A Germany winter of discontent?

Prices for natural gas have hit record highs in recent weeks.

Since January, the price for a Megawatt hour of gas on the European Energy Exchange has risen from €20 to over €100 today.

European Gas Spot Index. Source: EEX

At the same time, European gas storage facilities are only 72 percent full ahead of the winter in comparison to a ten-year average of 85 percent. These reserves are a crucial buffer for meeting demand during cold spells between October and March.

Market observers say that the low gas reserves could unsettle spot prices even further, especially if Europe is hit by a prolonged cold snap.

The main driver of the shortage is a surge in demand in Asia. Countries like Japan, China and South Korea currently pay more than Europe does, meaning that exporters like the US and Russia are delivering there rather than to us.

According to Handelsblatt, China’s liquified natural gas (LNG) imports increased by 26 percent year-on-year for the first six months of 2021 and it will soon overtake Japan as the world’s largest importer. Beijing is trying to move away from coal as an energy source, while also fueling half a million trucks with natural gas.

Meanwhile, industry in the US is pressuring the White House to curb exports due to the fact that US storage facilities are also emptier than normal.

This is all bad news for Europe, where the Netherlands have accelerated plans to end local gas production, leaving only Norway as a significant player. 

Several European countries have already been impacted. In the UK, a dozen smaller utility companies have filed for bankruptcy; Spain has pledged to cap utility costs to protect consumers.

In Germany, analysts are split on just how much of the costs will show up in heating bills this winter.

But this is about more than just utility bills.

Natural gas is used across industry as an energy source. Higher production costs will drive up the costs of goods, thus stoking inflation, which is already hitting levels not seen since the early 1990s. 

If prices start to run far ahead of wages for a sustained period of time, trade unions could start calling workers onto the streets in order to test the nerve of any new government.

---

Are there conditions in Germany that are exacerbating the problem?

Yes, several.

Germany has become more reliant on natural gas for its energy needs over the past few decades due to the so-called Energiewende - the move away from fossil fuels and nuclear power to renewables.

Natural gas is often referred to as a Brückentechnologie. It emits less CO2 than coal or oil and is thus seen as a stop-gap until some point in the near future when renewables will (allegedly) supply all our energy needs.