Global energy crisis comes to drought-stricken South America

Ethan Paterno, energy markets expert at PA Consulting, comments on US hydropower generation and droughts impacting the West.

Click here to read the full Bloomberg article

The article notes that the energy crisis sweeping the globe is about to hit South America, where a historic drought has the region desperate to replace a collapse in hydroelectric generation.

Brazil is on the edge of power rationing and major blackouts, and will need to rely heavily on importing supplies from Uruguay and Argentina through next month until the rainy season starts and dams are replenished. That will strain the entire continent, with countries like Chile also hoping to rely on Argentine gas to make it through a hydro crunch of their own.

South America in many ways has been ahead of the game when it comes to the energy transition. Brazil, Latin America’s biggest economy, has relied on its hydroelectric industry for decades and would typically use the source for more than 60% of the country’s electricity. But climate change is shifting the dynamics as long-lasting and worsening droughts overtake the region, making hydro increasingly less dependable. 

Now the continent will be forced to compete for natural gas as its back-up fuel just as more of the world is doing the same, with Europe and China facing enormous energy squeezes as well. 

The surge in export demand has already sent gas prices sky-rocketing. Futures traded in New York have more than doubled this year. In Asia, prices for liquefied natural gas, which get shipped around the world, have soared five-fold since April to a record. 

And South America isn’t the only region struggling to compensate for dried out hydroelectric reservoirs as fossil fuel prices surge. A drought gripping the U.S. West has dried up rivers and streams, reducing reservoir levels at some of the nation’s biggest dams to record lows. Overall, the extremely dry conditions are expected to reduce the nation’s hydropower generation by 14% in 2021 compared with last year, according to U.S. Energy Information Administration.

Ethan says: “We are in a new paradigm of lower precipitation across the West” in the US. Ultimately, that’s going to mean lower hydroelectric production going forward.”