Macro observation No. 62 in 2021 (total No. 385): causes, effects and Countermeasures of European natural gas crisis

Causes, effects and Countermeasures of European natural gas crisis

In the third quarter of 2021, the global natural gas price represented by European natural gas rose sharply, which led to the rise of a package of energy prices such as electricity and crude oil. With the rising demand for heating in winter and the impact of energy shortage or continuous fermentation, the risk of European natural gas crisis gradually overflows. This paper aims to analyze the causes and impact of the current round of European energy price rise, study and judge the development trend of the global energy market in the future, and put forward policy suggestions for China to deal with relevant risks.

I. global energy prices generally rose, and European natural gas prices hit new highs. In 2021, with the trend of global economic recovery, global energy prices gradually recovered from the trough in 2020 and rose sharply in the third quarter. The prices of natural gas, coking coal, power coal and electricity in Europe, America and Asia have hit record highs, and the energy problem continues to ferment. Among them, European natural gas prices led the increase driven by various factors. Taking April 1, 2021 as the base period, the base period price index is set to 100. By the end of September 2021, UK IPE natural gas futures rose to 485.5, significantly ahead of 207.9 of us NYMEX natural gas futures, 189.3 of China's Dachang coking coal futures and 124.9 of Brent crude oil futures. In the context of global economic integration, the European natural gas price rise crisis may accelerate its spread to the world.

II. The sharp rise in European energy prices is the result of the superposition of many factors

The sharp rise in global energy prices represented by European natural gas is affected by the superposition of multiple factors.

(I) the current round of energy price rise is closely related to the change of energy supply and demand structure in Europe

First, the supply of major natural gas supply channels in Europe has declined. On the one hand, due to frequent earthquakes, Groningen gas field in the Netherlands, an important gas field in Europe, will stop production as soon as 2022. The annual output of the gas field is about 12 billion cubic meters, which is expected to affect about 5% of the total supply of natural gas in Europe. On the other hand, Russia has reduced its natural gas supply to the West for political reasons. Although Russia's natural gas exports to Europe showed an overall growth trend from January to July 2021, due to bilateral relations with Ukraine, Russia reduced the amount of natural gas delivered to Europe when the demand for natural gas in Europe rebounded sharply and pushed up the price.

Second, the supply of new energy such as wind power lacks stability. Take wind power in the UK as an example. In recent years, the proportion of wind power generation in energy supply in the UK has been greatly increased, from less than 5% in 2011 to 15%, and the proportion of coal power generation has been rapidly reduced, from 30% in 2011 to 7% in 2017. The rapid increase of wind power in the energy supply structure makes the European energy supply heavily dependent on the stability of wind power supply. The fear of energy crisis caused by the sharp rise in natural gas prices has been fermented in the UK, largely due to the lack of wind power in the English channel, which needs to be supplemented by the temporary use of natural gas power generation.

Third, in the context of carbon neutrality, European oil and gas companies have reduced their investment in upstream business. European oil and gas companies such as shell, BP and total have set targets to reduce the carbon intensity of upstream businesses and promised to become a net zero emission enterprise by 2050 or earlier. The overall investment and output of European oil and gas companies are decreasing, the overall self-sufficiency rate of Europe has decreased significantly, and they are more dependent on foreign imports.

Fourth, the frequent occurrence of extreme weather has further exacerbated the imbalance between supply and demand. In February 2021, extreme cold weather occurred in the United States, large-scale power outages occurred in Texas and Ohio, natural gas infrastructure was damaged, and natural gas production fell rapidly. In the summer, the Midwest of the United States experienced continuous high temperature and drought, the temperature was significantly higher than the 10-year average, the cooling demand of residents increased, driving the demand for natural gas power generation. The price of natural gas showed a situation of "not light in the off-season", and the inventory remained low. In August 2021, hurricane IDA caused the natural gas production in the Gulf coast of the United States to decline again, and the recovery of production continued to be lower than expected.

(II) the current round of energy price rise is greatly affected by macroeconomic policies

First, Europe is in the stage of accelerating the transformation of carbon neutral energy policy, and the demand for natural gas is prominent. In July 2021, the EU issued a "fit for 55" package of low-carbon development policies to further promote the realization of its carbon neutrality goal. At present, the main energy supply for power production in Europe comes from renewable energy (23.79%), nuclear energy (21.63%), natural gas (19.61%) and coal (14.85%). Among them, natural gas and coal belong to fossil fuels. According to the "2050 net zero emission" road map released by the International Energy Agency (IEA), it is expected that fossil fuels will still play an irreplaceable role in the global energy supply with a share of 20% by 2050. Compared with coal-fired power generation, natural gas power generation has obvious advantages in carbon emission. The carbon dioxide emission generated in the process of power generation can be reduced by about 40% compared with coal. Under the goal of carbon neutrality, the demand for coal and natural gas will "ebb and flow", and the demand for natural gas will highlight, driving up prices. In addition, with the acceleration of energy transformation under the goal of carbon neutrality, Europe's energy structure is in a period of rapid transformation, it is difficult to maintain a stable equilibrium level at both ends of supply and demand, and the probability of short-term supply-demand imbalance increases, resulting in sharp fluctuations in natural gas prices.

Second, the proliferation of liquidity under European loose policies has boosted energy prices. Under the background of the gradual deepening of the financialization of bulk commodities, the price of energy bulk commodities is increasingly affected by loose liquidity. Historical experience shows that the loose monetary policy and fiscal stimulus policy of the central bank after the crisis often promote the rapid rise of commodity prices. Take the US subprime mortgage crisis in 2008 as an example. After the crisis, the Federal Reserve invested a lot of liquidity into the market through quantitative easing to stimulate the economy. The scale of the Federal Reserve's balance sheet expanded rapidly from $490 billion to $4.2 trillion. The price of crude oil rose from US $122.9/barrel at the end of 2012 to US $122.4/barrel at the same time.

After the covid-19 outbreak, the European and American central banks once again injected a large amount of liquidity into the market through a series of monetary and fiscal policies to boost the economy, and the easing and stimulus intensity even exceeded the subprime mortgage crisis. Similar to previous crises, energy commodities have risen sharply under the unprecedented flood of liquidity. By the end of September 2021, among major energy commodities, the price of Brent crude oil (NYMEX) had risen from $23 / barrel to $78 / barrel, an increase of 239%; The price of thermal coal (Zheng Shangsuo) rose from 476.4 yuan / ton to 1408 yuan / ton, an increase of 195%; The price of natural gas (IPE) rose from 16.5p/semm to 241.3p/semm, an increase of 1363.3%.

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