What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing. China has dominated the headlines recently with the evergrand collapse, which has the potential to de-leverage the company's red-hot real estate sector and cause an economic slowdown. But recently there have been new developments in the world's second largest economy, which could cause even greater disruptions and have the potential to ripple through the world. Over the past few weeks, provinces throughout china have started facing serious electricity shortages, with many industrial companies being forced to severely reduce their electricity consumption.

They first started restricting power to commercial enterprises such as factories limiting the hours they were allowed to operate in three northeast provinces. Shortages have gotten so bad that electricity is being rationed for residential uses. More than 100 million people, or about 10 of china's population now face energy rations limiting the times of day that they have access to electricity to make matters even worse. The area's hardest hit are the northern regions, which face extremely cold temperatures during the winter, as temperatures get even colder over the next few months.

The shore just could get even worse, while the northeast regions are hardest hit, power restrictions are affecting almost all regions of the country. The heavily populated and economically important province of guangdong has imposed restrictions, including, but not limited to not allowing air conditioning to be set below 26 degrees celsius, not using elevators for the bottom three floors of buildings and temporarily shutting down electricity intensive factories. There are two important questions to ask regarding this power crisis. Firstly, china is reasonably advanced with modern energy infrastructure.

How is it possible that they could have such a massive public utility failure and, secondly, with china being one of the most important industrial exporters? What impacts will these energy rations have on the rest of the world? Coal is a major energy source in china, accounting for about 65 percent of total consumption. It is also perhaps the least environmentally friendly way to produce electricity due to its high carbon footprint and various toxic chemicals that releases into the air. It's estimated that coal related air pollution directly or indirectly causes up to a quarter million premature deaths in china. Over the past few years, president xi jinping has tried to reduce the country's dependence on coal and switch it to renewable energy, as well as natural gas, which is comparatively cleaner.

They have committed to increasing the share of renewable energy to 20 percent of consumption by 2030.. To this end, they have reduced issuances of new coal mining permits, tightened safety regulations at coal production facilities and otherwise made it more difficult to produce the commodity. They urgently want to increase air quality before the 2022 winter olympics, so they can show the world they are serious about decarbonization. The plan was to slowly win the company off of coal, so they would have time to develop cleaner forms of energy.

To pick up, the slag they've invested billions of dollars in solar and wind energy, but still not enough to completely replace coal and, with these forms of energy being unreliable, they need to increase their natural gas production to power the grid during times of peak demand. During the post-pandemic recovery, global demand rebounded much faster than most observers, initially anticipated. This was largely boosted by unprecedented fiscal and monetary stimulus in the u.s and other western nations. Steele and other commodities have seen their prices surge since beginning of the year.

On the back of strong demand, according to data compiled by reuters, the prices of many energy-intensive commodities have more than doubled on a year-over-year basis. Chinese factories started running on all cylinders to take advantage of the high prices. This has increased electricity demand 16. In the first half of 2021, as compared to the prior year, china's energy woes have been compounded by the fact that they import a significant amount of coal from the natural resource, rich australia.

Diplomatic relations between the two countries took a sharp turn for the worst. This past april, when australia's foreign minister called for an inquiry of china's early handling of the kovit 19 pandemic relations got even worse. Recently after australia signed a multi-billion dollar deal with the us and uk to develop nuclear submarines. This was widely viewed as an effort to deter china's power in the region to retaliate against australia, china banned coal and other imports from the country.

It looks like these restrictions will end up hurting china more than it hurts australia, as it further exacerbates their already desperate electricity situation, and things are truly getting desperate. On september 24th, a sudden power outage at a casting factory in nao ying province resulted in gas poisoning which sent 24 workers to hospital in critical condition. Coal shortages during the winter months are not new to china. In the past they would fill the gap by importing natural gas from other countries, but a combination of increased demand from europe and other asian nations, as well as supply constraints in russia, have caused prices to soar.

Public utility providers in china charge semi-fixed electricity rates to end customers with global natural gas prices. Surging, their only option is to impose quotas to conserve what little supply they have unless china can start importing coal from australia again soon. Most analysts expect the shortages to last. Until march of 2022, when temperatures start rising again, china and other asian nations buy much of their natural gas from russia.

As chinese demand. Surged, russia's supply has come under severe strain. This has led to surging prices across europe. For example, uk natural gas prices have increased about 4 fold since the beginning of the year, which has led to shortages and skyrocketing electricity bills to consumers.

Most natural gas is transported by pipelines, while can be liquefied and transported by ship. This is a difficult process and only certain ports have the capacity to process these shipments, unlike oil, which is easily transportable natural gas prices, can differ significantly from country to country. Currently, prices in the uk are more than double than in the us. The situation in europe is not nearly as bad as china and there are not yet power outages, but there are serious concerns that things could get a lot worse in the winter when energy demand is seasonally highest.

The global natural gas shortage is caused by two major factors. Firstly, demand has rebounded from the pandemic much faster than expected. Natural gas producers did not adequately prepare for this, and it takes a long time to bring capacity online. In just like china, european nations have been decreasing coal consumption in favor of renewable energy, such as wind and solar.

These forms of energy are unreliable and thus require natural gas to fill in the gaps. The combination of decreased production and increased demand have caused prices to soar, while u.s natural gas prices have risen substantially this year, they're nowhere near as high as in china or europe have not resulted in shortages. This is largely because the us is natural gas. Independent advances in fracking technology have allowed the country to produce more than it consumed since 2015..

Most of the gas is transported domestically and has not been subject to major disruptions. Increased global demand has caused us producers to liquefy some of that natural gas and ship it overseas, but the liquid natural gas ports have limited capacity and u.s prices have remained substantially below global spot prices for the past few months, while the us is not directly impacted By the chinese power shortage, the indirect effects will be immense. China is a major exporter of commodities and industrial products. The power rationing will negatively impact the global supply of steel, electronic components, manufactured consumer goods and pretty much anything else you can think of.

This will lead to greater commodity and consumer price inflation in the u.s. This could potentially benefit companies outside of china that many factor affected commodities such as steel and aluminum. The biggest losers of this situation will be manufacturing companies that rely on components supplied from china or the commodities that will see their prices, increase it'll, probably be a bad thing for the automobile manufacturers who are already facing a chip shortage. The last thing they need is a shortage of steel and aluminum from china, but appears that this is exactly what they'll get on the macro side.

The decrease in output from china will almost certainly increase consumer price inflation in the us, as china accounts for almost 20 percent of u.s imports, the fed could possibly call this negative supply shock transitory and thus not adjust their interest rate policy timeline. The power shortages in china and europe also show how dependent the world still is on coal. China will likely have to delay its timeline for transitioning to renewable energy sources if they want to avoid similar shortages to happen in future winters being the world's largest emitter of carbon dioxide. This probably is not a great thing for climate change.

Alright guys that wraps it up for this video, what do you think about china's energy crisis? When do you think they can stop using coal? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.