Energy Crisis & Its Impact on Global Economy

The world has been grappling with an energy crisis since 2021.  While the primary driver was the sudden economic recovery, post pandemic and the associated increase in demand, the Russian invasion of Ukraine, in Feb 2022, has really pushed it over the wall.  The price of natural gas and oil reached their record highs and so did Electricity.

Energy prices are the biggest driver of CPI or Consumer Price Index and as a result, the world is experiencing inflation today.  The impact of severe inflation is far reaching.  It pushes many families into poverty, forces some factories to curtail output or even shut down, and as a result, slows down economic growth to the point that some countries head towards severe recession.  This is what we are seeing today.  

Russian oil and gas export is being affected by the sanctions on Russia from various countries, especially Europe.  As a result the demand for oil and gas from the US, Australia and Qatar increased and the prices increased too.  Many countries who were regular customers of American, Australian and Qatari gas, are facing serious competition.  

So while Europe, whose gas supply is uniquely vulnerable because of its historic reliance on Russia, is facing rationing, while many emerging economies are seeing sharply higher energy import bills and fuel shortages.

While today’s energy crisis is similar to the oil shocks of the 1970s, the primary difference is that today’s crisis involves all fossil fuels, while the 1970s price shocks were largely limited to oil, because at that time the global economy was much more dependent on oil, and less dependent on gas. 

Most importantly, the entire world economy is much more interlinked today, than it was 50 years ago, magnifying the impact. That’s why the current energy crisis is the first truly global energy crisis.