January 23, 2022

four questions to understand soaring prices and its consequences

European gas prices have experienced a spectacular increase for several months, and the trend is not reversing. On the first day of winter, Tuesday, December 21, the prices of this fossil fuel broke records on the markets. The benchmark European price, the very volatile Dutch TTF, gained more than 22% to settle at 180.267 euros per megawatt hour (MWh). They are ten times higher than those observed a year ago and up 90% since the beginning of December. What is this situation due to and what are the economic, social and geopolitical consequences of this crisis?

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  • Where does the gas consumed in the European Union come from?

The European Union (EU) is dependent on the rest of the world for its energy consumption: 60.7% of its energy consumption is satisfied by imports, in particular because it does not produce oil and hardly any gas. For the latter, which represents more than 21% of its final energy consumption in 2019, it is 90% dependent on external supplies, and therefore subject to price variations that it cannot control.

The gas is delivered in two ways. The first consists of transporting gas under pressure in gas pipelines, pipes which often pass underground or at sea. In the third quarter, 77% of European gas imports passed through the pipelines. The remaining 23% is transported by ship in the form of liquefied natural gas (LNG). This second mode of delivery makes it possible to diversify the sources of supply: this is how the EU imports gas from the United States, Qatar or Algeria.

The main suppliers to the EU are Russia (41% of gas imported in 2019) and Norway (16.2%). Next come Algeria, Qatar, Nigeria and the United States. In France, however, Russia only accounts for 17% of gas supply, and Norway almost 41%.

  • How is the 2021 situation problematic for gas supply?

The current price increases are the result of several factors, which lead to both a significant increase in energy needs and difficulties in increasing the supply of natural gas. Their concomitance automatically leads to an increase in prices and creates a “gas shock”.

On the one hand, the year 2021 was marked by a significant increase in energy needs in Europe, due to the winter of 2020-2021, which was particularly cold and long, and the rapid restart of the economy after the crisis due to Covid-19 in 2020. At the same time, various meteorological phenomena, such as the absence of winds in the North Sea, have led to less production of wind power and have increased the need for gas to produce electricity.

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However, numerous incidents in gas producing and exporting countries have caused a squeeze in world supply. Europe’s main natural gas suppliers have been unable to increase their exports for a number of reasons: maintenance work on Russian gas pipelines, a fire on one of them this summer, the reduction the transit of Russian gas through Ukraine due to tensions between the two countries, maintenance operations on deposits in the North Sea or even the shutdown of the largest LNG production site in Norway after a fire.

The gas supply was all the more insufficient as the increase in energy demand is general. Asia, for example, experienced a winter just as long as Europe, and a very significant economic rebound. Gold, “There is competition on the gas market on a global scale between Europe and Asia, and the second captures an increasing share of LNG imports to the detriment of the first”, underlines Patrice Geoffron, professor of economics and director of the Center for Geopolitics of Energy and Raw Materials. China is well on its way to becoming the world’s largest importer of LNG, while liquefied gas imports fell by 35% in Europe in the third quarter.

  • Why such a boom in recent weeks?

The entry into the winter of 2021-2022 and the falling temperatures point to a further increase in the demand for energy for heating. European stocks must therefore be filled when they are currently lower than usual, because the difficulties on the gas market since the start of the year have forced countries to draw on their reserves. “At the end of June 2021, the EU’s average gas storage fill rate was only 48%, the lowest for a decade at this time of year and down 33 percentage points from 2020 “, noted the European Commission in October. In mid-September, the stock fill rate was 71%, according to The echoes, compared to 86% usually during this period.

The drop in LNG imports into Europe and the immediate limitation of Norway’s export capacities also reinforce the Old Continent’s dependence on its main gas supplier, Russia. However, diplomatic tensions between Brussels and Moscow over Ukraine – through which part of the Russian gas purchased by the EU passes – are growing. Vladimir Putin uses gas – to some extent – as a diplomatic weapon. “Russia, through Gazprom, delivers what must be delivered under European contracts, but does not increase its export capacities”, recalls Patrice Geoffron.

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Especially since “Europe’s supply difficulties play into the hands of Russia, which uses it to put pressure on the Europeans in order to speed up the implementation of the Nord Stream 2 gas pipeline”, continues the economist. The 1,200-kilometer pipeline must carry Russian gas to Germany without passing through Ukraine, Poland or the Baltic countries. It has always been defended by former conservative chancellor Angela Merkel, but the new German government is less conciliatory. The German Minister of the Economy, Robert Habeck, for example, warned on Saturday against “Severe consequences” for the new gas pipeline in the event of Russian aggression against Ukraine. The new head of diplomacy, Annalena Baerbock, also threatened on December 12 “Stop” pure and simple Nord Stream 2 in case of escalation in Ukraine.

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  • What are the consequences of these tensions on the gas market for the inhabitants of the EU?

Low European stocks raise fears of supply disruptions for some countries during the winter period. In France, due to a storage reform in 2018, the filling rate was however 90% at the end of September, “Beyond the minimum filling threshold necessary to guarantee security of supply this winter”, according to the Energy Regulation Commission (CRE).

The price increases for consumers and businesses have been felt for several months, however, and do not only concern gas.

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Gas prices have a direct impact on electricity prices in all countries due to the functioning of the single European electricity market, on which states buy a more or less important part of their electricity. The wholesale prices of this energy are set there according to the marginal cost principle: they depend on the cost necessary to start up the last plant called in Europe to meet demand. The plants are called in a certain order, until the needs are met: renewables have the lowest marginal costs, they are called up first; if their production is not sufficient, we turn to nuclear power stations, then to fossil fuel power stations (coal, fuel oil, gas). Most of the time, it is gas-fired power stations – most of the thermal power stations in France – which are the “last called” and which therefore determine the wholesale price of electricity.

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In order to prevent the possible social consequences of this surge, many countries, including France, have taken measures to mitigate the impact, at the end of the chain, on households. Corn “The concern is great for electro-intensive companies, such as those in the automobile or steel sector, for which energy is a very important load, explains Patrice Geoffron, who points out that certain industrial sites had to be shut down. The question is whether they will be able to pass the cost on to their customers, which will translate into higher prices, or if they will be able to absorb it with lower margins. It will depend on the duration of the shock ”.

According to CRE, the drop in wholesale prices is not expected before spring or summer 2022, and the return “To normal” for 2023.