Reasons Behind the Gas Price Rise in Europe
Since the start of the Russia-Ukraine conflict, the United States, the European Union, and the United Kingdom have imposed several rounds of sanctions on Russia. While this has negatively impacted Russia, it has also led to a back-biting effect that has imposed a significant toll on many European countries. Energy supplies have been severely strained, leading to a surge in electricity and gas prices, rampant inflation, and an overall sense of despair among citizens.
Recently, Bloomberg reported that European gas prices, which have been on the rise due to gas shortages, have slipped slightly from the record levels reached earlier this year.
One of the most significant reasons behind the rise in gas prices is the reduction in gas imports from Russia. While imposing energy sanctions on Russia is an option, it won't be a straightforward solution for Europe. Putting an end to trade with energy giants like Russia altogether would be an expensive strategy for Europe, given its heavy reliance on Russian fossil fuels to meet the region's energy demands. For example, Germany, which imports more than half of its gas from Russia, mostly through the Nord Stream 1 pipeline, would face significant challenges.
Several factors are contributing to the surge in gas prices. The demand for natural gas in Europe, seen as a bridge toward energy transition, has witnessed a rapid increase in recent years. In 2014, EU gas demand was 400 BCM, which rose to 470 BCM in 2019. While figures for 2020 and 2021 are yet to be released, in Germany alone, gas consumption was 60% higher than the previous year's level even in April, when heating was not required. According to Fast Company, about 85% of British households rely on gas for heating, more than any other European nation except Italy. Italy, on the other hand, counts on gas for 40% of its power generation capacity, half of which it imports from countries such as Russia.
Moreover, Europe's gas reserves dropped to their lowest in a decade this summer as prices continued to escalate, leading to panic in both markets and the public.
The rising price of natural gas in the international market is the result of a global imbalance between supply and demand. Several factors contribute to this situation. For instance, Eurasia experienced an abnormally cold winter and spring, which increased the demand for natural gas for heating. Additionally, unusually high summer temperatures in Europe, the United States, and Australia have also led to a spike in demand for cooling energy. Furthermore, the global economic recovery is fueling energy demand growth.
However, on the supply side, the world is projected to supply around 3.85 trillion cubic meters of natural gas in 2020, a 3.3% decrease from 2019. There have been few approved new liquefied natural gas (LNG) export projects worldwide, except for Qatar, which is expanding its gas export project significantly. While the global LNG supply increased by 30 to 40 million tonnes per year over the past few years, it only grew by around 10 million tonnes from 2020 to 2021, leaving a supply gap that has made higher gas prices inevitable.
In addition to these global factors, Europe's non-fossil energy sector has had a challenging year. Wind power generation has been below average due to a prolonged period of low wind, and rare droughts in places like Norway have reduced hydroelectric output to meet export demands. Furthermore, the UK's nuclear power plants are undergoing maintenance, while countries like Germany and Sweden continue to shut down their nuclear power plants under a nuclear de-nuclearization policy. All these factors have pushed up the demand for gas in Europe.
Europe's climate policy has been contributing to the rising energy prices seen across the continent. One of the key impacts of this policy is the increasing cost of carbon permits. These permits create a cost for power plants that use coal instead of natural gas. Given these incentives, power plants have looked to switch to natural gas for power generation, as it has fewer carbon emissions. However, due to recent reforms that aim to cut the number of permits issued, their prices have skyrocketed to record levels. Such high costs make it more expensive to use coal instead of natural gas, leading to an increase in energy prices.
However, the recent surge in natural gas prices has made some power plants revert to dirtier coal, despite the high price of carbon permits. This shift has further intensified the carbon permits' price, leading to even higher energy costs. According to Euronews, roughly 20% of the current energy price increase can be traced back to the rising cost of carbon permits, based on data from the European Commission.
To address the current energy crisis, Europe is taking steps such as increasing gas storage and implementing government spending plans that aim to reduce the burden on households. However, many Europeans are worried about next winter when they will face an even greater energy predicament. Russia will cut off gas supplies, and government subsidies cannot sustain for a while. Many Europeans believe that the upcoming winter will be the hardest.
