The Worlds Energy Pain

 If ever the proof was needed that the world is globalised these days .... 

Its A Truly Globalised World

.... its the impacts if the Covid pandemic, and the Russian invasion of the Ukraine.

For instance, the Covid pandemic spread so quickly, as air travellers carried it worldwide within a very few months of its eruption in the comparatively remote Chinese city of Wuhan (who outside of China, had heard of the large city before the pandemic?), until it caused mayhem economically and socially. Similarly the Russian invasion of the Ukraine has had global impacts on both energy and food supplies worldwide. In Europe, the greatest impact has been on energy prices, especially that of natural gas. 

Being Right Royally Screwed

The problem Europe (and therefore the UK also), has, is that natural gas prices in Europe, are actually currently double those in Asia, and 10 times as much as in the USA, so we all feel that we are currently being right royally screwed, in to a continent wide economic recession, and that Putin is winning the economic tussle. 

The reasons for the huge discrepancy between the European and the USA natural gas prices is not some evil trick of capitalism, or even VAT/green taxation levels etc ... its because the USA has a large domestically produced supply of natural gas, and a limited capacity to export it by pipe line to Canada and Mexico, and in fact Canada exports more natural gas than it imports ... it only imports due to location/distribution advantages near US border.

So the *USA consumers get the benefits of a plentiful domestic natural gas supply, without having to compete with consumers elsewhere for that natural gas. Natural gas in the USA is used much like the product is used in Europe, with 38% going toward electricity production, 33% going to industrial uses such as refining and fertilizer plants, and 15% for residential uses such as heating ... 20% of US natural gas is now exported through pipelines and Liquid Natural Gas (LNG) but the US operates at full export production capacity, so little more could be exported as LNG to the EU/UK, thus not affecting the world price.

Now a bit of background ... There are three main trading price centres for world gas ... the Netherlands known as 'Dutch TTF', the Asia hub called the Japan Korea Marker (or JKM), and the US hub, known as the Henry Hub in Louisiana ... and conditions vary in each of these areas, due to local production / distribution / consumer market sizes, hence the current price differences natural gas. To give you an example of how this actually reflects in natural gas prices, in March 2022 the Dutch TTF was trading at $42 per million British thermal units (mtu). In Asia,  the JKM was trading at $37 mtu while in the U.S. the Henry Hub in Louisiana was trading at $4.60 mtu (but the US rate has now risen to more than $8).

Crude oil prices, on the other hand, are set by global trading, and that sets the price worldwide (including in the U.S.) ... the US benchmark is the West Texas Intermediate (WTI) crude price, which usually trades slightly below (approx 3 per cent), the global price, which is tracked by Brent crude futures (North Sea Oil). Therefore everyone is impacted more or less equally when oil prices rice. 

What we have in Europe is a large concentration of industry and population, with the nearest large natural gas production (outside of the North Sea/Norway), being Russia, which is by far the largest supplier of natural gas in Europe .... so we are all paying the price of the German led charge towards Russian oil/gas under different regimes, but accelerated by the then Chancellor, Gerhard Schröder who pushed for the Nordstream natural gas pipes project. In 2005, he actually signed the deal off even as he was departing the Chancellor's office, after losing the German elections. 

Its current restricted delivery and now closure, are simply because Russian President Putin can and has weaponised the product, to punish the EU for its economic sanctions ... a risk that was always inherent in the move towards virtually sole reliance on Russia for gas and oil (a fact pointed out at the time all the deals were signed .. but ignored by Schröder, who is a personal friend of Putin).

Despite the EU the majority of member states now having drastically reduced their reliance on Russia for Gas and Oil since the invasion of the Ukraine, the current sky-high energy prices mean that the EU countries still pay Russia almost the same daily amount of money, for what little they still do get from them. So Putin has hardly been damaged at all .... the aim therefore of cutting Putin off from his EU revenue has actually failed, whilst putting the European continent on to an almost certain path to another recession.

So now every European nation is scrambling around to find alternative gas and oil sources, and so are competing against each other, thus pushing the prices up .... so in an effort to impose some sort of unity, the EU is trying to get some agreement on negotiating on one price, and has even invited the UK to join in. The aim is to try to benefit from lower prices on the global market using European financial muscle (which combined is equal to the USA). However, the EU/UK are in a weaker position than the US because other nearby natural gas and oil sources are either already under contracts, or rely on the (nearly all Arab or Venezuelan) suppliers goodwill, which is in short supply as they are all currently reaping windfall profits as natural gas prices soar.

What we don't want to do, is to set in stone an artificially high natural gas price, driven by signing long-term panic driven contracts ... in two or maybe three years, the gas prices should fall to a natural market level, which will be far lower then current levels, as supply and demand rebalance again e.g. If Russian gas will be sold almost exclusively to China and India - and other smaller Asian economies, then those countries won't need Arab or South American supplies anymore so their prices will also fall. 

We need either as Europeans or as the UK need to keep that in mind in any long-term contract negotiations. 

* Its been reported that the U.S. is not producing a single kilowatt hour (kWh) more than it was 15 years ago, and that overall electricity generation in the U.S. has in fact dropped from 4.005 trillion kWh in 2007 to 3.96 trillion kWh in 2021. All despite a rising demand caused by the U.S. population growing by 30 million to more than 331 million from 2007 to 2021.