What’s happening in Europe is getting scary…
And it could be coming our way.
Across the pond, natural gas prices have gone ballistic.
With storage facility inventory levels at historic lows and pipeline flows from Russia and Norway constrained, European natural gas prices have skyrocketed 500% and are now at record highs.
European natural gas is currently trading for more than $26 per million cubic feet.
That’s more than five times the price of natural gas in the U.S., despite the fact that our natural gas prices have doubled this year!
The fallout from this natural gas price shock has been swift.
It’s directly impacting the world’s food chain, as European fertilizer producers are forced to reduce output.
That drives up costs for farmers, which then impacts the cost of food.
Multiple power producers in the United Kingdom have been forced into bankruptcy.
The U.K. government is now warning about possible “rolling blackouts” this winter.
Analysts predict that there could be widespread factory shutdowns with costs making production economically impractical.
It makes a person realize how we take our access to affordable electricity for granted.
The situation is already scary, and winter hasn’t even started.
If the weather is cold in the U.K. and Europe, there is going be a major natural gas supply problem.
This is the kind of pickle that I wrote about back in March when I warned that we were setting ourselves up for painful energy prices.
While we want to get ourselves off hydrocarbons and use renewable energy, the reality is that we can’t do it overnight.
We still need oil and natural gas to power our economies, keep us warm and feed our people.
We still need oil and gas, but we are already taking the action to get rid of hydrocarbons and reduce our available supply.
Government policy across the world is making it harder for oil and gas producers to conduct their business.
This year, a climate-focused activist investor won board seats at Exxon Mobil (NYSE: XOM) with the intention of forcing management to accelerate its climate change goals (and reduce production).
Canada’s second-largest pension fund will be withdrawing all of its money from oil production by the end of next year.
And investors are demanding less production growth and more cash flow accountability from oil and gas management.
Due to these factors, the amount spent on drilling for oil and natural gas has plummeted.
Spending on drilling new oil and gas wells this year is going to be roughly half of what it was in 2014.
The oil and gas business essentially runs as if it were a relentless treadmill.
If you want to grow or even maintain production, you’ve got to constantly drill, drill and drill some more.
But now we aren’t drilling as much, and it’s impacting supply.
The head of global commodities research at Bank of America (NYSE: BAC), Francisco Blanch, recently summed up the new oil and gas industry, warning, “We are moving into a straitjacket here for energy.”
What Blanch means is that as our government policies try to push us further from oil and gas, they create a deeper level of underinvestment in new production.
The government’s policies are putting a straitjacket on the oil and gas industry’s ability to adequately supply us.
We don’t want to use oil and gas, but we still need to because renewables are not ready to carry the load by themselves.
Without sufficient supply, the simple laws of supply and demand guarantee that prices are going higher.
That’s why I view this European natural gas price spike as a preview of what’s to come in the oil and gas markets over the next decade.
We may want to be done with oil and gas…
But we aren’t, and a reduction in supply is going to result in some painful energy prices.