RE: Interesting Times article on why energy prices will likely fall soon7 Sep 2022 19:07
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I have to say, however, that the paper is well-argued, offering good reasons why gas prices should fall. Europe’s dependence on Russian gas has declined, from 36 per cent of gas imports by pipeline in 2021 to 12 per cent so far in the second half of 2022. European gas consumption is also declining and in the first half of the year was 11 per cent lower than a year earlier, leading the authors to say that the European Commission’s 15 per cent reduction target can be achieved, though it will be important, as in Britain, to maintain pressure on users to reduce demand. Europe also has rapidly increased the amount of gas in storage. By the winter, stores are on track to be 92 per cent full, enough to cover the average winter drawdown two times over. The scramble for gas to store may have helped to keep prices high.
Most of all, there is an inconsistency between ever-gloomier recession forecasts in mainland Europe and the UK, and ever-higher gas prices. It is “paradoxical”, the authors point out, to predict that gas prices will stay high for years, even as those same high prices inflict serious economic damage. More likely is a substitution away from gas in energy use and “deep destruction” in gas demand.
Finally, there is what the Kyiv School of Economics’ paper describes as Europe’s “trump card in its back pocket”, the giant Dutch Groningen gasfield. The field, one of the largest in the world, is capable of increasing production to replace remaining Russian gas volumes.
Students of economic history may recall that Groningen caused what became known as the “Dutch disease”. The discovery of Groningen in pre-euro days pushed up the guilder, then the currency of the Netherlands, making life hard for Dutch exporters. That was the Dutch disease.
While pumping up production from Groningen is closer to reality than fracking in Britain, which may never happen, it is not without its challenges. Since 2014-15, the Dutch government has been running down production at the field because of local concerns about earth tremors and quakes. The Kyiv paper argues that high prices would allow people to be better compensated and in recent months the Dutch government has been looking at the possibility of boosting production in response to the energy crisis.
The gas price story is not dependent on Groningen, however. The gas market, as noted, has been driven by fear factors and speculation, not fundamentals. History tells us markets can behave in this way only for so long before they re-engage with reality.
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