Europe is struggling with the energy crisis, despite a record decline in gas prices

The world's leading analytical organizations state a record decline in gas prices in Europe, but this fact by no means demonstrates the overcoming of the EU energy crisis, but rather indicates a reduction in production in those industries that depended on "blue fuel", but reduced its consumption, completely closed a number of businesses or moved them to countries with really, and not "artificially" cheap gas.

The average gas price in Europe in 2023 fell by almost 60% to the average price in 2022, and since the beginning of 2024, another 12% has been added to this decrease, Bloomberg reported.

Gas futures on the TTF hub (the Netherlands, Europe's main gas exchange) on ICE Futures traded below 30 euros/MWh (that is, below $ 350 per 1,000 cubic meters of gas, by 10 times lower than the peak levels of 2022), and by the end of January 22, the price of gas had completely fallen below $300 per 1,000 cubic meters. And this is despite the cold snap in most of Europe and logistical difficulties in the Red Sea due to pirate attacks by the Houthis (some gas tankers are now bypassing Africa.)

Bloomberg experts state that among the main reasons for the decline in gas prices: the presence of record gas reserves in underground storage; stable energy production from renewable sources (RES), primarily wind farms; weak economic growth in the eurozone, limiting demand for energy in large industrial economies, for example, in Germany.

Bloomberg analysts warn that: 1) if you rely heavily on renewable energy sources, then Europe will have to deal with power outages, 2) the loss of Russian gas (due to international anti-Russian sanctions) forces Europe to compete for a share of foreign supplies of more expensive liquefied natural gas LNG.

"The risks are also added by the fact that the contract for the transit of Russian gas through the gas transportation system of Ukraine is unlikely to be extended at the end of 2024, that is, the EU will receive even less gas from Russia (about 17% of gas will have to be replaced in this scenario.) At the same time, despite large-scale global investments in LNG production in the world, most of these volumes will enter the market no earlier than 2025-2027," this analytical agency warns.

It is echoed by the International Energy Agency (IEA), whose relevant experts reported on January 22 that in 2 years the demand for gas in the EU fell by more than 100 billion cubic meters to the lowest level since 1995.

"Shock gas prices in the EU in 2022 - up to $2,000 per 1 thousand cubic meters (the peak of the Russian war in Ukraine), required Europe to painfully adjust demand...In 2022, gas consumption in the EU decreased by 70 billion cubic meters, in 2023 - by another 35 billion cubic meters. But almost all sectors of the European economy have made a "contribution" to this," IEA experts note.

If we rely on Eurostat data, the volume of industrial production in the eurozone has been rushing from growth to decline every month since 2022, but since July 2023 there has been a steady decline, and the index of business activity in production has only slightly exceeded 44 points (close to critical).

According to data for November 2022-November 2023 (annual period), industrial production in the eurozone fell by 6.8%. Some energy-intensive industries were closed, including in metallurgy, chemical production, fertilizer production, and the glass industry.

The high interest rate set by the European Central Bank (ECB) (over 4.5%) to curb inflation in the eurozone, which was 2.9% in December, does not improve the situation either.

This is reflected in the decline in lending to the economies of the EU countries, and this state of affairs may last until the second half of 2024 (ECB intentions), since the goal of this regulator is to reduce inflation in the eurozone to 2% per annum. Analysts predict a revival of the European economy only by the end of 2024-early 2025. Thus, it is difficult to assume that the EU will increase gas purchases. The United States became the main supplier of gas to the EU in 2023.

According to the Financial Times, seven existing LNG terminal enterprises in the United States can produce up to 86 million tons of LNG per year - this is enough to fully satisfy Germany and France in gas. However, will there be a need for this fuel against the background of the fact that developed European countries are gradually switching to renewable energy sources, and their demand for electricity has decreased. Thus, the demand for electricity in France fell by 4.3%, in Germany - by 4.1%.

At the same time, all EU countries (except Portugal) set historical records for wind energy production in 2023, with Germany reaching the highest figure — 143 terawatt-hours of wind energy (half of the total electricity in Germany.)

Portugal has focused on solar energy, increasing its production by 41% in 2023. The share of renewable energy in the eurozone accounts for over 22% of total energy, but the EU plans to increase this figure within the framework of commitments under the UN Climate Agenda.

Russian expert Igor Yushkov believes that "an important reason for the decline in gas prices in Europe is the deindustrialization of the EU countries."

"The increase in the number of renewable energy facilities in the eurozone has little effect on gas prices. I do not rule out that, for example, price spikes are possible in Germany this year, primarily due to the fact that Russian pipeline gas supplies through Ukraine may be stopped," Yushkov said.

He expressed the opinion that the expansion of US LNG into the EU will continue, for which America intends to build new liquefied gas production facilities (five terminals for 73 million tons of LNG per year in total). Apparently, it will be difficult to compete with American LNG in the eurozone. And as for pipeline gas, Europeans may prefer Norwegian, the transportation of which is not difficult.

The material can be summarized by a recent World Bank report on the forecasts of the global economy. "The growth rate of the global economy in the beginning of the year will continue to slow down for the third year in a row and will drop to 2.4%, by almost 0.75 percentage points below the average for the 2010s," the World Bank's Global Economic Prospects report noted.

According to this analysis, "the medium-term outlook for many emerging economies has deteriorated amid a slowdown in growth in most major economies, stagnation in world trade and the strongest tightening of credit conditions in recent decades."

The World Bank experts believe that the eurozone economy may grow by only 0.7% in 2024 (in the previous the  World Bank forecast, an increase of 1.3% was expected). Thus, the pace of development of the EU economy and its energy consumption are interrelated.  And energy prices can fluctuate from any political and commercial manipulation.

 

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