Because gas prices are high and why the EU Council was not a success
What the European Union has not decided on the gas price roof and what to expect from November. Sergio Giraldo's analysis
“The European week ended with a bang: at the European Council of 20-21 October Italy snatched a resounding success, winning over the backward countries of northern Europe. The Council has in fact decided to ask the Commission to draw up a proposal on which the Council will decide on the creation of a dynamic corridor for the price of gas, which is a victory for Mario Draghi because he has already lowered the bills of Italians ”.
This is the imaginative summary of the majority of Italian newspapers after the close of the European Council in which, in reality, nothing was decided. The famous ceiling on the price of gas is not there and if it ever will, it will be useless or, worse, harmful. Germany takes home mandatory solidarity on gas volumes in extreme cases and joint purchases. Everything else is hot air or a little more.
The truth is that the EU and governments have no credible solution, except one. All the contraptions the EU is desperately trying to patch up are palliative at best, and outright nonsense at worst. The more complicated the problem becomes, the more "new" ways of dealing with it increase in Brussels, generating two problems: on the one hand, one carefully avoids addressing the root of the problem, on the other, the already pachydermal European superstructure swells with others bodies, other obligations, other "tools", other regulations. For an institution that would like to be liberal it is self-denial, but above all it is the demonstration that there is absolutely nothing liberal in the EU. On the contrary, it begins to show all the characteristics of the bureaucratic, planning and omniscient Moloch, on the Chinese model.
The only concrete way to lower the price of gas, the only solution, is to create a supply surplus, which generates a series of long positions between producers and suppliers, causing prices to fall. The reality of the years in which the European gas market operated regularly (between 2015 and 2019, for example) was precisely this, so much so that the European market was not affected, at the time, by the drastic drop in flows from Libya to Italy, nor have price peaks ever occurred during the normal maintenance stops of the various gas pipelines. This is because there were alternative flows that could compensate, primarily the Russian ones, but also LNG, which covered the marginal needs in Europe. We only remember a few days of disturbance on the occasion of the explosion that occurred in 2017 in Baumgarten, an important Austrian gas hub, or on the occasion of the icy Burian a few years ago. For this reason, at the time, Italy made a law that instituted the gas emergency procedure.
Over the last year, Vladimir Putin has done his part, putting the whole of Europe in difficulty by gradually reducing gas flows, but it should not be forgotten that it was the European Union that wanted to do without Russian gas starting from last spring. This meant that 150 billion cubic meters of supply per year disappeared from the market. How else could the price have reacted, if not by getting up? That offer cannot go to other parts of the world outside of Europe, because there is no infrastructure to divert it to other destinations, so the decline in supply has become structural worldwide and has kept prices high. What did Europe do to find these 150 billion cubic meters of gas that suddenly disappeared? In no particular order, the individual states moved and compensated with increases in pipeline imports from Norway and Algeria, and above all with an increased import of LNG, notably from the USA. Then they went around the world in search of contracts, Italy with Eni in this was faster than others. However, it is liquid gas that will arrive in Europe only from next year or even from 2024 and which requires immediate and robust investments in regasification capacity. Relying (by naïve calculation) on the fact that Russia would not unilaterally suspend supplies until the change process was over, Europe began in March to refill its stockpiles in forced stages, pushing demand up and with this the prices. In fact, the peak of prices occurred at the end of August, in the last trading days of the last month of "summer" gas (September), which was the marginal one to fill the storage, and after Russia had blocked the Nord Stream 1 for supposed maintenance problems.
Given the European decision to give up Russian gas, the supply surplus that would be used to lower prices today cannot be created by acting on the supply side, on which everything possible has been done. A significant surplus can be created that affects prices only by acting on demand, in particular by reducing it by about 25% compared to previous years. This they know very well in Brussels and this is indeed happening. The long discussion on European "remedies" has lasted for more than a year and has not brought any concrete results: prices took off from May to August and this discouraged the industry from consuming a raw material that was becoming a commodity. luxury. The endless debate on the price cap was basically a delaying maneuver to ensure that in the meantime the market would clean up the most fragile companies, small or large.
Gas prices with short-term deliveries are low today because demand languishes (-22.5% Italian industrial demand in September compared to the same month of 2021), storage is now full and heating is off, partly because it's hot and a little bit because by law they must remain off until October 29th. But the forward price curve hasn't dropped that much and, above all, we need to see what will happen when the cold arrives. Today, the European gas system is in a long position, because gas arrives but demand is at a standstill. Therefore, the variables to keep an eye on from next month are the following: temperature, any interruptions or decreases in gas flows in the various pipelines, compliance with the Cingolani plan for lowering consumption and use of storage. Greetings to everyone, especially to the new Minister of the Environment and Energy Security, Gilberto Pichetto Fratin . He will need it.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/perche-i-prezzi-del-gas-sono-alti-e-perche-non-e-stato-un-successo-il-consiglio-ue/ on Sun, 23 Oct 2022 07:36:19 +0000.