Explained: What is the reason behind the natural gas price hike?

Natural Gas Price Hike: There are a host of reasons behind the price surge of natural gas, including the pre-pandemic activities, production crunch, and energy geopolitics. Read the below article for an in-depth explanation.
Created On: Oct 12, 2021 18:04 IST
Modified On: Oct 12, 2021 18:04 IST
Explained: What is the reason behind the natural gas price hike?
Explained: What is the reason behind the natural gas price hike?

Natural Gas Price Hike: When travel restrictions were put in place to curb the spread of the COVID-19 pandemic, the cost of energy was cheap but as the world economy reopens, the energy demand has risen manifold. The demand has skyrocketed the prices in Europe and Asia for the past few months. The power plant and factories in these regions have turned to a cheaper fuel source for the generation of electricity, crude oil. 

Reopening of world economies

When the world economies slipped into COVID-induced lockdowns, the global energy demand declined but as the economies reopened, the demand rebounded. The energy producers who suffered through the unprecedented shutdown struggled to meet the present demands and pushed up the prices. 

Even the world largest natural gas producer, the US, witnessed a hike in prices. The soaring prices hit hard the entire Europe which heavily imports natural gas to meet its energy demand. 

Production crunch in Europe

In a bid to reach net-zero by 2050, many nations across the world have shifted to natural gas from coal to produce electricity. Europe too shifted from coal-fired plants to natural gas. Europe’s natural gas production has also shrunk over the years as many countries have shut down production fields citing environmental concerns. 

The continent’s largest producer of natural gas, Norway, has seen a crunch in production, thereby leaving Europe at the mercy of Russia. According to Rystad Energy, Europe’s natural gas production was about 300 billion cubic metres in 2005 which has shrunk to 200 billion cubic metres in 2021. 

Energy Geopolitics

Price hike amid the growing demand and significant decline in production of natural gas in Europe, along with shrinking supplies from Russia have made the situation worse.

Supplies from Russia passes through a pipeline via Ukraine and Poland. Russia has now built another gas pipeline-- Nord Stream 2-- connecting Russia directly to Germany. However, the supplies to Europe through Nord Stream 2 are yet to start as the pipeline is awaiting approval from the European authorities. 

Earlier, when Europe’s energy demand shot up, Russia stepped up supplies but during the present crunch, Russia’s state-controlled energy giant, Gazprom, has booked fewer additional exports than the traders wanted, thereby pressurising supplies. According to the International Energy Agency, the Russian exports to Europe in 2021 were lower than that of 2019, fuelling speculation that Russia is using an energy crunch in Europe to get approval for its newly built Nord Stream 2 pipeline.  

Russian President Vladimir Putin has expressed concern over the strain in Europe and said that the country could reach another record of deliveries of energy resources to Europe, including natural gas. Putin’s promise calmed the market for a day, but the price remained twice as high as they were a month earlier. 

Coal Shortage in India and China

Apart from Europe, several Asian countries such as India and China are also looking for coal alternatives. The two top coal consuming countries-- India and China-- are grappling with an energy crisis due to the shortage of coal. 

Much of the coal-fired power plants in India are running low on inventories. India which is heavily dependent on coal for electricity generation may turn to clean sources, which could further soar up the prices of natural gas. Similarly, China is also grappling with power shortages and the government may ration electricity during peak hours. 

The shortage of coal in India and China is also a key driver behind the price hike of natural gas. Also, a colder and longer than expected 2020 winter hints towards the low inventory levels in Europe and winter is coming-- shooting up demand and supply. 

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