One of the strongest El Niño climate patterns in the past 50 years is active and causing irregular weather patterns globally. El Niño is characterized by above-average ocean temperatures in the eastern and central equatorial Pacific Ocean. The weather pattern began to develop in March 2015 and is expected to peak between December 2015 and April 2016, when the equatorial Pacific Ocean temperatures are warmest. What sort of impact will El Niño have on various sectors of the energy industry as it begins to peak?
Reduced Natural Gas Demand
Temperatures are expected to be above-average during the winter in large areas of the Northern Hemisphere as a result of El Niño. In terms of natural gas (NG), the three largest consumers are the United States, Russia, and China. North America tends to see greater increases in temperature during an El Niño event when compared to Asia, but both areas are forecast to have a warmer-than-average winter in significant NG heated areas. In much of the Midwestern and Northeastern regions of the United States—areas that tend to have the strongest demand for NG—a warmer winter is expected. While much of the Southern United States may see slightly colder weather, this will not cause a significant increase in NG demand. Overall, decreased NG demand does not bode well for an already decimated NG market. Inventories for NG are expected to reach all-time highs this winter.
Less Wind Energy
According to the U.S. Energy Information Administration, wind power generation fell 6% during the first half of 2015, despite an increase in wind generation capacity of 9%. The forecast shows more of the same until the spring of 2016, with wind power producing over 4% of electricity generation nationwide. Wind farms have been operating near one-third of capacity so far in 2015 and should expect more of the same through early 2016.
El Niño leads to heavy rains and snow along the western coast of the Americas. While this can provide some drought relief, flooding also becomes a major concern. For markets that generate significant electricity from hydroelectric dams, the increased moisture and snow pack from El Niño are a welcome sight.
Potential Reduction in Crops for Biofuels
Palm oil is a primary feedstock for biodiesel production. Over 85% of the world’s palm oil exports are produced in Malaysia and Indonesia. For Southeast Asia, El Niño means warmer, drier weather. This can lead to drought and increased fires in the Indonesian peatlands. Haze from the fires stunts fruit growth and palm oil production. While palm oil is only one of several sources of vegetable oil used in biodiesel production, increased prices of palm oil may lead to higher production prices for biodiesels. Although the fires in Indonesia have some impact on biofuels prices, it is having a much more significant toll on greenhouse gas emissions and air quality across Asia.