The Next Energy Crunch Has Arrived

In fact, the crisis started in 2021 never went away

Photo by Andrey Metelev on Unsplash

The cost of electricity skyrocketed in the past few years, crippling households and businesses alike. And while gasoline prices seem to be falling (at least for now), the energy part of the overall cost of living crisis just seems to be getting worse every year. And while the role of AI data center expansion cannot be underplayed, there are much deeper causes to this true long emergency than what meets the eye.

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Not the only one

While today’s bills has indeed reached extraordinary heights, the cost of electric power in the US was on the rise since the second half of 2021 already. According to the US Bureau of Labor Statistics the average price of electricity per kilowatt-hour in US cities is now above 18 cents, after hovering around 13-14 cents/kW all throughout the 2010’s. That’s a whopping 30% increase in four years even among friends… And since the production of almost every item or service you buy involves consuming a lot of electricity (from chilling food to powering water pumps and processing facilities), this energy cost increase was a major contributor to the unfolding cost of living crisis, ruining everyday life in America and across the western world.

U.S. Bureau of Labor Statistics, Average Price: Electricity per Kilowatt-Hour in U.S. City Average, retrieved from FRED, Federal Reserve Bank of St. Louis, August 28, 2025.

The still unfolding electricity crunch was not the only one in recent history though. As you can see from the chart above, a similarly steep increase was observable in the 2004–2008 period (+33%) and an even steeper one between 1978 and 1982 (+62%). And what was common in all three cases? Geopolitical upheaval combined with falling / stagnating oil production. You see, the rise in US electricity prices is closely tied to the availability of oil and natural gas. So while we no longer burn large amounts of oil to produce electricity most of the world’s power was still generated by burning coal and natural gas (32 and 22% respectively in 2024), despite the rising share of “renewables” and hydro.

The first problem with our high reliance on natural gas that a large amounts of it is “associated gas” — i.e. extracted together with oil. Less oil lifted thus means less natural gas produced (1). Second, rising oil and natural gas prices tend to come with a rise in coal prices as well — since most of that bulky and heavy fuel is mined and carried by diesel powered excavators, ships and trains… Not to mention the fact, that when gas is expensive grid operators switch to burn more coal instead. Coal prices thus duly spiked in all three cases: in 1982, then in 2008, and finally in 2022, too.

So when, in 1979, the overthrow of the western backed Iranian shah led to a halt in oil exports — at the same time when US domestic production was struggling to stay afloat following it’s 1970 peak in output and world oil supply was in a decline — electricity prices were immediately affected. During the 2004–2008 period US production fell further still, compared to its 1970 peak, and average annual world supply growth was again slowing down to a barely visible half percent year-over-year. Struggling oil production — in fact the peaking of world conventional crude extraction — coincided with a huge demand increase generated by the rapid industrialization of China, leading to a massive rise in oil and other commodity prices (also produced by burning oil). The 2004–2008 period also concurred with the Global War on Terror, including the invasion of Iraq and Afghanistan, adding not only a risk driven price premium on top but a greatly increased military consumption, too. (A hundred million barrels burned by the US military in a year is a force to reckoned with.) As a result of geopolitical tensions and stuttering oil supply — both in the early eighties and late 2000’s — West Texas Intermediate (WTI) oil prices doubled and even tripled in a few short years.

Last but not least, the most recent energy price hike was induced by a worldwide health crisis and the following lock-down of entire economies, crashing oil demand and production overnight. Oil extraction, however, is not like opening or closing a tap: ramping it back up to previous levels took an awful long time, suddenly leaving rapidly recovering economies without enough energy to go around. Energy prices were, as a result, again on a steep rise already in the second half of 2021. Then came the massive escalation in the then 8 years old Ukraine crisis in 2022 followed by a trade war between the West and Russia, giving a further boost to oil and gas prices (2). Again, a massive supply shortfall combined with a geopolitical crisis; a perfect recipe for energy price hikes.

Source

A difference in kind

No two energy crises are the same though. The one, started in 2021 and lasting to this day, is an outlier in many respects. First, natural gas has replaced coal as the number one source of electricity in America (see chart above). This has made US grids less vulnerable to coal price hikes, but all the more sensitive to natural gas prices, which shoot through the roof in 2022, but receded to 2016–2019 levels since. Yet, the cost of electricity for the average US citizen failed to follow suit… But why? Experts cite various reasons: growing LNG exports creating a competition between overseas and domestic buyers, heat waves, ageing infrastructure, bottlenecks, policy shifts, and of course AI data centers consuming gigawatts of power. Sure enough, AI could drain 12% of America’s electricity supply by 2028, leading to a potential 25% further price increase, which if true, could make this energy crisis the costliest so far. And we haven’t even mentioned the power churned up by bitcoin mining, let alone what factories re-shored to America would consume once they finally come online.

There are, of course, limits to these ambitions. First, there is still an unresolved worldwide transformer shortage and a supply bottleneck, delaying grid expansion plans considerably. Second, US natural gas output seems to be peaking and, in fact, rolling over — exactly at the worst moment when a whole lot more LNG export capacity comes online and AI data centers pop-up like mushrooms after a summer rain. This peak in natural gas production should come as no surprise to regular readers, though. As I explained last November, low oil and gas prices are a curse to the industry and will yield exactly these results. As high performing oil and natural gas reserves slowly deplete and get replaced with ones which deliver less oil and less gas per feet drilled, expanding gas production would require significantly higher prices. Since electricity costs are already record high (thanks to high demand and a lack of grid capacity) a rise in natural gas prices is the very last thing consumers want to see, let alone be able to pay. Something got to give.

‘But hey, we’ve still got plenty of oil and gas left!’ Sure, I’m not saying we are running out of those anytime soon. What’s important to understand here, is that neither the price of oil, nor that of natural gas, could rise back up again and stay there for much too long. As the cost of these fossil fuels builds into every single product, every kilowatt of electricity, every gallon of tap water, every food calorie, every bit of copper (and other metals) mined, there is a limit to how much the economy can bear. And when most consumers already struggle to pay their bills due to rising inflation and wage stagnation (in real terms), high energy prices can only lead to demand destruction — and even lower prices for producers.

The pressure exerted by high electricity prices also weighs on gasoline prices, leading a decline in gas consumption, too. People simply can no longer afford to drive as much as they used to. This invisible price ceiling makes further exploration, not only risky but meaningless: if there are no returns to be made at these prices, then why the fuss? Not that there is too much left to be discovered, though. According to RystadEnergy, a global independent research and energy intelligence company:

Global recoverable oil resources, including estimates for undiscovered fields, stabilized at approximately 1.5 trillion barrels. The most significant revision over the last 10 years has been in yet-to-find resources, where our projection has been reduced by 456 billion barrels. This is due to a steep decline in frontier exploration, unsuccessful shale developments outside the Americas and a doubling in offshore costs over the past five years. Rystad Energy expects reserve replacements from new conventional oil projects to be less than 30% of production over the next five years, while exploration would replace only about 10%.

In plain English we burn three times as much oil every year than what oil companies could unlock within existing fields or what becomes available through technology improvements, and ten times as much as they physically discover. We are living up a huge, but one-time inheritance at a breakneck speed. The rest is really just a play with numbers: adjusting figures in an excel file to make companies (especially nationally owned ones) more attractive for investors. Oil reserves thus remain stable on paper, even as their extraction increasingly looks like a pie in the sky:

“Full extraction of these oil resources will require oil prices stabilizing at higher levels and further estimate increases will require new technologies to lower production costs. Over the next decades, the capital needed will likely not be available to meet continuously increasing oil demand, service prices could skyrocket, and there will likely be limited appetite for innovations to sustain such high emissions from oil.”

World crude oil production in million barrels per day. The orange area is a +/-1.5% wide band around a 82.5 mb/d average production (marked by an orange dashed line). Also take note of a similar period of stagnation from 2004 to 2008, in the run up to the great financial crash in 2008. Note also, that growth after 2011 came primarily from US shale producers, while the rest of the world was already in decline. Chart: own work. Data source: Statistical Review of World Energy

Third time’s a charm

High prices or not, oil and gas are finite resources. I mean what part of that statement is unclear, controversial or hard to get? If something is finite, it means that one day it will run out. Before that could happen, though, the time arrives when — after burning the cheap, easy-to-get part — the rest becomes increasingly uneconomic to recover and global production growth stalls… Then rolls over and begins to decline. (4)

The previous two energy crises — the 1970’s then that of the 2000’s — were both linked to a peak in oil output. At first, it was the rollover of American conventional oil production. Since they were the biggest producer of that time this also led to a global decline in oil supply, which was temporarily stabilized by the ramping up of Alaskan, Gulf, North Sea and Saudi oil production in the 1980’s and 1990's. The second crisis marked the end of growth for traditional oil output worldwide, leading to a prolonged period of very high (>$100/barrel) prices. It was these high prices — combined with an investment frenzy fueled by zero interest rate policies in the wake of the great financial crisis — that led to a boom in shale oil output. By the third time we have arrived at the peak of global oil production in November, 2018, with the pandemic making it look less bad in comparison.

At the moment, global average daily crude oil production is on a bumpy plateau since 2015 — that is, for ten years now. The reason why world oil supply seemed to be stable, despite declining conventional production, was US shale oil, primarily driven by the now also peaking Permian basin in Texas. The much touted shale “revolution” notwithstanding world crude oil output was hovering around 82.5 million barrels per day for the better part of the last ten years — except for 2020 and 2021 where extraction was 5–6% lower compared to that average. As of today world oil production is poised to reach (or even surpass) the pre-pandemic peak of November 2018, once again.

Thanks to other shale plays coming online (Argentina, China) and increased offshore drilling, this brief revival will only extend the plateau period at a high cost, before the decline in large conventional fields finally erodes all gains and leads to a global decline in oil output. And before you tell yourself, that this is just plain old doomerism from a random blogger, this is exactly what finally gets admitted in mainstream media, too. Even according to Bloomberg global oil production is on track for a massive shortfall unless demand begins to fall rapidly.

This is what decline after peak oil could look like. Note: this chart puts peak into the early 2030’s, but I’m quite skeptical about the discovery portion… This scenario would require sky high prices to be realized. According to the realistic (i.e. $60/barrel) scenario we will most likely follow the light blue curve. Source

So, what do we (or rather our leaders) do in light of all this? They indulge in the fantasy of building nuclear power plants, wind turbines, dams and solar farms with battery storage, irrespective of the fact that these “alternative” technologies require fossil fuels in every single step of their lifecycle from mining to decommissioning. How on Earth we would be able to build and re-build an exponentially increasing number of those power plants while trying to dig up more metals than we did in the past 10000 years from our depleted mines, and at the same time trying to feed more people than ever with half as much oil available than today, is beyond me. My guess is that as soon as the reality of a falling oil production hits, all such pretensions will be dropped as national elites would be too busy managing the ensuing financial market collapse… Let alone keeping the lights on.

Until next time,

B

Thank you for reading The Honest Sorcerer. If you value this article or any others please share and consider a subscription, or perhaps buying a virtual coffee. At the same time allow me to express my eternal gratitude to those who already support my work — without you this site could not exist.

Notes:

(1) Fracking and drilling for natural gas alone has started change this picture in earnest from 2010 on. Besides that, as oil wells deplete they become gassier over time, resulting in a brief increase in gas production. That, however, is nothing but the swan song of the oil production in an area — much like the hissing sound you hear when your hair spray finally runs out.

(2) It was the banning of payments for Russian natural gas through SWIFT, the EU’s unilateral suspension of service contracts and European countries stopping transit flows which has led to the natural gas price spike in 2022. As Europeans scrambled to find alternatives, from burning South African coal to buying up all LNG spot cargoes they could find, they have plunged both South Africa and Pakistan into darkness as their national grids were priced out of the competition for fossil fuels to burn. The Nordstream sabotage just cemented this situation, leaving the price of natural gas in Europe twice as high as it was before the conflict.

(3) In case you were wondering: the pressure exerted by high electricity prices weighs on gasoline prices, too. People simply no longer can afford to drive as much as they used to.

(4) According to the Rystad study cited above, total of 1,572 billion barrels of crude oil were produced historically from 1900 through 2024. With their estimates of 1.5 trillion barrels remaining, we are actually halfway through Earth’s proven plus probable reserves of petroleum. Geology dictates that at this point oil fields roll over en masse, leaving us with an inexorable decline, most likely halving our production rate in the next 25 years. Steady state is not an option in a world, where the next batch of resources require an increase in energy input.