“War in Ukraine and the gas crisis force a rethink of EU foreign policy”, Francis Ghilès (CIDOB, Barcelona)

As European gas prices hit an all-time high this week with futures linked to Title Transfer Facility (TTF), Europe’s wholesale natural gas price rose more than 40% to €173 per megawatt hour (on March 3rd). Natural gas prices in Europe are currently the equivalent of $225 per barrel of oil equivalent. That is an astronomical rise. In the US, the price of a similar unit is $5. Meanwhile, oil prices rose to their highest level in nine years with Brent crude reaching $118.22 a barrel.

Gas prices are sky high because Europe has no substitute for natural gas from Russia, the largest exporter both worldwide (260 bcm/year [Billion cubic metres]) and to the old continent (160 bcm/year, or 45% of total European imports). The spot market for gas is relatively small compared to oil. Most gas is not traded as liquid natural gas but is transported by pipeline that can only service certain markets. Hence there is very little gas which can be redirected to Europe and what can be redirected is very expensive. This explains the vast disparity in prices between Europe and the US and why the US has been encouraging buyers and sellers to break their contracts to allow Europe to restock its inventory. Inventories in Europe have been at historic lows since last autumn because prices were high and the Russians had already cut back their supply. Low inventories, a perception of scarcity and unchanged levels of demand created the conditions for a perfect storm – a fear factor and actual shortage which drove prices up.

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