The first energy squeeze of the green era has important lessons for governments
Yet another crucial global market has gone from glut to
shortage at breakneck speed. Last September in Europe
it cost €119 ($139) to buy enough gas to heat the average
home for a year and the continent’s gasstorage facilities were
Today it costs €738 and stocks are scarce. Even America,
has an abundance of shale gas, has seen prices more
than double—albeit from a much lower level—and could
increases if its winter is a cold one.
The shortage has many causes (see Finance section).
A cold European spring and a hot Asian summer boosted
demand. Rebounding industrial production has lifted
the global appetite for liquefied natural gas (lng). Russia has
less gas into European stockpiles. Hawks suspect it of trying to spook the market and ensure
its new Nord Stream 2 pipeline is approved. But
it has also faced disruptions, including a fire at
a processing plant in Siberia.
Gas has been plugging gaps in power production from other sources. The wind did not
blow much in Europe this summer, while
droughts interfered with hydropower output.
The rising price of the permits needed to emit carbon in the eu
has made coal expensive. So there is little alternative to burning
gas for electricity as well as for heating homes.
Whereas the world economy’s other bottlenecks—for container ships and microchips—have unleashed a capitalexpenditure boom, investment in fossil fuels is in longterm decline.
American shale can help only so much, because gas markets are
imperfectly linked via lng. High prices, when they strike, will
serve mainly to ration limited supply. But it takes big price
movements to curb demand. If the coming months are chilly,
Europe’s energy may have to become extremely expensive to
persuade firms and households to use less.
Sorting this out requires accurately diagnosing what has gone wrong.
Governments have not made enough allowance for the intermittency of renewable
energy. The world has too little nuclear power—a lowcarbon energy source that
is always on. Interventions and subsidies for gas will only make things worse.
Expensive energy angers voters and hurts the poor. But subsidising energy in a
squeeze, as Italy is doing, or capping prices, as Britain does, will exacerbate
shortages and make politicians’ commitment to greenery look empty. Governments
should use the welfare system to support household incomes if they must, while helping
energy markets work efficiently. The longterm challenge
is to smooth out volatility as the switch to renewables continues. Eventually
cheap battery storage might solve the intermittency problem; right now, more
gas storage would help too. In the meantime tweaks to the market could improve
things. In Britain many small energy suppliers which offer, say, oneyear fixedpriced
contracts to consumers, but buy energy at floating
rates will soon fail (see Britain section). Getting
firms selling at fixed rates to hedge against wholesale price increases should encourage more physical storage of gas. Another
idea is to invest more in connecting grids (a link between those
of Britain and France recently failed) and in lng
infrastructure, so that arbitrage trades can even out disparities in the global
supply of energy.
Dirty sources of energy should be expensive. But without reliable alternatives, price increases boost inflation, lower living
standards and make environmentalism unpopular (see Bagehot). If governments do not manage the energy transition more
carefully, then today’s crisis will be the first of many that threaten the vital move to a stable climate.