Why are natural gas prices rising?
The basic reason for the global price spike is a shortfall in inventory just as temperatures begin to dip (gas is the main fuel for home heating in the US and Europe). Gas stockpiles in the US are at least 7% below average; in Europe they're more than 20% below average. QuartzWhy is natural gas so expensive right now?
European gas prices broke historic records this month, edging close to an unprecedented $1,000 per 1,000 cubic meters. The price spike can be partly blamed on supply chains being unable to meet the rising energy demand in both the household and industry sectors as the global economy gets back on the rails after the global Covid-19 crisis. However, experts say major Western economies have become too dependent on renewable energy sources, such as wind and solar power. And this doesn’t seem to pay off, with the Wall Street Journal reporting last week that low winds in the North Sea were brewing chaos for energy networks.
“The sudden slowdown in wind-driven electricity production off the coast of the UK in recent weeks whipsawed through regional energy markets. Gas and coal-fired electricity plants were called in to make up the shortfall from wind,” the outlet reported. As a result, electricity prices have also been on the rise.
“Electricity and gas prices are going to be higher at home than everybody would want and they are going to be higher than they have been for about 12 years,” Dermot Nolan, a former CEO of UK energy regulator Ofgem, told Bloomberg in an interview.
Rising gas prices may also force European countries to pause their ambitions to turn to green energy sources, returning back to the dirtiest of them all – coal.
“Underfilled storage facilities continue to push the price of gas higher. If the facilities are not refilled now, and the winter turns out to be rather severe, EU nations may be forced to reactivate thermal power plants operating on other types of fuel, including coal, to compensate for the lack of electricity,” EU energy markets expert Simonas Vileikis told TASS.
Europe’s major gas supplier, Norway, has been unable to meet the demand with North Sea fields undergoing heavy maintenance after pandemic-induced delays. And amid all of this, European gas inventories are at their lowest level in more than a decade for this time of year. Given the rise in natural gas demand in Asia, which could force suppliers to turn their attention there, experts say the situation in Europe will get worse before it gets better.
“Gas supply is short, coal supply is short and renewables aren’t going great, so we are now in this crazy situation,” Dale Hazelton, head of thermal coal at Wood Mackenzie Ltd told Bloomberg.
“With natural gas prices already hitting record highs in Europe ahead of rising winter demand, prices could move even higher in the coming months… There is a potential it can get worse,” said Stacey Morris, director of research at index provider Alerian in Dallas.
According to Goldman Sachs, Europe will need to curb energy demand if the winter is cold, otherwise it may face outages. Rising energy prices are already putting some industries under stress, with fertilizer plants in the UK and Norway closing or curbing output. This puts at risk the EU’s food-supply chain, which uses natural gas in the heating of greenhouses and requires carbon dioxide gas, a byproduct of fertilizer production, in everything from meat processing to the beer and drinks industries.
Russian gas giant Gazprom’s CEO Alexey Miller recently said the EU will enter winter in about a month without having fully replenished its stockpiles. However, this could all change if Brussels stops stalling the launch of Russia’s Nord Stream 2 gas pipeline, which is capable of restocking European storages to the brim. The pipeline’s daily capacity of gas supply is comparable to the entire volume of liquefied gas that is now supplied to Europe.
Nord Stream 2 consists of two pipelines with a collective capacity to deliver as many as 55 billion cubic meters of natural gas annually from the Siberian fields in Russia directly to Europe via the Baltic Sea. The pipeline’s construction was completed earlier this month; however, Europe has been reluctant to speed up the certification process needed to launch deliveries. The project has been delayed under pressure from Washington and some Eastern European countries, which are opposed to increasing energy imports from Russia.
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