YesAND ANOTHER The crucial global market has gone from glut to scarcity at breakneck speed. Last September in Europe it cost € 119 ($ 139) to buy enough gas to heat an average home for a year and the continent’s gas storage facilities were full. Today, it costs 738 € and stocks are scarce. Even America, which has an abundance of shale gas, has seen prices more than double – albeit from a much lower level – and could see further increases if its winter is cold.
The shortage has many causes. A cold European spring and a hot Asian summer boosted demand for energy. The rebound in industrial production has boosted the global appetite for liquefied natural gas (LNG). Russia injected less gas into European stocks. Hawks suspects him of trying to scare the market and make sure his new Nord Stream 2 pipeline gets approved. But it also faced disruptions, including a fire at a processing plant in Siberia.
Gas has filled the gap in the production of electricity from other sources. The wind did not blow much in Europe this summer, as droughts hampered hydropower production. The increase in the price of permits needed to emit carbon in the EU made coal expensive. There is therefore little alternative to the combustion of gas for electricity as well as for heating homes.
While other bottlenecks in the global economy – for container ships and microchips – have sparked a capital spending boom, investment in fossil fuels is in decline in the long run. The American shale cannot help much, as gas markets are imperfectly linked via LNG. High prices, when they hit, will mainly serve to ration the limited supply. But it takes big price movements to curb demand. If the coming months are cold, European energy may have to become extremely expensive to persuade businesses and households to consume less.
Fixing this problem requires accurately diagnosing what is wrong. Governments have not sufficiently taken into account the intermittence of renewable energies. The world has too little nuclear power, a low-carbon energy source that is always on. Interventions and subsidies for gas will only make matters worse. Expensive energy irritates voters and hurts the poor. But subsidizing energy in a tightening, like Italy is doing, or capping prices, like Britain is doing, will exacerbate shortages and void politicians’ commitment to greenery. Governments should use the social protection system to support household incomes if they have to, while helping energy markets to function efficiently.
The long-term challenge is to smooth out volatility as the shift to renewables continues. Finally, cheap battery storage could solve the intermittency problem; right now, more gas storage would help too. In the meantime, adjustments in the market could improve things.
In Britain, many small energy providers who offer, for example, one-year fixed price contracts to consumers, but buy energy at variable rates, will soon fail. Ensuring that companies selling at fixed rates guard against increases in wholesale prices should encourage increased physical storage of gas. Another idea is to invest more in connection networks (a link between those of Great Britain and France recently failed) and in LNG infrastructure, so that trade-offs can equalize disparities in the world’s energy supply.
Dirty energy sources should be expensive. But without reliable alternatives, price increases raise inflation, lower living standards and make environmentalism unpopular. If governments do not manage the energy transition more carefully, the current crisis will be the first in a long series that threatens the vital transition to a stable climate. ■
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This article appeared in the Leaders section of the print edition under the title “Gas puzzlers”