Saturday, December 4th 2021
Oil price is falling, gas remains scarce
Only Putin can avert Europe’s gas crisis
From Max Borowski
The global energy market is easing, but one of the most important energy sources remains scarce in Europe. Cold weather and unusually low deliveries in recent weeks mean that Europeans will be completely dependent on the Kremlin’s favor in the coming months. This is economically and politically worrying.
Something is happening in the energy sector: prices are collapsing dramatically on the global oil market, and after months of steep increases, German consumers are also feeling a slight relaxation in fuel and heating oil. Crude oil prices plummeted by around 20 percent from their highs this year in October. Heating oil has become more than ten percent cheaper in a month-on-month comparison, and the ADAC reported a drop of a good seven cents in the past two weeks for premium gasoline.
Despite this relaxation, an energy crisis in Europe has by no means been averted in the coming winter months. Because with crude oil, an important energy source becomes cheaper, while another is becoming increasingly scarce. The supply situation is worsening for natural gas. “Nothing has changed for the better on the gas markets in the last month, but some for the worse,” says Hanns Koenig, co-boss and co-founder of the consulting firm Aurora Energy Research.
Weeks ago, the wholesale prices for natural gas in Europe had shot up significantly more than those of other energy sources. The reason: the gas storage tanks, which can ensure at least part of the supply in this country in winter, were unusually empty before the start of the heating season. At the same time, significantly less gas came from Russia, by far Europe’s most important supplier, than would have been expected. The first factories, such as those of fertilizer manufacturers in Great Britain that require large quantities of natural gas, have already ceased operations. Several gas suppliers filed for bankruptcy because they could not raise prices for end customers as quickly as their procurement costs rose.
Alternatives already exhausted
In the emerging panic, Russian President Vladimir Putin promised Europe to deliver significantly more gas as soon as the storage facilities in his own country are full. That should have been the case in early November. “Almost nothing has changed in gas flows in the past few weeks,” Koenig notes, however. “Far less natural gas is still arriving from Russia than normally at this time of year. At the same time, the weather has recently been unusually cold and consumption is therefore high. That is why the gas storage facilities have not been filled.”
Europe’s dependence on Russia has thus increased significantly again in the short term. The fact that in this situation the responsible Federal Network Agency stopped the certification process for the new Nord Stream 2 pipeline for formal reasons created additional tension. The hope that the pipeline wanted by Moscow, but highly controversial in the West, would go into operation quickly and that Russia would quickly deliver gas that was held back for political reasons, is therefore obsolete.
Germany and Europe hardly have any options for action, except to hope for a mild winter and Putin’s goodwill. “In the short term, Europe has no chance of freeing itself from dependence on Russia. If the winter stays that cold or gets colder and Russia does not increase its deliveries, gas prices could rise significantly again,” says Koenig. There are hardly any short-term alternatives or they are already being fully used, such as more electricity generation with coal instead of gas. “Politicians could try to reduce demand, for example by shutting down industrial plants with high demand for natural gas. However, this also has significant negative consequences,” explains Koenig. For example, grain prices have already risen because some fertilizer factories have shut down their production or increased their prices because of the high cost of the gas.
“Combination with troop deployment worrisome”
This is a frightening prospect not only for the residents of the around 20 million gas-heated apartments in Germany alone. Koenig refers to the acute political tensions between Russia and Europe, especially in connection with the conflict in eastern Ukraine. “The combination of Europe’s short-term heavy dependence on Russia in the gas market and the deployment of troops on the border with Ukraine is worrying.”
In view of the looming political and economic crisis, it is little consolation that after the end of winter there will be clear signs of easing on the gas market. The prices for gas deliveries in the coming summer are, according to the futures on the stock exchange, more than half below those for January and February. At the price level of the past few years, the gas market is unlikely to return in the foreseeable future.
Hanns Koenig urges us to learn lessons for the future. “Large consumers who have now been hit by the rise in prices should learn from this crisis not to rely on cheap gas in abundance on the spot market and secure themselves with long-term supply contracts in the future.” This would also give gas exporters such as the American liquefied gas producers the security they need to invest in expanding their capacities. This could also reduce dependence on Russia in the long term.