High natural gas prices weigh on Europeans and weigh on recovery

LONDON – As the world struggles to recover from the pandemic, soaring natural gas prices threaten to become a drag on economies in Europe and beyond. Wholesale fuel prices are at their highest level in years – nearly five times what they were then in 2019, before people started to get sick from the virus.

High costs are fueling electricity prices and have started showing up in utility bills, weighing on consumers whose personal finances have already been strained by the pandemic. Price hikes are unusual as demand is generally relatively weak during the warmer summer months, raising alarm bells about the prospect of further increases when demand increases in the winter.

Spanish households are paying around 40% more than they paid for electricity a year ago, as the wholesale price has more than doubled, prompting angry protests against utility companies.

“The rise in electricity prices has created a lot of outrage, and of course this is moving into the streets,” said María Campuzano, spokesperson for the Alliance Against Energy Poverty, a Spanish association that helps people people who are struggling to pay their energy bills.

The pain is felt across Europe, where gas is used for home heating and cooking as well as for the production of electricity. Citing record prices for natural gas, the UK energy regulatory agency Ofgem recently gave the green light for utilities to raise the ceiling on energy bills for millions of households paying standard tariffs by around 12%, to 1,277 pounds, or $ 1,763, per year.

Several trends are behind the surge in prices, including a resurgence in global demand after pandemic lockdowns, led by China, and a European cold snap at the end of this year’s winter that drained markets. storage levels. The higher than expected demand and the reduced supply are “a perfect storm,” said Marco Alverà, managing director of Snam, Milan’s big gas company.

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

“If it’s cold, then we’re in trouble,” Alverà said.

The jump has prompted some to call for an acceleration of the shift from fossil fuels to clean household energy sources like wind and solar power to free consumers from being at the mercy of global commodity markets.

“The reality is that we need to switch to renewables faster,” said Greg Jackson, managing director of Octopus Energy, a UK utility.

On the flip side, price turmoil can also be a harbinger of volatility if energy companies start to move away from fossil fuel production before renewables are ready to take over, analysts say. In addition, the closure of coal-fired power plants in Britain and other countries has reduced the flexibility of the system, Mr Alverà said.

Gas prices in the United States have also increased, but they are only about a quarter of those paid in Europe. The United States has a great price advantage over Europe due to 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 European markets is that suppliers did not follow their usual practice and used the summer months to fill the storage chambers with cheap gas which will be used during the winter, when the cold more than doubles gas consumption in countries like Great Britain. and Germany.

Instead, suppliers responded to the cold at the end of last winter by emptying gas storage facilities. Subsequently, they were reluctant to refill them with high-priced gas. As a result, European storage facilities are at the usual depleted levels in winter rather than peaks in autumn.

“The market is very nervous as the winter season approaches,” said Laura Page, analyst at Kpler, a research firm. “We have very low storage levels for the time of year. “

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

Liquefied natural gas, arriving by ship from the United States, Qatar and elsewhere, generally helps to balance the market. This year, however, LNG carriers have been lured by higher prices in China, South Korea and Brazil, where a drought has caused a drop in the power generated by the dams.

As a result, Italy, Spain and northwestern Europe have seen steep declines in liquefied natural gas infusions, according to data from Wood Mackenzie, a market research firm.

In addition to the tense situation in Europe, Groningen, the giant gas field in the Netherlands that has long served as a safety valve for both its home country and West Germany, is gradually being closed. due to earthquakes. Over the past year, European gas prices have fallen from around $ 4 per million British thermal units to around $ 18.

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

“At first glance, it seems like some sort of game is playing out here,” said Graham Freedman, analyst at Wood Mackenzie. On the other hand, Freedman said, Gazprom might not have any more gas to export.

A Gazprom spokeswoman said: “Our mission is to fulfill contractual obligations to our customers, not to ‘reduce the concerns’ of an abstract market.” She added that Gazprom had increased its supplies to near record levels this year.

Construction of the 746-mile pipeline, which runs under the Baltic Sea, was halted last year just before its completion off the German coast by threat of US sanctions. But in a deal with Germany in July, the Biden administration agreed to drop its threat to shut down the pipeline. On Monday, the project’s management company said it aims to operate the pipeline this year.

Stanley Reed reported from London and Raphael Minder from Madrid.

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