Constrained supply and increased demand have pushed energy prices to their highest levels in years, raising concerns about winter.
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Authors: Stanley Reed and Raphael Minder
LONDON-As the world struggles to recover from the pandemic, soaring natural gas prices are likely to drag down the economies of Europe and elsewhere. The wholesale price of this fuel is at its highest level in years — almost five times what it was at this time in 2019, when people started to contract the virus.
High costs have affected electricity prices and have begun to appear in utility bills, putting pressure on consumers whose personal finances are already tight due to the pandemic. Price increases are unusual because demand is usually relatively low during the warm summer months, which raises concerns about the prospect of further increases when demand surges in winter.
As wholesale prices have more than doubled, Spanish households are paying about 40% more electricity bills than a year ago, sparking angry protests against utility companies.
“The increase in electricity prices has caused a lot of outrage, which of course will take to the streets,” said Maria Camposano, spokesperson for the Spanish Coalition Against Energy Poverty, a Spanish association that helps people pay their energy bills.
This pain is felt throughout Europe, where natural gas is used for home heating and cooking and to generate electricity. Citing record natural gas prices, Ofgem, the UK energy regulator, recently gave the green light to utility companies to raise the energy bill cap of millions of households paying standard rates by approximately 12%, to £1,277 or US$1,763 per year.
There are several reasons for the price spike, including the recovery of global demand after the pandemic blockade led by China, and the decline in storage levels due to the European cold wave in the latter part of the winter. Marco Alverà, chief executive of Snam, a major Milan gas company, said that higher-than-expected demand and supply constraints are “a perfect storm”.
What is worrying is that if the European winter is cold, prices may rise further, which may force some factories to temporarily close.
"If the weather is very cold, then we are in trouble," Mr. Albera said.
This jump has prompted some people to call for an accelerated transition from fossil fuels to clean domestic energy sources such as wind and solar energy, so as to save consumers from the global commodity market.
"The reality is that we need to switch to renewable energy faster," said Greg Jackson, chief executive of Octopus Energy, a British utility company.
Analysts said that, on the other hand, if energy companies start to abandon fossil fuel production before renewable energy is ready to fill the gap, then price turbulence may also be a precursor to fluctuations. In addition, the closure of coal-fired power plants in the UK and other countries reduced the flexibility of the system, Mr. Alvera said.
The price of gasoline in the United States has also risen, but it is only about a quarter of the price of gasoline in Europe. The United States has a great price advantage compared with Europe, because it supplies a large amount of relatively cheap natural gas from shale drilling and other activities at home, while Europe must import most of the natural gas.
The imperative for the European market is that suppliers do not follow their usual practices, but use the summer months to fill storage rooms with cheap natural gas, which will be used in winter because the cold weather has increased natural gas consumption in countries such as the United Kingdom. More than doubled. And Germany.
Instead, suppliers responded to the cold weather at the end of last winter by emptying gas storage facilities. Subsequently, they have been reluctant to fill them up with high-priced gasoline. As a result, storage facilities in Europe are at the usual depletion levels in winter, rather than peak autumn.
"As we enter the winter, the market is very tight," said Laura Page, an analyst at research firm Kpler. "Our storage capacity is very low at this time of the year."
About 60% of Europe's natural gas imports include pipeline supplies from Russia and a small amount of natural gas from Algeria and Libya.
Liquefied natural gas shipped from the United States, Qatar, and other places often helps balance the market. However, this year, LNG carriers have been attracted by price increases in China, South Korea, and Brazil, where droughts have led to a decline in power generation from dams.
According to data from market research company Wood Mackenzie, as a result, the volume of LNG delivery in Italy, Spain and Northwest Europe has fallen sharply.
To make matters worse, the giant gas field Groningen in the Netherlands has long been a safety valve for the country and western Germany, but it was gradually closed due to the earthquake. Last year, the price of natural gas in Europe rose from approximately US$4 per million British thermal units to approximately US$18.
The exports of Russia and Algeria, Europe's largest natural gas suppliers, have increased significantly, but they have not been enough to alleviate market concerns. Some analysts question whether Gazprom is pursuing a high-price strategy or trying to persuade the West to allow the completion of its Beixi 2 pipeline project, which will transport natural gas from Russia to Germany.
Wood Mackenzie analyst Graham Freedman (Graham Freedman) said: “On the surface, there seems to be some kind of game being played here.” On the other hand, Mr. Friedman said, it may be the Russian gas industry. The joint-stock company has no more natural gas to export.
A Gazprom spokeswoman said: “Our mission is to fulfill our contractual obligations to customers, not to'reduce concerns about abstract markets'.” She added that Gazprom has increased its supply to nearly A record level.
The construction of this 746-mile pipeline running under the Baltic Sea stopped last year when it was completed near the German coast due to threats of US sanctions. But in an agreement reached with Germany in July, the Biden administration agreed to abandon the threat of stopping the pipeline. On Monday, the project’s management company stated that its goal is to put the pipeline into operation this year.
Stanley Reed reported from London, and Raphael Minder from Madrid.