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17 January 2013

The real reason why gas is so expensive in Europe compared to America

Why is the cost of heating your house going up? 

Conservatives rightly see escalating fuel bills as an issue that matters to ordinary people – and something on which we need to take action. Unfortunately, much of the associated comment is ill-informed green-bashing – as if the price rises in recent years can be largely explained by investment in renewable energy.

Though subsidies for wind and solar have played their part, other important factors are at work – and yet do not receive the attention they deserve.

The Economist provides a welcome instance of serious energy journalism with a report on the disparity between gas prices in Europe and America: 

  • “Compared with the rock-bottom price of gas in America, coal is not all that cheap. But it is a bargain compared with the price of gas in Europe. Although gas can be carted around in liquid form, that is expensive and the infrastructure required is still patchy; for the most part, gas is shifted through pipelines, and tends to be used close to where it originates. So whereas coal has world-market prices, gas has regional prices, often linked in one way or another to the oil price.”

As a matter of fact, Britain has shown that it is perfectly possible to build the infrastructure to import liquified natural gas (LNG), in a comparatively short period of time and without the need for government subsidy. But that is all the more reason to reform the European gas market – and in particular to junk the utterly unjustified link between gas and oil prices:

  • “Many European gas contracts were negotiated years ago with the Russian gas giant, Gazprom, and despite a wave of renegotiations European gas prices have stayed high. In the summer of 2012 they were more than three times the American gas price and more expensive than coal. Gazprom has said it will cut prices—probably by around 10%—in 2013, but that may make little difference.”

At a time when American consumers are enjoying the benefit of the shale gas revolution, Europeans continue to take Gazprom’s crazy prices. So, what on earth is going on?

Perhaps, we should question the cosy links between the European and the Russian elites. Consider the example of Gerhard Schroder, Angela Merkel’s predecessor as German Chancellor. Schroder left office in 2005 only to accept a senior position with Nord Stream AG – a gas pipeline company whose majority shareholder is, er, Gazprom.

Whatever the drawbacks of wind farms and the like, it is time to recognise that the biggest problems with UK and EU energy policy lie elsewhere. As a priority, Conservative opinion-formers in Britain should be demanding the liberalisation of European energy markets.

That said, the green lobby has some re-thinking of its own to do. The likes of Greenpeace wring their hands over shale in America – fearing that cheap gas will be bad for the environment, when their real worry should be  over the impact of expensive gas in Europe:

  • “The relative price of coal and gas is crucial to the health of European utilities. At the beginning of November 2012, according to Bloomberg New Energy Finance, a research firm, power utilities in Germany were set, on average, to lose €11.70 when they burned gas to make a megawatt of electricity, but to earn €14.22 per MW when they burned coal.”

Now, what do you think that will do for carbon emissions?


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