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5 October, 2021updated 29 Oct 2021 12:50

Weekly data: Why are gas prices so high?

Gas prices are soaring and reserves are dwindling all over the world, but is this caused by Covid-19, climate instability or supply chain problems?

By Ben van der Merwe

Gas burns on a domestic oven hob in the Molins de Rei district of Barcelona, Spain, on Thursday Sept. 23, 2021. Energy prices are soaring from the U.S. to Europe and Asia as economies emerge from the pandemic and people return to the office. Photographer: Angel Garcia/Bloomberg via Getty Images

Gas prices are soaring, with much of Europe facing a tough winter of depleted reserves. (Photo by Angel Garcia/Bloomberg via Getty Images)

The price of natural gas has skyrocketed on global markets throughout September and October. Geopolitics, macroeconomic trends and climate instability have met with a brittle global supply chain to produce an unprecedented mismatch between supply and demand.

As the Economist reports, the sudden halt to global economic activity due to Covid-19 in early 2020 led to the accumulation of enormous gas reserves in Europe.

Are high gas prices here to stay?

Events since then, however, have depleted these reserves much faster than anticipated. Asia’s unexpectedly rapid economic recovery in mid-2020 was followed by an unusually cold winter, leading to a sharp rise in gas prices on the continent and a draw-down on European reserves to feed the extra demand.

In 2021, a hot summer has led to further unexpected demand from Asia. As well as increasing demand for electricity to power air conditioning, the heat has coincided with a drought in China – limiting hydropower capacity and pushing the country towards an even greater reliance on gas, a problem exacerbated by the country’s efforts to move away from coal.

A simultaneous drought in Latin America has had similar effects, further squeezing global gas supplies, while low wind speeds in Europe have reduced output from wind farms.

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Meanwhile, supply-side issues have slowly accumulated. Exports of natural gas are down by more than 25% in Italy and the Netherlands in 2021, according to the International Energy Agency, while a severe shortage of truck drivers in the UK has left the country’s army to take up the task of fuel distribution.

Although Russia might have been expected to take advantage of the high prices by flooding the European market, it has chosen not to do so. Speculation has abounded that the country’s government is keen to up the pressure on Europe to advance the Nord Stream 2 pipeline.

How will the EU resolve its gas problem?

With a cold winter expected in the months ahead, the EU, and Germany in particular, is in the troubling position of having gas reserves significantly below their usual level.

There is likely to be no quick fix to the sector’s current supply constraints. Construction of new facilities and expansion of existing ones takes years. 

Despite evidence of a recent hiring spree in the sector, global gas supplies are expected to grow by just 1.6% in 2022 and less than 0.7% annually for the three years after that, according to figures from GlobalData.

The typical response of markets in such a situation would be to fall back on coal as a substitute, but coal has been hit by a similar price surge. The price of coal has nearly doubled since January 2020, according to data from the International Monetary Fund.

Analysts expect the price of coal to fall in the coming months. If it does, the result could be a damaging increase in global greenhouse gas emissions. Coal emits nearly twice as much carbon dioxide per energy unit as natural gas, according to the US Energy Information Administration.

With politicians converging on Glasgow for the COP26 international climate conference at the end of October, the global energy crisis is likely to weigh heavily on the minds of those sketching out a transition to net zero.

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