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What you need to know about the global energy market

We look at how different energy markets around the world are coping with the energy crisis, what could be next and what this means for investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Charlie Williams
Equity Research Assistant

Published on 25 October 2022

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Energy markets are under immense pressure. Geopolitical conflicts, global supply constraints and the complex nature of transportation all feed into the narrative of a global energy crisis.

The international oil benchmark, Brent oil, has been on a downward trend since its recent ten-year high of roughly $120 per barrel earlier this year, as recession fears have gripped markets. But the recent supply cut announced from OPEC+, an organisation of 23 countries controlling the vast majority of known oil reserves, can quickly change the outlook on oil prices.

It’s easy to assume all regions are facing a similar challenge, but the energy crisis isn’t created equally around the world. Here, we look at how the energy markets in Europe, the Americas and Asia are coping and what it means for you.

Above all else, we offer one simple takeaway – we think the world will continue to need oil and gas for the next few decades, even as we transition to a greener future.

This article isn’t personal advice. If you’re unsure if an investment is right for your circumstances, ask for financial advice.

Europe – a story of dependence

The European energy market has shown just how fragile it is to energy shocks. Last year, the EU imported nearly all its oil and one in four barrels came from Russia. Russia also supplied the region with 40% of its natural gas, to a large extent through the recently closed Nord Stream 1 pipeline.

Percentage of EU's total oil imports, 2021

Source: Eurostat, 2021.

The region’s battling with high energy prices and a gaping hole in supplies, both contributing to soaring inflation. The ban on shipment-based Russian imported oil by the end of this year hasn’t helped the outlook either.

Attention’s now shifting to government support, and the likes of Germany has recently announced a €200bn package to alleviate higher prices for businesses and consumers. That dwarfs France’s €24bn package, as both regions also open the discussion for a push to nuclear energy. That said, nuclear plants can take years to build, so the issue of short-term supply still remains.

The UK imports around 50% of its crude oil from Norway, but the issue here is still refining. Crude oil’s only useful once it’s refined into products like petrol, and Russia was the UK’s biggest trade partner for these end products in 2021. Without a notable UK oil refinery built in the last 50 years, refining bottlenecks are pushing oil prices up.

Russia supplied the UK with a smidge below 4% of its natural gas last year, with Norway again taking the spot as the UK’s biggest partner. This might not sound problematic, but roughly 80% of UK households heat their homes with gas. This leaves considerable exposure to global prices and puts the end users at the mercy of higher prices.

To combat this, the UK’s already removed a ban on fracking – a method of oil and gas extraction which releases additional resources. They’ve also given coal plants a reprieve from decommissioning to help with any short-term pain. Some see this as a setback on the ambitious carbon net-zero targets though.

The fast tracking of North Sea gas projects could also help, along with the expansion of renewable projects like wind and solar. In fact, the UK’s had some success in this region, with renewables seeing a big rise in electricity generation since 2010.

The Americas – a story of refinery and underinvestment

The US has often been dubbed as ‘self-sufficient’ in energy, helped by the shale revolutions where new drilling methods opened the flood gates to untapped oil and gas. The real situation’s a bit more nuanced than this.

The US has a major issue with its refineries – it can’t often refine the type of oil found there. Since the cost to reconfigure is too high, the region must import oil from the international market, putting them at odds with rising energy prices.

There’ve been attempts to alleviate some pain through talks with Saudi Arabia, one of the key players in OPEC+, and Iran over the nuclear deal, but both attempts appear to have been futile, as shown by the recent reduction in OPEC+ oil supply. The caveat here is Canada. Due to limited export capacity, Canada exports nearly all its oil to the US via pipelines, allowing some pain relief.

Total US oil imports, 2021

Source: U.S. Energy Information Administration (EIA), 2021.

New hope comes in the form of government support. The announced $369bn climate bill aims to boost the clean energy markets from solar panels, wind farms and critical minerals with tax credits to reduce the dependence on oil and gas.

They can’t look to Latin America for much hope either, output this year’s expected to hardly budge. A string of underinvestment and already low inventories has made for a poor showing in the region.

Asia – a story of coal and the revival of nuclear

Coal is the dominant energy source in the region due to affordability and availability. Unlike many developed nations, climate regulations and financial backing for oil and gas projects are few and far between. While coal offers a reliable source of energy right now, it’s considered one of the dirtiest fuels in the world. It contributes to not just global warming, but to unwanted conditions like acid rain.

China’s relationship with Russia has put it in good stead for oil, buying at favourable prices and putting its impressive refining capabilities to good use. A similar story can be told in India, albeit their refining capabilities are more limited. Both nations are looking to expand their fleet of nuclear reactors to shield from further disruptions.

Number of nuclear reactors in planning or construction by region

*Including Russia and Turkey

Source: World Nuclear Association, December 2021.

Japan’s loss of nuclear energy in 2011, after the fatal Fukushima disaster, has left the nation with a high dependence on liquid natural gas (LNG) imports. But the tides are turning as the nation looks to reverse anti-nuclear policies, potentially freeing up LNG for struggling Europe.

Other, smaller regions, like Pakistan and Sri Lanka, continue to be hit hard. The nations struggle to fight for the limited supply of global oil and gas, adding to the economic woes already felt in the regions.

What this means for investors

The global energy crisis has accelerated the case for a clean energy transition, highlighting the role renewable energy must play. But it’s not breaking news that energy majors are reaping some healthy profits from rising energy prices. And despite these companies shifting focus towards more renewable energy, the funding must come from somewhere.

Our energy woes haven’t hit every region the same, either. This opens the door for potential investment opportunities in different geographies and sectors.

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