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Rising Natural Gas Prices

  • IASbaba
  • October 20, 2021
  • 0
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INTERNATIONAL/ ECONOMY

  • GS-2: Effect of policies and politics of developed and developing countries on India’s interests
  • GS-3: Economy & Challenges

Rising Natural Gas Prices

Context: The is supposed to be an off season. Winter is yet to set in. But natural gas prices soared over the past few months, especially in Europe. The price of natural gas in Europe is now six times higher than what it was last year. Across the continent, natural gas inventories are falling.

What’s driving up the prices?

  1. Supply Constraints
  • Global energy demand fell in 2020 when economies slipped into COVID-induced lockdowns. 
  • When growth returned this year, especially to Asian economies, demand shot up and energy producers struggled to meet the growing demand, pushing up prices. 
  • Even in the U.S., the world’s largest natural gas producer, prices rose from $1.7 per million British thermal units on March 31 to $6.3 per mBtu on October 5. 
  • Europe, which is heavily dependent on imports to meet its energy demand, was particularly hit hard. 
  • As part of Europe’s shift towards cleaner energy, many countries had moved away from coal to gas to produce electricity. This increased Europe’s reliance on gas. 
  • On the other side, the Europe’s natural gas production has shrunk over the years, as many countries shut down production fields over environmental concerns. 
  • If Europe’s natural gas production (excluding Russia) was about 300 billion cubic metres in 2005, it fell to less than 200 bcm in 2021. Europe’s main producer of natural gas, has seen its production shrink from 117.6 bcm in 2015 to 105.3 bcm in 2021. This has left Europe largely dependent on Russia. 
  1. Energy Geopolitics
  • As prices shot up amid growing worldwide demand and falling production in Europe, supplies from Russia via a pipeline that passes through Ukraine and Poland also reduced, which made the situation worse.
  • Russia has built another gas pipeline, Nord Stream 2, which will take Russian gas directly to Germany bypassing Ukraine and Poland (who are critical of Putin). But supplies to Europe through Nord Stream 2 are yet to start as the pipeline is awaiting approval from European authorities. 
    • US & several countries in Europe remain critical of Nord Stream-2 pipeline, because they believe that the pipeline will enhance Russia’s leverage over Europe and would also allow Russia to economically punish Ukraine and Poland. 
  • In the past when Europe’s energy demand shot up, Russia had stepped up supplies. However, Russian exports to Europe this year were lower than they were in 2019. 
  • This has fuelled speculation that Mr. Putin is using the energy crunch in Europe to get approval from the EU for the Nord Stream 2 pipeline. Russia has dismissed such criticism, saying Russia has no role in the energy crunch.

What lies ahead?

  • The situation has calmed after Russian President Vladimir Putin assured Europe of increasing the supplies. 
  • But Mr. Putin didn’t say how Russia was going to increase it supplies — through the existing pipeline or Nord Stream 2?
  • It is to be seen if additional supplies would be tied to a quick approval for the Nord Stream- 2 pipeline. 
  • Furthermore, the Russian domestic gas market also remains tight. Inventories are running low, and winter is coming, which would shoot up demand constraining Russia’s export capacity. 
  • And demand is rising not only in Europe and the Americas, but also in Asia. Coal shortages in India and China could drive up prices of natural gas further.

Connecting the dots:

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