Is Russia Putin Up European Gas Prices?

Energy market analysts have a particularly strong understanding of cause and effect.

They are experts at spotting links between two events which, on face value, seem vastly unrelated.

One such link can be found between a few words spoken by a man on the other side of the globe, and the cost of heating a tin of beans in the UK.

Small increases in the day-ahead and month-ahead gas price last week were directly attributable to growing concerns about Russia limiting the supply of gas to Continental Europe.

Alarm bells sounded when Vladimir Putin threatened to cut off supplies to Ukraine if it failed to pay its gas bills in advance. Subsequently, the Russian gas giant Gazprom warned of risks to the gas supplied to Europe if Kiev withheld payment.

Several pipelines connect Russia with broader European distribution networks. The one which crosses Ukraine delivers large quantities of gas, and because it can be siphoned off as it makes its way through the country, Russia would be unable to stop Ukraine receiving gas without halting the flow to Europe.

Ukraine managed to stave off a European gas crisis, at least temporarily, by paying Moscow £10 million for its gas consumption in March. However, this relatively small sum might reasonably only delay the problem by a matter of weeks.

European gas market will remain edgy

Russia supplies around 30 per cent of the continent’s gas. The North Sea gas fields make Britain less dependent on Russia; however, we will not be immune from rising prices.

Britain is by no means detached from the European marketplace. Although we only buy a small proportion of gas directly from Gazprom, we top up with gas from other European countries who themselves supplement their supply with Russian gas.

Any cut-off that lasted for more than a few weeks would be particularly problematic for British businesses because of the lack of gas storage facilities in the UK.

While many countries are insulated from changes in the level of supply, owing to their large storage facilities, Britain can only store enough gas for little more than two weeks, making us particularly exposed.

How likely is a European gas crisis?

Although gas markets are likely to remain jumpy for some time, and consumers might expect small price increases in the near future – a gas crisis seems fairly unlikely.

On previous occasions when supply has been cut-off or limited, Gazprom, the Russian exporter, has lost huge sums of money – and suffered long-term reputational damage. Any move to cut supply would probably be harder on Russia than on Europe.

Any move to cut off supply will also likely motivate European leaders to step up attempts at becoming less dependant on Russian energy – which would have lasting implications for Russian exporters.

The general feeling is that Putin is fighting a war of words, and using supply threats to try and weaken his opposition in Ukraine. However, in the past he has proved a highly unpredictable character, so crises should by no means be ruled out.