Gas prices are on the rise. Here’s why

The unstoppable increase of global gas prices has been raising concerns across the world, especially in Europe.

As of Wednesday, the European benchmark natural gas futures contract hit a record high by reaching about 117 Euros ($134), with more than a 14 percent daily jump, posing a potential threat of shortage over the winter and interruption of industrial production.

Gas prices in Europe have skyrocketed to more than 400 percent compared to last year.

Despite heavy investments in renewable energy, natural gas still plays a key role in heating houses and supporting industrial production in European countries.

Europe could face power cuts unless Russia increases gas supplies to the bloc, Ole Hansen, head of commodity strategy at Saxo Bank told Russian news outlet Sputnik.

"Unless Russia is holding back gas supplies in order to force through an acceptance of the NS 2 [Nord Stream 2] pipeline, we expect Gazprom will increase supplies once domestic facilities have been filled, expected to [be] around the end of this month. If not, and given the competition with Asia, prices could stay elevated into the winter months with a colder than normal winter carrying the risk of supply cuts and rationing," Hansen said.

On the other hand, the United States has the same problem of inflation in natural gas prices as they increased more than 150 percent just in a year.

So, why are gas prices increasing?

As world economies emerge from the coronavirus pandemic, the supply of natural gas is falling short against the booming demand.

The efforts of transformation from coal plants to renewable sources to meet energy needs caused a vulnerability for many countries; coal plants close while gas stockpiles remain much lower than the pre-pandemic period.

The problematic situation is further exacerbated with Chinese state energy firms placing orders to buy fuel at any price.

The European Union is considerably reliant on gas for generating electricity as it constituted around 23 percent of the total production in 2019, following nuclear energy which generates 26 percent.

Scientists in Europe have developed batteries with larger storage capacity for use in renewable energy plants; yet even those could not store enough electricity to meet the demand – gas still plays an important role for electricity generation.

The transformation to green energy increased electricity exports from some European countries where there is an abundance of power due to restricted storage facilities.

The storage sites for natural gas in Europe hit their lowest levels in more than a decade in late summer, when they usually are replenished, due to limited supply of Russian gas as the country was rebuilding its own inventories.

Meanwhile, Norway’s maintenance works for its fields and processing stations caused a lower supply to reach Europe.

Eurozone wholesale power prices are at record highs, potentially exacerbating inflation pressures inflicted by Covid-related supply bottlenecks. In Germany, 310,000 households face an 11.5 percent increase in gas bills. 

Noting German factory gate prices were already the highest since 1974, Citi analysts predicted 5 percent hikes for electricity and gas prices in January, adding 0.25 percentage points to consumer inflation next year.