy bills for several years to come.

Renewable energy may get a boost from all this coal and natural gas price increases. Currently about 11-12 percent of global energy comes from renewable technology. The executive director of the International Energy Agency (IEA) stated in a press release that accompanied the IEA Renewables 2022 report that was published this past November:

Renewables were already expanding quickly, but the global energy crisis has kicked them into an extraordinary new phase of even faster growth as countries seek to capitalize on their energy security benefits. This is a clear example of how the current energy crisis can be a historic turning point towards a cleaner and more secure energy system.

The expectation is that by 2027, renewable energy will account for 38 percent of global power generation, which would be a significant increase from the current level, if that happens. Again, the issue is that the next several years do not look good for the cost of energy to your pocketbook.

At some point the federal government will need to act to probably figure ways to subsidize energy costs for many American households.  The tradeoff between heating a home in winter or putting food on the table can become a real challenge to many and turning to the government could be the relief that is needed. Hopefully, political blaming, which will inevitably come with any anger and frustration over high energy costs, will not completely derail any needed government initiatives that might help people. Ironically, anger and frustration aimed at the government, whether the White House or Congress, as though either are the source of energy costs going up, will lead to criticism that the government is doing nothing to help people. Yet, what will be wanted is a government program that addresses the concerns of those who are critical of any government action aimed at helping them.

Notes

William Barcelona, Danilo Cascaldi-Garcia, Jasper Hoek, Eva Van Leemput, “What Happens in China Does Not Stay in China,” International Finance Discussion Papers (IFDP), Board of Governors of the Federal Reserve System (November 2022): https:// www.federalreserve.gov/econres/ifdp/what-happens-in-china-does-not-stay-in-china.htm

Mitchell Beer, “Renewable Energy to Become World’s Top Electricity Source by 2025, Report Says,” truthout (December 10, 2022): https://truthout.org/articles/renewable-energy-to-become-worlds-top-electricity-source-by-2025-report-says/

Payel Bera, “Coal futures: Prices soar as demand is stoked by global scramble for energy,” capital.com (September 16, 2022): https://capital.com/coal-futures-price

Yi Chen, Development Strategies of the Chinese Natural Gas Market, CIEP, Clingendael International Energy Programme (2013): https://www.clingendaelenergy.com/inc/upload/files/Ciep_Paper_2013-07.pdf

“China Coal Imports Market Report 2021-2025,” ResearchandMarkets (February 21, 2021): https:// www.globenewswire.com/news-release/2021/02/11/2173890/0/en/China-Coal-Imports-Market-Report-2021-2025.html#:~:text=Meanwhile%2C%20the%20rising%20mining%20costs%20have%20made%20the,about%2010%25%20lower%20than%20that%20of%20domestic%20coal.

City A.M., “Coal Use is Reaching Record Levels in India and China,” oilprice.com (December 18, 2021): https://oilprice.com/Energy/Coal/Coal-Use-Is-Reaching-Record-Levels-In-India-And-China.html#:~:text=Coal%20Use%20Is%20Reaching%20Record%20Levels%20In%20India,nine%20percent%20in%202021%20to%20a%20new%20high.

Holly Ellyatt, “the U.S. was right-Europe has become a ‘hostage’ to Russia over energy, analysts warn,” CNBC (October 7, 2021): https:// www.cnbc.com/2021/10/07/europe-is-now-a-hostage-to-russia-over-energy.html

“England’s Big Chill,” Vicky Ward Investigates (December 23, 2022): https://vickyward.substack.com/p/englands-big-chill?utm_source=post-email-title&publication_id=565381&post_id=92503833&isFreemail=true&utm_medium=email

Lane Kenworthy and Lindsay Owens, “Political Attitudes, Public Opinion, and the Great Recession,” The Russell Sage Foundation and The Stanford Center on Poverty and Inequality (October 2012): https:// inequality.stanford.edu/sites/default/files/PublicOpinion_fact_sheet.pdf

Peter Nagle and Kaltrina Tema, “Energy market developments: Coal and natural gas prices reach record highs,” World Bank Blogs  (July 19, 2022): https:// blogs.worldbank.org/opendata/energy-market-developments-coal-and-natural-gas-prices-reach-record-highs

Eric Olander, “The Belt and Road Initiative: China is moving away from coal power,” theafricareport (June 22, 2021): https:// www.theafricareport.com/100124/the-belt-and-road-initiative-china-is-moving-away-from-coal-power/

Policy Circle Bureau, “India’s coal riddle: Surging imports despite huge reserves,” Policy Circle (July 6, 2022): https://www.policycircle.org/economy/indias-coal-imports/

Matt Reynolds, “Europe’s Plan to Wean Itself off Russian Gas Just Might Work,” Wired (August 18, 2022): https:// www.wired.com/story/russian-gas-europe/

Benjamin Storrow and Sara Schonhardt, “Europe’s scramble for LNG leaves Asia staving for energy,” E&E News CLIMATEWIRE (April 1, 2022): https://www.eenews.net/articles/europes-scramble-for-lng-leaves-asia-starving-for-energy/

Ruy Teixeira and John Halpin, “The Political Consequences of the Great Recession,” CAP (November 6, 2014): https:// www.americanprogress.org/article/the-political-consequences-of-the-great-recession/

“Winter Fuel Outlook, October 2022,” eia, U.S. Energy Information Administration (December 6, 2022): https:// www.eia.gov/outlooks/steo/report/WinterFuels.php

Muyu Xu and David Stanway reporting, edited by Christopher Cushing, “China sees biggest growth in energy and coal use since 2011,” Reuters (February 28, 2022): https://www.reuters.com/markets/commodities/china-sees-biggest-growth-energy-coal-use-since-2011-2022-02-28/