Europe faces good news and bad news.
The good news? Natural gas prices on the benchmark Dutch TTF exchange are down 71% from their absurdly high levels in late August. Back then, worries about supply shortages, Russia’s stoppage of gas flows through the Nord Stream pipeline, and a cold winter created a sense of impending doom. The bad news is that EU leaders are still trying to figure out a long-term gas market strategy without inadvertently causing further disruptions.
To its credit, the EU has cobbled together some effective short-term measures to mitigate the impact of sporadic price fluctuations while boosting the bloc’s overall gas reserves. Brussels has tried to address both the supply and demand side of the equation while Moscow has deliberately held back natural gas exports in order to weaken the EU’s commitment to Ukraine. EU gas storage levels are currently at levels over 93%. The EU has spent the last few months diversifying its suppliers. Russia now accounts for less than 10% of the EU’s gas supplies, compared to 41% in August 2021. The EU is increasing imports of liquefied natural gas from the United States, Qatar, and Africa (among others), and is exploring joint gas purchasing to leverage the EU’s bargaining power for cheaper prices and ensure EU members aren’t competing against one another for supplies.
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Still, the EU has had trouble settling on an actual price cap for natural gas. While the bloc threaded the needle on Oct. 18 by agreeing to intervene in European gas markets to prevent exorbitantly high price spikes, the details have yet to be worked out. The fact an intervention tool was signed off was a success for countries such as Italy, Spain and Poland that were advocating it in the face of German and Dutch opposition. But concerns about government intervention in the market continue to complicate the process.
The EU is trying to do two contradictory things at the same time: keep natural gas prices at a reasonable level while ensuring adequate supply. The problem, of course, is that artificially capping the amount of revenue gas suppliers can earn in Europe could compel many of them to divert shipments to more profitable markets. This would make it more difficult for the EU to refill gas storage facilities in anticipation of the following winter. This is precisely why German Chancellor Olaf Scholz was skeptical about gas price caps in the first place. The other issue is that lower prices could encourage European governments to buy more gas, which undermines the EU’s goal of reducing blocwide consumption by 15% between now and March of next year. If the price per megawatt hour is no longer in the $150-$200 range, the financial incentive to lower demand is less urgent.
European officials find themselves in a hard place. With inflation in the euro area reaching 9.9% in September, European populations are growing anxious. There is an urgency in Brussels to demonstrate to the average European that the bloc’s leadership understands their suffering. But in searching for a solution, the bloc risks creating entirely new roadblocks it will eventually have to address.
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Daniel DePetris (@DanDePetris) is a contributor to the Washington Examiner’s Beltway Confidential blog. His opinions are his own.
