It is looking like a race with no end goal. The price of gas continues to rise, becoming unaffordable for households and businesses all over the world. On 26 August 2022, natural gas in Amsterdam, Europe’s reference market, hit a new all-time high at EUR 339 per Megawatt-hour, then fell back a few points to EUR 337.
That is seven times more than a year earlier. Why? Why are prices rising like that? Experts argue that many are the causes and are only partly attributable to the new phase of the war in Ukraine and Putin’s blackmailing attitude towards Europe and other international adversaries. The price of gas had already reached considerable peaks as early as December 2021, i.e. two months before the invasion: 292 euros per MWh (megawatt – hour). The reality is that a large part of the problem is nothing more than the ‘drag’ of the pandemic. So, the causes of the price increase are many. The unfortunate thing is that they have added up.
This dossier inquires about the mechanisms leading to the price rises and that lay their deeper roots in the shape of the economic system itself.
Cover image: Mykola Makhlai. Below: American Public Power Association on Unsplash
It all starts with the Pandemic
For example: the end of the pandemic scare and the resumption of production activities worldwide led to a strong demand for natural gas. The crisis winter had effectively depleted stocks and, in response, there was a significant reduction in supply on the international markets. Why? Because of problems related precisely to the pandemic crisis, which forced the postponement of plant maintenance, reduced possible investments, and created a bottleneck in transport by sea.
While all this was happening rapidly, China was coming out of its COVID-19 torpor and increasing the demand for supplies for its plants, seeking new suppliers, given the international political problems that had recently arisen with Australia and the United States. The same applies to India, another industrial giant that has experienced a surge in demand for resources after the pandemic. Meanwhile, there was also less natural gas production from Russia and Norway. Added to this, several analysts including Greg Molnar of the International Energy Agency claim, was the exceptional heat this summer. Electricity consumption has skyrocketed, thanks to the use of air conditioners to cool homes and offices. Finally, there was war, with Russia playing with opening and closing the taps of the various gas pipelines supplying Europe.
a storm on the US, too
There is a further anomaly: the price of natural gas is also rising in the USA, which is the largest natural gas producer in the world and is completely independent of Russia. The reasons for this, too, are many: stocks are lower than average, due to the very hot summer. On the other hand, production at this stage is low, because the big companies prefer to keep their expenses low, just as exports are high, especially to Europe, and this obviously affects the price.
Following these arguments, it would seem to rule out the thesis of speculation, i.e. that the cost of the raw material is inflated and that investors are betting on the lower availability of gas to make big profits. For many experts, the problem lies in the pure logic of supply and demand: if the former increases due to industrial recovery or the private needs of citizens and the latter decreases, for technical or political reasons, it is inevitable that prices will skyrocket.
If this is true – and in part it certainly is – the situation in the coming months is not expected to improve. In fact, the market will be affected by the competition that will be unleashed between Europe and large Asian producers – China, India and Japan – to secure the gas supplies needed for industrial production. A hoarding race that risks driving up prices even further.
In short, there seems to be no room for optimism. Experts look to the future and see an increase in demand for electricity for the electrification of transport and heating. At the same time, dozens of coal and nuclear power plants will close. The grids, however, will have to remain stable to satisfy businesses and citizens. Renewable energies, such as wind or solar, even if work starts immediately, will take at least ten years to become a credible and consistent alternative. In the meantime, at least until gigantic storage and transmission infrastructures are built continent-wide, thermal power plants will be needed to compensate for fluctuations. And these power plants will be and are fuelled by natural gas. As if to say: back to square one.
WHO DOES WHAT: How are the EU States responding?
EU countries are trying to tackle the energy crisis by preparing rationing storage plans. To date – August 2022 – the only one approved thus far is the German one. German Chancellor Olaf Scholz and Deputy Minister for Economic Affairs Robert Habeck have set a target of reducing consumption by 20 per cent.
A number of measures will therefore be triggered from 1 September 2022:
– in public buildings, corridors and passageways will have to keep the heating off, while in public areas the temperature must not exceed 19 degrees;
– buildings and monuments will no longer be illuminated
– signs and illuminated billboards will be switched off, as will shop windows between 10 p.m. and 6 a.m;
– private individuals will only be prohibited from heating swimming pools.
For private individuals, as things stand, these are only suggestions and not obligations. In any case, Berlin has calculated a gas saving of about 2-2.5 per cent.
FOCUS 1: natural gas reserves globally
According to BP’s Statistical Review of World, these were in 2020 the top 10 countries in the world in terms of gas reserves. The measurement is in trillions of cubic metres.
1. Russia: 37.4;
2. Iran: 32.1;
3. Qatar: 24.7;
4. Turkmenistan: 13.6;
5. United States: 12.6;
6. Venezuela: 6.3;
7. Saudi Arabia: 6.0;
8. United Arab Emirate: 5.9;
9. Nigeria: 5.5;
10. Algeria: 2.3
As experts point out, in the 20-year period encompassing 2000 – 2020, proven natural gas reserves increased by 1.5 trillion cubic feet. In 2019, world reserves peaked at just over 7 trillion cubic feet. 38% of these reserves are in the Near East.
FOCUS 2: dependence on Russian gas
Germany is the European country most dependent on Russian gas. In 2020, Berlin imported about 65% of its natural gas from Russia, i.e. 42.6bn cubic metres. Italy was second, with 29.2bn cubic metres. Germany’s energy dependence on Moscow stems from the accident at Japan’s Fukushima nuclear power plant in March 2011. Berlin decided to get out of nuclear power and started the conversion of its power plants. It increases gas imports from Russia and reaches agreement on the Nord Stream pipeline. At the same time, it focuses on renewables, which now provide around 48% of its total energy. The second most dependent European country on Moscow’s gas is Italy. It imports 38% of the gas it consumes. This dependence has increased over the years: in 2012 it was 30%. Italy imports 95% of the gas it consumes, about 72 billion cubic metres. Rome has decided to raise the level of its domestic natural gas production and at the same time has made agreements to increase imports from Algeria, Egypt, the Republic of Congo and Angola. In Europe, Austria, Hungary, Slovenia, and Slovakia obtain about 60% of their natural gas from Russia.