Has The Price Of Natural Gas Gone Up - Energy price growth will not abate next year Rising natural gas prices are affecting the global energy market and other sectors of the economy, from industry to utilities. Andrea Pescatori, Martin Stuermer, Nico Valks
The global energy market is an unprecedented confluence of factors, bringing back memories of the energy crisis of the 1970s and compounding inflation and an uncertain global economic outlook.
Has The Price Of Natural Gas Gone Up
Spot natural gas prices have quadrupled to record highs in Europe and Asia, and the sustained and global scale of this price increase is unprecedented. Usually, such movements are seasonal and local in nature. For example, prices in Asia increased last year, but not in Europe.
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It is expected that these prices will return to normal levels by the beginning of next year, when the demand and supply of heat will be adjusted. However, if prices remain as high as they have been, this could hamper global growth.
At the same time, ripple effects are felt in the coal and oil markets. Brent crude, the global benchmark, hit a seven-year high of $85 a barrel as more buyers look for alternatives to heating and power generation amid tight supplies. Coal, the closest substitute, is in high demand when power plants return. That pushed the price to the highest level since 2001 and led to an increase in the price of European carbon emission permits.
With this background in mind, it helps to look back at the beginning of the pandemic, when restrictions in the global economy brought many activities to a standstill. This led to a drop in energy consumption and reduced investment by energy companies. However, natural gas consumption recovered quickly due to industrial production, which increased demand by about 20 percent of final natural gas consumption at a time when supplies were relatively low.
Indeed, energy supplies have been slow to respond to price signals due to labor shortages, maintenance delays, long lead times for new projects, and weak investor interest in fossil fuel energy companies. For example, US natural gas production remains below pre-crisis levels. Production in the Netherlands and Norway also fell. And Europe's largest supplier, Russia, has recently slowed shipments to the continent.
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Weather also creates imbalances in the gas market. The harsh winters and hot summers of the Northern Hemisphere increase the demand for heating and cooling. At the same time, renewable energy production has fallen due to lower-than-average wind production in Northern Europe this summer and fall, as droughts in the United States and Brazil reduce reservoirs.
Coal can help offset natural gas shortages, but some supplies are intermittent. Logistical and weather factors have disrupted production from Australia to South Africa, while the world's largest producer and consumer of coal, China, has seen its production decline and abandon coal use and mining in favor of renewable energy or natural gas.
In fact, China's coal reserves are at record lows, increasing the threat of fuel shortages for power plants this winter. Lower-than-average natural gas stocks in Europe during the winter increase the risk of further price rises as electricity utilities compete for scarce supplies ahead of the cold snap.
Because household electricity and natural gas bills are often regulated and prices are more rigid, coal and natural gas prices have less impact on consumer prices than oil. However, manufacturers that rely on the fuel to make industrial chemicals or fertilizers face higher natural gas prices. This dynamic is particularly noteworthy as it affects supply chain disruptions, rising food prices, and uncertain inflation outlooks.
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If energy prices remain at current levels, the value of global fossil fuel production as a share of gross domestic product will rise to 4.7 percent this year, from 4.1 percent (estimated in our July projection). Next year, the rate could reach 4.8 percent, up from 3.75 percent in July. Assuming that half of this increase in oil, gas and coal costs is due to reduced supply, global economic growth will fall by 0.3 percentage points this year and by about 0.5 percent next year.
Supply disruptions and price pressures pose unprecedented challenges for a world with uneven post-pandemic recovery, but for policymakers nothing compares to the energy shock of the early 1970s.
During this period, the price of oil quadrupled, directly affecting the purchasing power of households and businesses, and ultimately leading to a global recession. Nearly half a century from now, with coal and natural gas playing a less dominant role in the global economy, a sharp rise in energy prices will take a significant hit.
Moreover, at the end of the season in Europe and Asia, we see from the futures market that natural gas prices will normalize by the second quarter. The prices of coal and crude oil are also likely to decrease. However, uncertainty remains high and small shocks to demand could trigger new price increases.
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This means that the central bank should check price pressures from temporary energy supply shocks, but be ready to act early if the real risk of expected deflation materializes (especially in a weak monetary system).
Governments should act to prevent blackouts while restricting electricity supply if it is not profitable. Power outages in China, in particular, could disrupt chemical, steel and manufacturing operations and disrupt global supply chains during peak sales of consumer goods. Finally, support for low-income households can help reduce the impact of energy shocks on the most vulnerable populations, as high utility bills are reduced.
Countries should allow international prices to pass through to domestic prices while protecting the neediest households. In February 2021, UK natural gas prices are 38p per gas (a measure of gas consumption). It reached 537p in the quarter this month. What caused the high prices?
Many places of work, industry and recreation are suddenly demanding more energy at the same time, putting more pressure on suppliers than ever before.
Natural Gas Prices
European governments are looking for ways to import less energy from Russia, which previously supplied 40 percent of the EU's gas consumption. Along with this, the price of other sources of gas is increasing.
The EU has pledged to reduce its dependence on Russian gas, and in July member states agreed to cut their gas consumption by 15 percent.
For example, before Germany invaded Ukraine, it imported 55% of its gas from Russia. It is now down to 35%, with long-term plans to stop Russian imports.
However, along with the pressure to stop relying on Russian gas, there are fears that Russia may further limit or even stop its natural gas supplies in return for military aid to Ukraine.
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Russia's largest state-owned energy supplier, Gazprom, is under increasing pressure as it has suspended gas supplies to Bulgaria, Finland, Poland, Denmark and the Netherlands due to non-payment of rubles.
As European countries no longer buy natural gas from Russia, they must drastically reduce their own gas exports, putting more pressure on international supplies.
Many are forced to rely on the international market for liquefied natural gas (LNG), which can be shipped around the world by ship, rather than through pipelines.
In previous years, European countries bought the rest of the LNG from countries such as Qatar and the United States in the summer and stored it for the following season.
Munich, Germany. 16th Mar, 2022. A Petrol Station In Munich, Germany Displays The Current Price Of Fuel On March 16, 2022. Despite Germany's Hesitation To Cut Back On Fuel Supplies From Russia
The problem they face this year is that Asian countries have signed long-term contracts before most of the world's LNG is produced, leaving a limited amount on the international market.
Most of the world's gas is flared in the country of origin. But many places do not have enough, especially in winter, and imports are needed.
Once the imported gas reaches its destination, it is sold to various energy suppliers at favorable prices (including direct and delivery costs). Some are bought at pre-negotiated future prices based on what is expected in the next month.
And some gas is burned to produce electricity, which means higher gas prices increase our electricity bills.
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The rest is used for heating and hot water in households and businesses, or for winter storage.
Fuel pricing systems vary from country to country. There is no international fuel price.
Wholesale natural gas prices are determined by how much it costs energy suppliers to buy gas from domestic or international producers. Natural gas prices rise and fall with global demand.
Speculations that fuel prices may be inflated on the international market and fears that disruptions will occur soon. This can increase gas bills for households and businesses.
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In England, for example, spot prices are calculated using the UK's National Balancing Point (NBP), which accounts for any gas in the country's national transmission system. This will include gas imported from abroad and facilitate trade between buyers and sellers.
Now a European country
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