Europe told to expect doubled gas price
Pastor Dale Morgan
Europe told to expect doubled gas price*
By Ed Crooks in London
Published: July 15 2008 22:59 | Last updated: July 15 2008 22:59
The price of natural gas in continental Europe is to double in the space
of a year as a result of the rise in oil prices, according to a leading
consultancy.
Such an increase would put a further squeeze on hard-pressed European
consumers and businesses, and add to the upward pressure on inflation in
the eurozone, which has been estimated at 4 per cent in June.
It would also stoke concerns about the prevalence in continental Europe
of long-term contracts for gas supply, which link the price to the cost
of oil products such as heating oil.
European gas prices typically follow the price of oil with a lag of
about nine months, so if the price of crude oil remains at record
levels, the future price of gas can be calculated with a reasonable
degree of confidence.
According to Cambridge Energy Research Associates (Cera), a US-based
consultancy, the rise in the oil price from about $70 a barrel a year
ago to about $145 today will result in the gas price rising from about
$350 per thousand cubic metres at the start of the year to about $730 by
April 2009.
Any rise in the price of gas would also push up the cost of electricity
because gas is generally the marginal fuel for power generation.
Household energy bills, including for electricity, gas and heating oil,
make up about 5 per cent of consumers’ expenditure in the eurozone. In
Germany the bloc biggest economy – the average is 7 per cent. Energy
bills and food costs have been the main factor behind the rise in
inflation this year across the European Union.
As the eurozone exports slowed, people thought it would be compensated
for by a consumer spending spree. But what’s happened has been a sharp
rise in inflation that has hurt consumers’ spending power, hit their
confidence and limited their spending,†said Howard Archer of Global
Insight, another consultancy.
The higher gas price in continental Europe has driven up prices in the
UK. Britain has a more liberalised gas market that is not formally
linked to the oil price but it has become increasingly tied to the rest
of Europe as North Sea gas production has declined.
Consumer groups argue that the link between gas and oil prices should be
broken because it supports co-operation between large gas producers and
utilities.
Jonathan Stern, of the Oxford Institute for Energy Studies, said that
there was “no reason why gas prices should be so high†.
“When oil was at $25-$30 we could live with that. At $60 oil we
started thinking the gas price was a bit high. At $140 oil this is
craziness: there is no way anyone can argue this reflects the balance of
supply and demand for gas,†he said.
Demand for gas in the EU fell in 2006 and again in 2007.
Prof Stern said the justification for the price linkage – that gas was
a substitute for fuel oil in power stations and heating oil in homes –
had weakened as the use of oil in power generation in Europe had waned.
However, Shankari Srinivasan, of Cera, suggested the price link to oil
was likely to persist. “An oil-linked price is not necessarily a
higher price, but it is more predictable and can show less volatility
than a pure gas market price,†she said.
The growth in liquefied natural gas (LNG) shipped in tankers is expected
to strengthen the links between regional gas markets and potentially
bring supplies to the EU that are not linked to oil prices.
But the ability to deliver LNG to where suppliers achieve the best
returns has, generally, seen it shipped to Asia rather than the US or
Europe. Japanese demand has been particularly strong since nuclear
reactors were shut down following an earthquake a year ago.
The volumes of LNG shipped from the Atlantic basin and from countries
such as Egypt, Nigeria and Trinidad to Asia have risen from nothing in
2005 to 9bn cubic metres last year, according to Wood Mackenzie, another
consultancy.