Wednesday, July 16, 2008

Gas Prices To Double In Europe

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’s 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’s 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.

Source - Financial Times


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