The rising price of gas

The world price of natural gas has increased from $2.50 per unit to $5.60 per unit over the last 12 months – an increase of 124%. Like a price ‘spike’ in most markets, the cause of the increase in price can be attributed to a number of different factors. These are some of the factors behind the current rise in the price of natural gas:

• Last winter was relatively cold and prolonged in many northern hemisphere countries that are significant users of natural gas which increased the demand for gas and left world gas stocks 25% below their long-term levels.
• The supply of gas from two of Europe’s biggest gas producers, Russia and Norway has been disrupted over the last few months due to work being completed on gas supply infrastructure.
• As the world economy has recovered from the Covid19 pandemic there has been a general rise in the demand for energy. In Asia, for example, there has been a significant rise in demand for liquefied natural gas.
• Sustainable energy sources in Europe have not been able to make up for the shortfall left by gas. The amount of energy supplied by wind turbines has been low because of a lack of wind due to unusually calm climatic conditions in Europe during the summer.

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• Energy companies have found it difficult to switch to coal as an alternative for gas to generate electricity. Rising demand for coal in China has forced up the price of coal and there are political difficulties of switching to coal to generate electricity. Burning coal also means energy companies need to purchase more carbon trading credits and the price of these has doubled.

The rise in gas price can be seen as something of a ‘perfect storm’ for the energy industry and it has significant consequences for different stakeholders in the market. The impact the rise in gas prices is likely to have on low-income households is a major concern.

Points for discussion

What is the role of the price mechanism in explaining how the price of gas has been increased by a recovery in the world economy after the Covid19 pandemic?

Who are the winner and losers resulting from a rise in the price of gas?

Should the government put a maximum price on gas to protect low-income consumers?