Rising natural gas prices add to worries about inflation

The focal point for natural gas problems is in Europe, but because of interconnected markets the impact is spreading around the world. | Getty Images

A host of problems have converged to drive the cost of natural gas higher and if they persist, it will add further to the cost of nitrogen fertilizer, an array of industrial processes and space heating 

This will pile on top of already existing price inflation in farm inputs sparked by production and transportation disruptions and labour shortages caused by COVID-19.

The focal point for natural gas problems is in Europe, but because of interconnected markets the impact is spreading around the world.

The benchmark natural gas price in Europe dropped during the economic low point of the pandemic but has rocketed to about 300 percent of where it was in January.

The soaring cost is causing headaches for power providers that use natural gas to generate electricity and caused nitrogen fertilizer makers to temporarily pause production.

Gas supply can’t keep up to demand, which rose as economic restrictions were lifted.

Europe imports much of its natural gas from Russia via pipeline and from the United States and the Middle East by liquid natural gas (LNG) tankers.

Recovering economic activity in Asia increased the competition for, and price of, U.S. and Middle East gas.

Gas from Russia comes with geopolitical issues. Much of it now comes via pipelines through Ukraine, which collects tolls that are an important part of its government revenue.

Germany and Russia have been building an alternate pipeline, the Nord Stream 2, that crosses under the Baltic Sea. Construction is mostly complete but the project is controversial. It would allow Russia to bypass the Ukraine route, creating the potential to starve Ukraine of important revenue. Russia and Ukraine have been in a low intensity military conflict since 2014 when Russia annexed Crimea and supported pro-Russian forces in eastern Ukraine.

Also, many in eastern Europe worry the Nord Stream 2 pipeline will make Germany and the rest of Europe dependent on Russia, giving the Kremlin too much political leverage.

Suspicions are already high. Dozens of members of the European Parliament are urging the European Commission to investigate Russia’s main gas exporter, Gazprom of manipulating supply and prices, even though shipments to the west are up by almost 25 percent.

The critics allege Gazprom wants to encourage shortages in Europe so that the final approvals needed for Nord Stream 2 will be granted.

Other factors contributing to gas prices include a cold winter and spring that lowered inventory of stored gas, and restricted North Sea gas production.

Also, an unusually calm summer lowered electricity generated by wind that had to be replaced by natural gas fired turbines.

On top of it all, Europe’s emission trading scheme has bid up the price of carbon credits to a record high, causing increased costs for those who generate electricity from coal or gas.

The expensive gas caused fertilizer maker Yara to curtail 40 percent or about two million tonnes, of its European ammonia output of 4.9 million tonnes a year.

Another fertilizer producer, CF Industries, last week said it would halt production at its two plants in Britain. 

However the British government stepped in with money to keep one plant operating for three weeks.

Surprisingly, the motivating factor for the government was not the plant’s main ammonia product but the byproduct — carbon dioxide.

CF Industries captures the CO2 and sells it to the slaughter industry that uses the gas to stun hogs before slaughter. Also the gas is used in meat packaging, dry ice and in carbonated drinks.

So the CO2 was considered essential. The government hopes two other plants that produce CO2 but are undergoing maintenance will reopen after three weeks allowing it to terminate the assistance to CF Industries.

North American benchmark natural gas prices at the New York Mercantile Exchange are also up, but not as sharply as in Europe. The NYMEX price is up about 75 percent from the start of the year. It is influenced by the European situation, and also Hurricane Ida knocked out wells in the Gulf of Mexico.

Gas storage levels in the U.S. are lower than normal and on Sept. 15 Industrial Energy Consumers of America wrote to the U.S. energy secretary asking that the government limit LNG exports to allow storage levels to rise to a five-year average to provide a cushion against damaging prices if winter is colder than normal and gas demand rises.

The worries about natural gas prices add to the concerns about a range of issues that stoke inflation, create shortages of critical parts and slow economic recovery.

Global central bankers earlier this year said inflation would be “transitory” as the disruptions caused by the pandemic slowly resolve, but it is looking like neither the pandemic nor inflation are going to quickly disappear.

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