What is behind rocketing natural-gas prices?
European gas prices have soared in recent weeks, climbing to a high of $25 per million British thermal units (see below, left panel). There are, as always in these issues, a number of factors that are being blamed for the cause of the spike such as Russian supply bottlenecks to a lack of wind in the North Sea.
However, as winter approaches, those countries most dependent on gas, for heating homes and generating electricity, could be feeling the chill.
But we have to put all this in perspective. Even before the recent price surge, gas was in short supply. Following a prolonged northern-hemisphere winter, European countries ran down reserves and, in doing so, left their stocks 25% below the historic average (chart, right panel).
The market then experienced significant disruptions of imported gas piped in from Russia and Norway. This ‘route’ supplies nearly half of Europe’s gas and the disruption made inventories hard to replenish. The flow of gas from Norway was limited due to on-going work on improving the country’s infrastructure, a long-term project not due to complete for another 3 years. We then had a massive fire at a processing plant in Siberia leading the Russians to refill their own stock after a brutal winter throttled its output.
On top of this, is a multi-government lack of vision concerning a “Plan B”. Few, if any, governments have addressed a fall in supply and all the rhetoric from the politicians has come home to roost. Simply put, the lack of alternatives exacerbated the squeeze on supply.
In addition to Europe’s weather woes, as a result of significant climate change, there was also a rising demand for liquefied natural gas in Asia as economies recovered from the Covid-19 slowdown. All of this has driven up prices.
And just to add more weather woes, those wind turbines we all love (we all love them, yes?), which generate about 10% of Europe’s power, slowed down during an unusually still (lack of wind) summer.
In a normal, cyclical weather pattern, European power companies would switch to coal when the prices of gas and alternative energy sources rise. However, dwindling supply from European mines and high demand from China have pushed up the price of the black stuff as well. Let’s not forget the rising cost of European carbon permits, which carbon producers must buy to offset their emissions. We have seen prices move from around €30 per tonne at the start of the year, to a record €63 in early September. Don’t forget, if more coal is burnt to compensate for the dearth of natural gas, increased demand for permits will push their price up even more.
Countries heavily reliant on natural gas and wind have been hardest hit. Britain, which derives about 40% of its energy from natural gas and 20% from wind turbines, has suffered most as it has to purchase the rest of its energy needs from overseas. The deals to do so have been in place for decades and we would have been in the same place in or out of the EU. This is not the EU being difficult, this is the market in the middle of a perfect storm. The wholesale price paid by suppliers has spiked 250% this year and, coupled with a regulatory cap on retail prices, has driven several smaller providers out of business and the government is considering emergency loans to prop up ailing survivors.
With all this talk of wind and gas, we also need to be realistic about our own energy use. There are plenty of alternative options available and maybe now is the time to look at them as see what we can all do to reduce our energy usage and be a little greener. With energy prices expected to remain high, consumers may soon feel the pinch and we need to wish for a warm and windy winter!
Should you require any further information, please do not hesitate to speak to your Prosperis adviser on 01423 223640 or email us below.
