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Why have gas prices skyrocketed?


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    Gas prices in Europe have soared in recent weeks, reaching a peak of $25 (E21.3) per million British thermal units (chart 1, top panel). The escalation is the result of a number of factors, from Russian supply bottlenecks to the lack of wind in the North Sea. As winter approaches, the countries most dependent on gas (for heating homes and generating electricity) could feel the chill.

    Gas was already in short supply before the recent price hike. A prolonged northern winter caused European countries to draw on their reserves, which fell by 25% below the historical average (chart 1, bottom panel). Import disruptions from Russia and Norway, which account for almost half of European gas, made it difficult to replenish stocks. The flow from Norway was constrained by infrastructure upgrades in the country; a fire at a processing plant in Siberia and the need to refill the country's own storage facilities after a brutal winter strangled Russian production.

    The reduction in supply has been exacerbated by the lack of alternatives. Rising demand for liquefied natural gas in Asia, as that continent's economies recover from the Covid-19 recession, has pushed up prices. Meanwhile, wind turbines, which produce 10% of Europe's power, have slowed output during an unusually quiet summer.

    Normally, European power companies turn to coal when gas prices and alternative energy sources rise. However, dwindling supply from European mines and strong demand from China have also pushed up the price of coal. And so has the cost of European carbon permits, which coal producers must buy to offset their emissions. From around 30 euros per tonne at the start of the year, they reached a record 63 euros in early September (chart 2). And, if more coal is burned to make up for the shortage of natural gas, the increased demand for allowances will push up their price even further.

    Normally, European utilities turn to coal when gas prices and alternative energy sources rise. However, the dwindling supply from European mines and strong demand from China have also pushed up the price of coal. And so has the cost of European carbon permits, which coal producers must buy to offset their emissions. From around 30 euros per tonne at the start of the year, they reached a record 63 euros in early September (chart 2). And, if more coal is burned to make up for the shortage of natural gas, the increased demand for allowances will push their price even higher.

    © 2021 The Economist Newspaper Limited. All rights reserved.

    From The Economist, translated for La Vanguardia, published under license. The original article, in English, can be consulted at www.economist.com.

    Translation: Juan Gabriel López Guix

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