After reaching astronomical heights in the summer of 2022, European gas prices fell sharply in the autumn of that year. And following a brief spike in the summer of 2023, they then fell again. By February of 2024, they were not far from their pre-war average. Was the crisis finally over?
Alas, no. For the past twelve months, prices have been steadily rising and are now more than three times higher than their pre-war average. On 10 February, they surged above €58 per megawatt-hour, the natural gas equivalent of paying $100 per barrel of oil. “Absolutely destructive for energy-intensive manufacturing,” was the comment from Javier Blas, Bloomberg’s energy man.
Why are prices rising? Two reasons. The first is that, having been relatively lucky with the weather in 2022 and 2023, Europe faced a much colder and less windy winter in 2024: frigid temperatures have pushed up gas demand, while the lack of gusts has reduced supply from wind generation.
The second reason is that a transit agreement allowing Russia to supply gas to Europe through Ukraine – via its ironically named “Brotherhood” pipeline – came to an end in December. Despite the two countries being literally at war, Russia was still paying Ukraine transit fees for gas, and Ukraine was still allowing gas to pass through its territory, until just a month ago. Understandably, Ukraine chose not to renew the agreement this time.
Rising gas prices are having predictable effects on manufacturing output, as the quote above from Blas makes clear. The chart below plots a production index for energy-intensive industry in Germany since 2015. (That’s the sector most affected by high energy prices).
As you can see, the index remained stable from 2015 to 2020, and then quickly recovered after the pandemic. Yet it fell more or less continuously from late 2021 to late 2023. (Recall that Russia began reducing gas flows to Europe in late 2021, as a kind of intimidation tactic.) After a brief recovery at the start of 2024, when gas prices came close to their pre-war average, it has fallen again over the last six months.
Energy-intensive production is now substantially lower than it was even at the height of lockdown. And the data here only go up to December: since there’s a lag between prices and production, and prices have risen further since December, it’s likely that production is now even lower than indicated on the chart.
As you might expect, cratering energy-intensive production is dragging down industrial production more broadly, and largely explains why the country’s GDP hasn’t risen at all since 2019. With population increasing, this means that German living standards are now lower than they were five years ago.
One option for European policymakers would be to sign new LNG contracts with countries like the US and Qatar. The problem is that LNG is much more expensive than pipeline gas (owing to the inherent costs of transportation and “regasification”) and the only way to secure lower prices from suppliers is to sign long-term contracts. Yet nobody’s quite sure whether Russian pipeline gas will start flowing again once the Ukraine war ends, so parties on all sides are wary of entering into such contracts.
Europe’s present strategy, of hoping things just kind of work out, doesn’t seem very promising.
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Just think, a cheap, reliable and plentiful supply of gas from a near neighbour or a much dearer supply from across the sea.
It’s a good job Uncle Sam never thought to blow up that Nord stream 2 thingy or Europe would be in real trouble.
And think as well of the huge amounts of oil and gas in UK waters around us. Think if the massive amounts of gas available from land based wells in the form of fracked gas – enough they say to power Britain for decades, all on its own.
If we only realised the wealth available the cost of manufacturing UK designed and built small nuclear reactors would be affordable so we could have at least two, uncorrelated sources of reliable electrical energy as well as natural gas for industrial and domestic use.
all this at much lower prices and secure, if only the judges can be kept at bay.
I fear not.
Kill all the lawyers!
(That’s Shakespeare, not an incitement to kill legal professionals)
A judges’ republic is a contradiction in terms!
Meanwhile Britain’s Minister of Energy Insecurity colludes with minority eco-zealots to prevent the majority of the British populace from accessing abundant, affordable hydrocarbon energy beneath Britain’s feet and under Britain’s seas.
All to pander to climate fallacy, folly and wishful thinking. Breezes and sunbeams are no substitute for high-density, high-gradient 24/7/365 energy from hydrocarbons and/or controlled nuclear fission. Windmills and waterwheels went out of fashion three centuries ago for very good reasons, that remain relevant to this day. Verities last a long time.
Energy crime against the humanity of the British people.
“As you can see, the index remained stable from 2015 to 2020, and then quickly recovered after the pandemic.”
Please, Noah, we know better than this. Stop using their language, there was no pandemic!
Otherwise, an excellent article. Thanks.
Another person that should know better is Russell Brand, he is always saying “since the pandemic”……If I catch him in Hay I will remind him, or chuck him out of the window.
The correct term (based on Event 201) would be plandemic of course. Maybe Noah used that and the spell check changed it …..? (Trying to be generous here).
Many options open, all of which would be better than doing what we are doing now:
Normalise relations with Russia
Drill for oil and gas in the UK, on and off shore
Build more nuclear power stations
Start digging for and burning coal again
Remove subsidies for and quotas for electric cars
All of these would IMO reduce gas prices
It’s almost as if our “energy policies” are designed for maximum destruction of the economy combined with maximum transfer of wealth to unproductive activities (windmills)
All because most European countries are vassal states of the US and are unwilling to admit that Russia was totally justified in their actions against Ukraine.
I remember watching EU MEPs voting down a full enquiry on the destruction of the Nord Stream Pipeline. Bunch of spineless eunuchs. They would call you a conspiracy theorist for blaming the US/NATO, but they don’t want to look into it.
Of course the other thing European authorities could do is lift their moratorium on fracking and produce their own gas from the vast shale resources across Northern Europe.
That way they would have domestic energy abundance, independent of Putin, Trump or Qatar.
They can only go higher and higher because there is nothing to bring them down. It isn’t just the severity of the winters. Last year was a year without a summer and this is likely to continue for decades. You need to think about this if you have any option to move out of north western Europe. Living under a fog canopy makes people sick just read about the Justinian darkness and plague – “the sun gave forth its light without brightness, like the moon, during the whole year,”