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European Union's Coal ban likely to have a ripple impact on Energy Prices

European Union's Coal ban likely to have a ripple impact on Energy Prices

European Union's Coal ban likely to have a ripple impact on Energy Prices

  • 11-Apr-2022 12:48 PM
  • Journalist: Francis Stokes

The current energy crisis, which involves not only oil but also natural gas and coal, is worse than the iconic oil crisis of the 1970s. Following the Yom Kippur conflict between Israel and an alliance of Arab countries in 1973, oil prices plummeted fourfold in three months because of the Middle Eastern oil producers' declaration of an embargo on oil supplies to the United States as retaliation for the US's backing for Israel.

On Thursday, the European Union announced a fresh set of measures in Russia, which includes a ban on coal imports from the country. As Russia meets a significant portion of Europe's coal need, the EU will scurry to source the fuel from far distant suppliers, which would be more expensive to ship from South Africa, the United States, Colombia, or even Australia. Europe's planned embargo on Russian coal imports will further tighten an already tight global coal market, causing a domino effect on coal, natural gas, and electricity prices in Europe and across the globe.    

Even before Russia's invasion of Ukraine, global coal markets were tight, as the energy crisis and natural gas shortages in Europe and Asia in the autumn of 2021 pushed up coal use and price. China and India, Asia's two largest coal-consuming countries, were struggling to secure enough of the dirtiest fossil fuel as natural gas prices skyrocketed, incentivizing further coal use for electricity generation. Coal supply was severely hampered at times, partly due to China's unofficial restriction on Australian coal imports.

Finally, it was time to act. In a speech on Wednesday, European Commission President said, "This is for the first time we directly sanction the import of fossil fuels from Russia, so cutting off an important cash source."

"The coal ban means European customers will have to brace for high power costs throughout this year," an industry analyst warned, "since supply shortages in coal-dependent countries would spread across the continent via its well-connected power networks."

Germany, Europe's largest economy, as well as Eastern Europe, will be particularly hard hit. Given the global coal market's already restricted supply, the country will find difficulty obtaining alternate supplies, even at high costs. Given the increasing coal demand in Asia and the high freight costs and long journeys, major exporters such as Australia and Indonesia will only have a limited amount of coal to spare for Europe.

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