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Column: After Near Miss Last Winter, Policymakers Must Pay More Attention to Energy Supplies


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Near misses can make systems safer and more reliable if they reveal previously hidden weaknesses and operators and regulators draw the right lessons from a narrowly avoided disaster.

But they can also breed complacency if operators and regulators conclude there is no need to worry and assume their luck will continue to hold in future (“Normal accidents”, Perrow, 1984).

Global energy systems avoided a severe crisis during the winter of 2021/22, but mostly because temperatures were far warmer than normal across most of the northern hemisphere, reducing heating demand.

During the “long winter” from October through March, which includes almost all the hemisphere’s heating demand, temperatures were 1.64°C above the long-term average for the 20th century.

The long winter was the third-warmest on record, helping limit consumption of gas, coal and electricity across the major consuming centres of Asia, Europe and North America .

Next winter is likely to be colder, assuming some degree of mean-reversion, implying more heating demand and higher consumption of gas, coal and electricity in one or more of the three major regions.

But all three regions are emerging from this winter with gas coal and oil inventories below the seasonal average, leaving them vulnerable to any disruption in supply or higher than anticipated consumption.

Policymakers in Europe and North America are determined to impose tough sanctions to punish Russia’s invasion of Ukraine, which will likely reduce production of gas, coal and oil before the end of the year.

All three major regions are likely to enter next winter facing higher energy consumption, lower production, and limited inventories, increasing the risk of physical energy shortages and/or extremely high prices.

After successfully muddling through the winter of 2021/22, few policymakers in Europe and North America seem to understand the risks they are running with energy supplies in winter 2022/23.

COAL CRISIS, 1946/47

Policymakers have often ignored early warning signs an energy crisis is developing.

In the winter of 1945/46, Britain narrowly avoided a coal and electricity crisis as coal output failed to keep pace with rapidly growing post-war electricity consumption and inventories fell sharply.

The averted crisis encouraged policymakers to assume they would be able to scrape through the next winter in the same way (“The bleak midwinter 1947”, Robertson, 1987).

But coal output did not improve much and the country failed to build sufficient stocks over the summer of 1946, leaving even less room for error the following winter.

Distributed coal stocks fell to just 9 million tonnes at end of 1946 from 13 million at the end of 1945 and 16 million at the end of 1944.

The weather turned exceptionally cold at the start of 1947, coal stocks started to run out, power rationing became widespread, factories were forced to close and millions were thrown temporarily out of work.

OIL CRISIS, 1973/74

In the winter of 1972 and spring of 1973, the United States experienced sharp price rises and shortages first for heating oil and then gasoline.

GLJ
GLJ

U.S. heating oil inventories had depleted to just 137 million barrels by the end of January 1973 compared with 163 million in 1972 and 162 million in 1971.

Gasoline stocks fell to 205 million barrels by the end of April 1973 down from 226 million in April 1972 and 235 million in April 1971.

As prices climbed and stocks fell, the Senate Banking Committee held hearings in May 1973 on “the impact of petroleum product shortages on the national economy”.

At roughly the same time, the Joint Economic Committee of the House of Representatives and the Senate held hearings on “the gasoline and fuel oil shortage”.

Later, in October 1973, the major Arab oil producers imposed an embargo on exports to the United States, triggering the first oil shock.

The Arab oil embargo and the resulting price increases have been deeply imprinted on the memory of voters and politicians.

But the shortage of petroleum had been apparent before the embargo was imposed – use of the “oil weapon” was merely the final trigger that turned a potential crisis into an actual one.

Some of the iconic photographs of drivers queuing for gasoline and filling stations displaying “no gas” signs were actually taken earlier in 1973 – months before the embargo.

TIMELY ACTION

Every energy crisis has four elements: (1) the pre-crisis erosion of spare production capacity and/or inventories; (2) failure by policymakers to appreciate the increasing risk and take timely preventive action; (3) a short-term trigger that turns potential shortage into actual shortage; and (4) a panicked reaction from consumers which makes shortages worse when the crisis finally hits.

Near misses such as 1945/46 in coal and 1972/73 in oil should have been a signal that spare capacity and inventories were becoming dangerously depleted and a full crisis was only one more step away.

Near misses should have served as a final warning to policymakers to avoid complacency and make significant changes to production, consumption or both.

In the 1940s and the 1970s, however, policymakers failed to take timely action – leading to an energy crisis when their luck finally ran out.

The winter of 2021/22 was also a near miss in global markets for coal and gas and in European and Asian electricity systems; the question is whether this time will be any different.

Have policymakers absorbed the correct lessons from last winter’s energy shortage? Do they understand how to manage the risks? Will they be better prepared next winter? Or will they hope to muddle through?

John Kemp is a Reuters market analyst. The views expressed are his own.



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