Why are gas prices soaring in Europe? - ERDAL TANAS KARAGÖL

Why are gas prices soaring in Europe?

Energy prices are one of the most pressing problems facing EU countries these days. Restrictions related to Covid-19 resulted in shrinking economies and significant reductions in energy demands, as well as a decrease in energy prices.

However, declining production of hydroelectric power plants due to climate change, the decrease in existing stockpiles as economies begin to recover and the increase in natural gas demand, coupled with the lack of energy supply due to the absence of new natural gas resources have all caused energy prices to soar.

Since the increase in energy prices will lead to cost pressure and negatively impact competition, this signals a difficult period to come with regard to companies' production decisions.

As economies remain in the recovery phase, it is clear that the looming energy crisis will be the biggest obstacle impeding it. It is not difficult to say that the increasing natural gas demand, especially in winter, will make this process even more difficult.


WHAT’S THE FUTURE OF THE GREEN DEAL?

By announcing the green deal, the EU has taken a critical step in terms of combating climate change, reducing greenhouse gas emissions, and ensuring environmental and social sustainability, such as using renewable energy.

However, the EU has been experiencing significant problems in ensuring energy supply security in recent years. In particular, the increase in natural gas demand, the lack of sufficient natural gas flow from Russia, the lack of energy production with renewable resources, and the tendency towards spot markets resulted in the steady rise of natural gas prices.

Due to rising natural gas prices, it’s evident that numerous countries are trying to ensure their energy supply security by turning to coal as an alternative source. Of course, the high demand for coal has sent its price soaring.

Naturally, you must be wondering: What about the green deal?


WHAT’S THE SITUATION IN TURKEY LIKE?

Turkey has made important breakthroughs when it comes to energy supply security in recent years. 

Ankara is highly dependent on foreign energy, especially natural gas. In other words, Turkey meets almost all of its natural gas demand, which reaches 50 billion cubic meters per year, through imports.

Gas is imported to Turkey through one of the two following methods:

The first of which is that Turkey imports natural gas through pipelines with countries such as Russia and Azerbaijan, which have significant reserves of natural gas. 

For this purpose, TANAP and TurkStream natural gas pipelines, with Azerbaijan and Russia respectively, have been built.

While through the second method, liquefied natural gas (LNG) is imported from a spot market or over contracted quantities. The demand for natural gas is met through LNG from countries such as the U.S., Qatar, Nigeria, and Algeria.

However, it is also worth mentioning that there has been an excessive trend towards spot markets recently. The rising price of natural gas in spot markets all over the world, mainly due to the increasing demand from EU countries, puts significant pressure on energy costs.


SPOT MARKET OR PIPELINES?

In the past, it was widely thought that more advantageous prices would be prevalent in increasingly competitive spot markets since natural gas purchased through pipelines with long contracts was more costly.

However, natural gas now also costs an arm and a leg in spot markets, as there simply is not enough natural gas transported by pipelines, long-term contracts are avoided and the European natural gas market is liberalized.

For this reason, it is important to maintain a balance between pipelines and spot markets when importing natural gas.


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