Europe’s Gas Storage Deficit Heightens Economic and Political Risks in 2024
Rising Energy Prices and Political Tensions Across Europe
By Balazs Koranyi
FRANKFURT, Sept 17 (Reuters) - Europe's delay in restocking natural gas storage reserves, combined with near-record prices for diesel and other refined oil products, has added to the pressures on governments as they try to contain public discontent and the rise of the far-right.
Germany’s Political Landscape and Gas Dependency
The issue is acute in Europe's biggest economy Germany, where the Alternative for Germany, or AfD party, won elections in one state last week on a platform demanding peace with Moscow and the restoration of contracts for cheap Russian gas.
A further AfD surge in state-level elections this weekend would tighten the squeeze on conservative Chancellor Friedrich Merz as he weighs his options for costly measures to lower fuel prices.
Current Gas Storage Levels and Contributing Factors
Europe's gas storages, meant to serve as a buffer against supply and price shocks over the peak demand winter months, are 69% full, below the 85% average for this time of the year over the last five years, according to industry body Gas Infrastructure Europe.
Germany and the Netherlands, which together hold 35% of the bloc's storage capacity, are major laggards as high energy prices due to disruption linked to the U.S.-Israeli war on Iran have deterred private companies from buying and governments from enforcing national storage targets.
The calculation was that the Iran war, which began at the end of February, would end quickly, prices would retreat and companies could restock Europe's most important fuel at affordable prices, analysts said.
That bet looks increasingly shaky.
Market Reactions and Analyst Warnings
"Each month that Europe delays restocking raises pressure on prices as peak winter usage approaches," said UniCredit strategist Jonathan Schroer.
Compared with the energy price shock around the time Russia began its invasion of Ukraine in 2022, prompting Europe to wean itself off Russian gas and introduce policies on gas storage targets for the winter peak heating season, the economic situation now is in some ways less critical.
Countries have diversified their sources of energy and a softer labour market has curbed workers' ability to demand increased wages, helping to curb inflation.
Governments, however, are still praying for a mild winter and the European Central Bank increased interest rates last week, with policymakers warning it may need to do so again if energy price pressures fail to recede.
Impacts of Global Oil Prices and Gas Benchmarks
As global oil prices have climbed above $100 a barrel in response to an upsurge in the Middle Eastern conflict, petrol prices are 24% higher across the EU than a year earlier while diesel is up 38%, partly on hits to Russia's energy infrastructure by Ukraine. Jet fuel costs are up more than 100%.
The gas benchmark is trading at €81 ($93) per megawatt hour, up 150% on a year earlier and above the ECB's "adverse" forecast, with risks skewed toward higher readings.
Depending on the weather, Morgan Stanley predicted it could even go to €100/MWh. "Relying on weather for supply security is a risky bet," its analysts said.
Other analysts said the risk was that storage sites will shrink and prices will remain high.
"I could see in even just a normal cold winter, not even a dramatically cold winter, storage being very heavily depleted," said Jack Sharples at the Oxford Institute of Energy Studies. The subsequent need to replenish stocks in 2027 with imports could leave liquefied natural gas markets tighter for months after.
Gas Shocks and Economic Consequences
Persistent Effects on Inflation
GAS SHOCKS CAN BE ESPECIALLY PERSISTENT
That outcome would be particularly bad news for the economy.
Research from the Bank of Italy published in June found that while oil shocks tend to produce short-lived inflation, gas shocks generate stronger and much more persistent effects that seep into the underlying inflation most closely watched by the ECB.
ECB Policy and Sectoral Impacts
This is why financial investors think the ECB will be forced to raise interest rates another three or four times to a level that meaningfully restricts economic growth with higher borrowing costs that crimp consumer spending and deter investments.
"My attention is now focused less on oil and fuel prices, but increasingly on gas and electricity prices," ECB policymaker Peter Kazimir said.
Economists say the most vulnerable sectors are likely to be airlines, chemicals, autos, and building materials, while energy firms, utilities and banks can expect to be net winners, even if higher interest rates tend to be a drag on lending growth.
Government Responses and Fiscal Risks
As the pressure mounts on governments to blunt the cost of energy, Germany is notably exposed by the extent of its energy-intensive industry.
Others are at risk as their weak public finances crimp their ability to act.
Italy's ruling conservative coalition, trailing rivals in polls, said this week it would scrap road tax for 14.5 million cars and motorcycles from next year at a cost of over €2 billion on top of a cut to diesel excise duty that has already cost €2.8 billion.
Such measures may calm immediate popular discontent but longer term will add to Italy's and other governments' mounting debts.
"Blanket measures that affect everyone, including those who don't need them, are a false economy," French Finance Minister Roland Lescure told journalists on Tuesday. "Why? Because ultimately, we'll have to fund them."
($1 = 0.8720 euros)
(Additional reporting by Nora Buli in Oslo; Leigh Thomas in Paris; Giuseppe Fonte in Rome; Maria Martinez in Berlin; Editing by Mark John and Barbara Lewis)
