European gas prices have soared in recent weeks, climbing to a high of $25 per million British thermal units (chart 1, left panel). A number of factors, from Russian supply bottlenecks to a lack of wind in the North Sea, caused the spike. As winter approaches, the countries most dependent on gas—for heating homes and generating electricity—could be feeling the chill.
Even before the recent price surge, gas was in short supply. A prolonged northern-hemisphere winter meant that European countries ran down reserves, leaving their stocks 25% below the historic average (chart 1, right panel). Disruptions of imports piped from Russia and Norway, which supply nearly half of Europe’s gas, made inventories hard to replenish. The flow from Norway was limited because of work on improving the country’s infrastructure; a fire at a processing plant in Siberia and the need to refill their own tanks after a brutal winter throttled Russian output.
A lack of alternatives exacerbated the squeeze on supply. Rising demand for liquefied natural gas in Asia, as economies there have recovered from the covid-19 slowdown, has driven up prices. Meanwhile wind turbines, which generate about 10% of Europe’s power, slowed during an unusually still summer.
Normally European power companies would switch to coal when the prices of gas and alternative energy sources rise. But dwindling supply from European mines and high demand from China have pushed up the price of the black stuff, too. So has the rising cost of European carbon permits, which carbon producers must buy to offset their emissions. From around €30 ($35) per tonne at the start of the year, they climbed to a record €63 in early September (chart 2). And 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 (chart 3), has suffered most. The wholesale price paid by suppliers has spiked 250% this year; that, coupled with a regulatory cap on retail prices, has driven several smaller ones out of business. The government has ruled out a bail-out for ailing survivors. Heavy industry is already reeling from price increases. With energy prices expected to remain high, consumers may soon feel the pinch, too. Europeans should hope for a warm and windy winter. ■
Editor’s note: This article has been updated to include the British government’s ruling out bail-outs for gas suppliers
Source: https://www.economist.com/graphic-detail/2021/09/20/what-is-behind-rocketing-natural-gas-prices
