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European Power Crisis

Europe is currently experiencing an energy crisis. Prices have increased as a result of the unpredictability of natural gas supply due to Russia's conflict in Ukraine. Fears of winter shortages and freezing homes have increased as the price of natural gas has skyrocketed to as much as $500 a barrel of oil equivalent, 10 times the normal average. Significant commodities are already being impacted. Due to high prices, the manufacture of fertilizers, which depends heavily on natural gas, is being stopped. Natural gas prices have risen in Europe as global demand rises. While this is true for most commodities, it has been a particular issue with natural gas. It is due to a global economic recovery as countries lift COVID-19 restrictions and reopen their economies completely. Markets are now competing as demand rises following the pandemic's shock. 

Experts say demand has risen for a variety of reasons, including Europe's colder winter, which caused people to keep their homes heated for longer than usual. This, combined with the phase-out of coal and a poor year for wind production, has increased demand for natural gas. On the supply side, there are several issues, including less maintenance of oil and gas fields during the COVID-19 crisis and less investment. There have been concerns that Russia may be using the crisis to lobby for the completion of the recently completed Nord Stream 2 pipeline by not sending more natural gas to Europe for storage. Russia was the largest natural gas exporter to the European Union in 2019 and 2020, accounting for more than 40% of EU imports. According to the International Energy Agency (IEA), Russian exports to the EU are down from previous years, and Russia could do more to increase gas availability to Europe and ensure storage is filled to adequate levels in preparation for the coming winter heating season.

Options include an emergency block-wide price cap and, more fundamentally, a decoupling of electricity and gas prices, which is supported by several member states and was adopted as a "Iberian exception" this summer by Spain and Portugal in order to reduce electricity bills. Fortunately, the continent's gas storage reservoirs, which will be critical for getting through the winter, have exceeded the commission's 80% capacity target two months ahead of schedule, with Spain, Italy, Germany, and France exceeding it. France has frozen gas prices at October 2021 levels, limited electricity price increases to 4% until at least the end of the year, and distributed €100 to low- and middle-income households to assist with energy bills. 

The European Union is preparing to intervene in its energy market, dampening soaring power costs in the short term as the continent braces for the economic hit of energy shortages this winter. According to Commission President Ursula von der Leyen, the bloc intends to limit prices in the short term before breaking the link between gas and electricity costs in the long term. While she did not provide specifics, the direction of travel highlights the sense of panic in European capitals. "We will have to develop an instrument, which will happen in the coming days and weeks, to ensure that the gas price does not dominate the electricity price," she said Monday evening during a joint appearance in Berlin with Germany's Economy Minister Robert Reich.


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