From Abundance to Thirst

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European gas prices increased roughly 14-fold from the third quarter of 2019 to the third quarter of 2022.
US gas prices have tripled over the same period.
Global oil prices increased by about 40 percent.
European gas prices and Asian gas prices moved almost sevenfold to $33 per million British thermal units in the fourth quarter of 2021 from $4.90 in the fourth quarter of 2019.
Oil prices stood at $78 per barrel in the fourth quarter of 2021, $18 higher than eight quarters earlier.
Coal rose to $182 a ton in the fourth quarter of 2021 from $73 over the same period.
After six months of war in Ukraine, European gas prices in the third quarter of 2022 had climbed another 75 percent; oil prices were up only 15 percent since the invasion.
Wholesale electricity prices in parts of Europe peaked at seven times what they were in early 2021.

Oil and gas investment surged beginning around the turn of the century, peaking in 2014.
The U.S. shale oil and gas revolution doubled U.S. oil and gas production within a decade, making the United States a net exporter of hydrocarbons.
The 2014 collapse in energy prices led to drastic cuts in global oil and gas investment.
Producers slashed investment and divested from fossil fuels; investment in renewable energy lagged the United Nations’ net zero by 2050 target by about $1 trillion a year (IEA estimate).
The combined effect produced a shortfall in total global energy investment.
Electrification increased reliance on natural gas as a buffer; the global share of gas in total primary energy production rose from 16 percent in 2010 to 22 percent in 2021.
In OECD countries, the share of gas in power generation increased from 23 percent to 30 percent between 2010 and 2021.

In 2021, cold weather and low renewable generation coincided with faster-than-expected rebound in global gas consumption after the pandemic.
Russia, which usually supplied one-third of European gas consumption, reduced its gas flows to Europe starting in mid-2021 before the start of the war.
Gazprom decided not to fill its central European storage facilities in 2021.
The reduction in Russian gas flows represents a supply shock equivalent to about 17 percent of European gas consumption and non-European LNG imports combined evaporating off the market.
Rerouting LNG from Asia and Europe, reduced EU gas consumption, and increased supply from Algeria, Azerbaijan, and Norway helped buffer the shock, but required large price increases because demand and supply elasticities are low.

Natural gas markets are fragmented and rely mostly on pipeline infrastructure; only a quarter of global gas markets are integrated.
Pipeline constraints prevent rapid arbitrage across regions; gas liquefaction and re-gasification terminals connect European pipeline markets to the global LNG market but capacity and rerouting limits remain.
Russia lacks sufficient pipelines or gas liquefaction terminals to reroute a large fraction of its European pipeline exports elsewhere, making the decline in Russian flows a true physical supply shock.
Oil markets are more integrated: transportation and processing infrastructure allow for cross-border arbitrage, raising supply and demand elasticities and making oil price impacts more temporary.
Russian crude oil exports remained steady in 2022 despite sanctions and reduced business by Western firms; market adjustments included a widening spread between Brent oil and Russian oil prices and rerouting Russian oil to India, China, and elsewhere.
Strategic oil reserves were released to tame higher oil prices, and global slowdown, including in China, exerted downward pressure on oil demand and prices.

European wholesale electricity prices move in tandem with gas prices because electricity prices are set by the highest marginal cost of production and gas-fired plants were often the marginal producers.
Electricity prices have been extremely volatile and peaked at seven times early-2021 levels, including in Spain and Portugal where gas’s share in power generation is relatively small.
Divergence in wholesale energy prices across Europe reflects infrastructure bottlenecks, differences in power generation mixes, and varying policies on subsidies or price caps.

Allow market price signals to induce adjustment; price subsidies that shield consumers and distort signals are not helpful and can necessitate rationing if market forces are blocked.
Protect vulnerable households using lump sum payments and other mechanisms while keeping price signals working.
Foster greater integration of global natural gas markets and regional electricity markets to better buffer supply and demand shocks.
In addition to support for renewables, assist in building gas liquefaction and trade infrastructure as well as denser electricity transmission networks.
Expedite these actions to help replace Russian energy supplies and manage the intermittence of renewable energy.

From Abundance to Thirst — F&D Magazine, December 2022. Authors: Andrea Pescatori and Martin Stuermer.

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