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Brun: "Scaling gas prices can cool economic recovery"

19 Octubre - 2021
Gas

The price of electricity is through the roof, especially because of gas prices. According to the European Commission, the increase in energy prices responds to four factors. The first is the increase in global demand for gas for economic recovery, which has not been accompanied by an increase in supply. In addition, weather conditions cause the production of renewable energy to fall because there is less wind and water than in the summer. Thirdly, European carbon market prices have also increased, as have gas, which represents a quarter of the total energy consumption in the European Union.

In the European Union 31 million people – 7% of the population – suffer from energy poverty. Apart from the social impact of the increase in energy prices, the European Commission is also concerned that this increase will affect businesses and, therefore, economic recovery, supply chains and inflation. According to Brussels' calculations, the increase in energy prices will be "temporary", but they will not start to fall until April 2022. Despite the fall in spring, the price is expected to remain higher than the average for previous years.

The Master in Finance and Banking at UPF Barcelona School of Management Professor, Xavier Brun, explains the role of geopolitics in price scaling and points out ways to lower dependency on this material.

Gas represents a quarter of the total energy consumption of the European Union, are we very dependent on gas?

It is a fourth, yes, it's pretty high, but to understand that we have to go to the origins. Historically, almost all gas has come from Russia, relatively cheaply. The cost of transport can double the price of gas if it comes from far away, for example buying it in the United States of America is worth about two dollars the cubic metre and transporting it to Europe can cost another five dollars. Russian gas is much cheaper and less polluting than oil or coal, which must be imported from Indonesia, Australia or the USA.

The combined cycle centers have been adopted everywhere because they do not depend on external agents, such as sun or wind. Gas is reliable and cheap energy. Electricity peaks use this energy which is more expensive and dirty, but only by pressing a button works.

And how has its price got so high?

Because of politics. Russia wants to make itself worth. The international community was against the annexation of Crimea, a place in Ukraine where Russia passed its gas pipeline. But fearing boycott and tolls from Ukraine they opted for another option. Germany, which is highly dependent on Russian gas, chose to launch a submarine gas pipeline across the Baltic Sea, the Nord Stream-1. But the increase in demand has exceeded the supply from this channelling. And so we have to take it from other places. In Spain, gas comes from Algeria and relations with Algeria are not good. Now they push prices.

Production chain costs will increase and prices will rise. And this can result in a decrease in consumption.

World demand has risen and therefore the price has risen considerably. Gas supply did not rise to the same rate as demand.

Putin recently said he would guarantee gas supply.

Many times the economy is understood by politics. Putin now appears as the saviour of Europe, which applauds him, when he himself has created the problem. Apart from supply problems in  oil wells areas such as the USA or Saudi Arabia. American gas comes from an extraction process using slate. The process stops with the pandemic and these wells have been covered them with cement. This plug must now be removed and it takes some time to do so or they are unusable. USA supply has dropped while demand has grown.

The economic revival after the restrictions on the covid has also affected prices, right?

Totally.

Has gas price roof?

No. If there is no gas, prices skyrocket.

The price of gas, together with the logistical problems that we are experiencing and will continue, is the perfect storm for inflation. The question is whether it will be temporary.

What will the consequences of this increase in gas prices, beyond energy poverty?

Steelwork, glass, aluminium, ceramics... These are all very intensive industries in the use of electricity. The costs of production chain will increase and prices will rise. And that can lead to a reduction in consumption. The economic recovery we have seen can therefore be cooled. The economy has been overheated and there may now be a brake.

This, together with the logistical problems we are experiencing and will continue, is the perfect storm for inflation. The question is whether it will be temporary.

Can something be done to lower the prices? The renewable energies transition to stop depending on gas cannot be made at once.

With gas prices not much can be done, it is a global supply and demand issue. Can something be done for countries in favour of energy transition? Yeah. While we are still dependent on gas, there are alternatives: on the one hand putting batteries, but they are expensive. On the other hand, nuclear power, which is cheap, but not everyone wants to have it in their backyard and dismantle them, is expensive. The situation is complicated.

It cannot be that consumers pay the CO2 emission rights of electricity companies

What can be done to reduce the electricity bill?

The price of electricity has risen because of gas prices and prices of CO2 emission rights, which are to be paid for by electricity generators, which have an impact on the bill. I believe that the state should ensure that these costs are not deductible, so that the generating companies pay for them and cannot move them to the light bill. It cannot be that consumers pay CO2 emission rights. They must be encouraged to look for alternatives. On the other hand, Europe should issue more CO2 emission rights, increasing the supply, which would lower prices. This is the only direct and temporary way to reduce the cost of this bill.

But more CO2 goes against the Paris Agreements.

Yes. I absolutely believe in the Paris Agreements, they must not be lost, but we should think about it temporarily. The transition to a green economy is more complicated than we thought. The impact of this transition has not been properly measured and the incentives for it to become a reality must be economic. If companies are given incentives to generate green energy, the transition will be faster.

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