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What price do we pay for gas?

This article first appeared on Sharkspread’s website and was reprinted with permission.

The second part of this year was dominated by news related to bullish energy markets, including spiking gas prices and extreme price volatility. Causes have been explained in detail by many sources, but few did summarise the aftermath of soaring gas prices and how they affect our everyday lives. The present article attempts to illustrate some of the most important consequences in Europe and the CEE region that were triggered by surging gas prices.

Although wholesale natural gas prices started increasing in the second quarter of 2021, the real aftermath became more visible in the fourth quarter of 2021. In October several energy companies collapsed in the United Kingdom leaving more than 2 million end consumers without a supplier, similarly, a major energy supplier in the Czech Republic had to shut down, as well. Furthermore, Timisoara and Szolnok had to suspend district heating right at heating season’s start.


Consequences of high gas prices.

Shortly after these events, many governments started to implement measures to protect households and businesses. Hence, Romania introduced a price cap on natural gas to prevent consumers from defaulting on their energy bills, while Croatia and Hungary announced maximum values of petrol prices. Also as a consequence of the energy crisis, North Macedonia declared a 30-day state of emergency on 9 November and before that Moldova had been in a state of emergency until the new long-term gas deal with Russia was signed.

Effects of skyrocketing gas prices are not only felt among domestic end-users but also industrial and agricultural sectors are heavily affected. First to feel effects are the energy-intensive companies. For example, natural gas is a key component for manufacturing ammonia, therefore increased production costs have forced several ammonia plants in Europe to shut down, while fertiliser production has also become uneconomical at many sites. This in turn means higher costs for farmers contributing to price increase of food products. No wonder that French farmers were told to leave corn crops unharvested as drying corn requires natural gas. Such events directly contribute to food price inflation.

Hampering fertiliser production caused the shortage of its by-products, such as AdBlue or CO2. AdBlue is a diesel fuel additive and its deficit together with rising fuel prices threatens road freight transportation. CO2 is crucial for food and beverage (F&B) industries, and is used to carbonate beverages or extend the freshness of products.

Energy-intensive industries, like paper or food packaging production, are similarly exposed to gas price movements and are subsequently causing prices of other final products to go up. Therefore, the effects of gas prices are all-encompassing and can hurt businesses of all sizes, small and medium-sized enterprises might be the most vulnerable in the current price environment.

Finally, we should not forget about the environmental implications. 2050 carbon neutrality goals might be in jeopardy as the profitability of coal-fired generation has started to surge over the gas-fired power plants, thus high natural gas prices caused CO2 emission levels to rebound to their second-highest value to date in October.

On 13 October – as a quick response – the European Commission presented a toolbox including short and mid-term measures to mitigate the energy crisis without endangering Green Deal goals. Shortly after the European Council held an extraordinary summit on 21-22 October leaving energy ministers to discuss the details and implementation of the possible measures. The only outcome is to leave the possibility for European countries to manage the crisis on their own. As consensus was not reached in EU measures, many further talks will follow.

In consequence of the above, annual inflation in the Eurozone rose sharply to 4.1 per cent in October up from 3.4 per cent in September, while in Hungary it hit a 9-year record at 6.5 per cent. Annual inflation shows the rate of price change of goods and services, hence soaring gas prices had contributed to the price increase of different types of products and services.

The article aimed to provide a snapshot of the current situation and focuses on consequences related to the natural gas prices, whereas potential long-term effects or implications caused by other commodity markets were not investigated. Nonetheless, some of the latest headlines are already projecting further price increase of food products, building materials and the bankruptcy of more companies with receiving their first energy invoices of the new gas year and early next year.

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