High Natural Gas Prices Strain Europeans, Weighing on Recovery

LONDON – As the world struggles to recover from the pandemic, rising natural gas prices threaten to weigh on the economies of Europe and elsewhere. Wholesale prices for the fuel are at their highest level in years – almost five times what it was at this point in 2019, before people contracted the virus.

The high costs flow into electricity prices and appear in electricity bills, putting a strain on consumers whose personal finances are already strained by the pandemic. The price jumps are unusual, as the demand in the warmer summer months is usually relatively low, which raises the alert about the prospect of further price increases in the case of demand jumps in winter.

Spanish households are paying around 40 percent more for electricity than a year ago as the wholesale price has more than doubled, sparking angry protests against utilities.

“The electricity price increase caused a lot of outrage, which of course also took to the streets,” said María Campuzano, spokeswoman for the Alliance against Energy Poverty, a Spanish association that helps people who have to pay their electricity bills.

The pain can be felt across Europe, where gas is used for heating and cooking, as well as generating electricity. Citing record prices for natural gas, UK energy regulator Ofgem recently gave the green light to utilities to raise the energy bills ceiling for millions of homes paying standard tariffs by about 12 percent to £ 1,277 or $ 1,763 a year.

Several trends are responsible for the soaring prices, including a resurgence in global demand for pandemic lockdowns, led by China, and a European cold snap in the latter part of winter that depleted stocks. The higher than expected demand and the scarce supply are “a perfect storm,” said Marco Alverà, CEO of Snam, the major gas company in Milan.

The concern is that if Europe had a cold winter, prices could continue to rise, possibly forcing some factories to temporarily close.

“When it’s cold we are in trouble,” said Mr Alverà.

The jump has led some to call for accelerating the shift from fossil fuels to clean domestic energy sources such as wind and solar in order to free consumers from being at the mercy of global commodity markets.

“The reality is we need to move to renewable energy faster,” said Greg Jackson, CEO of Octopus Energy, a UK utility.

On the flip side, the price turmoil can also be a harbinger of volatility as energy companies begin to abandon fossil fuel production before renewables are ready to offset the slack, analysts say. In addition, the closure of coal-fired power plants in the UK and other countries has reduced the flexibility of the system, Alverà said.

Business & Economy

Updated

9/8/2021, 6:19 p.m. ET

Gas prices have also risen in the US, but they are only about a quarter of the prices paid in Europe. The United States has a huge price advantage over Europe because of its large domestic supply of relatively cheap gas from shale drilling and other activities, while Europe has to import most of its gas.

The immediate concern for markets in Europe is that suppliers have not followed their usual practice, using the summer months to fill storage chambers with cheap gas, which is used in winter when cold weather increases gas consumption in countries like the UK than doubled and Germany.

Instead, the suppliers responded to the cold weather late last winter by emptying gas storage tanks. As a result, they were reluctant to refill high-priced gasoline. As a result, European storage facilities are more likely to be at their usual depleted levels in winter than they are at their autumn highs.

“The market is very nervous as we head into the winter season,” said Laura Page, an analyst at research firm Kpler. “We have very low stocks for the time of year.”

Europe imports around 60 percent of its gas, with pipeline supplies coming from Russia and, to a lesser extent, from Algeria and Libya.

Liquefied natural gas, which arrives by ship from the US, Qatar, and elsewhere, typically helps balance the market. This year, however, LNG tankers have been attracted by higher prices in China, South Korea and Brazil, where a drought has caused a decline in energy generated by dams.

As a result, Italy, Spain and northwestern Europe have seen a sharp drop in liquefied natural gas infusions, according to research firm Wood Mackenzie.

In addition to the tense situation in Europe, Groningen, the huge gas field in the Netherlands, which for a long time served as a safety valve for both its home country and West Germany, is gradually being shut down due to earthquakes. Last year, European gas prices rose from around US $ 4 per million British thermal units to around US $ 18.

Russia, the largest gas supplier to Europe, and Algeria have increased their exports significantly, but not enough to allay market concerns. Some analysts wonder whether Gazprom, Russia’s gas company, is pursuing a high-price strategy or is trying to convince the West to allow the completion of its Nord Stream 2 pipeline project, which will deliver gas from Russia to Germany.

“At first glance, it looks like some kind of game is being played here,” said Graham Freedman, an analyst at Wood Mackenzie. On the other hand, according to Mr Freedman, Gazprom could run out of gas to export.

A Gazprom spokeswoman said, “Our mission is to meet contractual obligations to our customers, not to reduce the concerns of an abstract market.” She added that Gazprom has increased deliveries to near record levels this year.

The construction of the 746-mile-long pipeline, which runs under the Baltic Sea, was stopped last year shortly before completion off Germany’s coast by threats of US sanctions. But in a deal with Germany in July, the Biden government agreed to drop its threat to stop the pipeline. On Monday, the project’s management company announced that the pipeline should be operational this year.

Stanley Reed reported from London, Raphael Minder from Madrid.