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How are our gas prices affected by Crimea?
It’s fair to say that many readers of this blog will have had more than half an eye on the situation over in Ukraine and, political concerns to one side, will be wondering how it will affect our gas supply and therefore market prices.
Although there are moves afoot to stabilize the situation, East and West are still far apart in terms of an agreement. The situation in Crimea is really a proxy frontline for a macro-political war being waged by the planet’s big players. In the Western corner we have the EU and US, keen to involve Ukraine, both politically and economically, with the interests of the West. In the Eastern corner we have Russia, concerned at such motives, especially when this political love-in is taking place on its very doorstep. Lest we forget, Russia only lifted the iron curtain relatively recently, their Baltic sea fleet is based in Crimea, and they would argue they are simply looking out for their own interests.
So, where does leave businesses? Well, one worst-case scenario would argue it leaves us rather cold and unable to cook tea. Around a third of Europe’s gas supplies currently comes from Russia. And about a half of that comes via… guess where? Yes, the Ukraine. So effectively, we are currently very reliant on both Russia and Ukraine and their continued compliance in not turning the tap off.
And it wouldn’t be the first time that Russia – through its largest energy company Gazprom - has turned off that tap. Four years ago they did just that, cutting off the gas supply to both the Ukraine itself, and also disrupting the flow of the transit gas destined for the rest of Europe, beyond Ukraine’s borders. In that case, the tap wasn’t turned back on for a fortnight. And that can have a very real impact on business gas supply, and confidence in the market and therefore on prices. So politics has this key knock-on consequences in the realm of economics.
Interestingly, previous disputes have only taken place over money… essentially the unpaid gas bills to Gazprom from the Ukraine. And of course we’re not talking a few hundred quid to NPower, we’re talking arrears of $2billion. The Oxford Institute for Energy Studies recently released a report looking into the crisis in Ukraine and what it might mean for the gas industry. It concluded that the simple matter of unpaid bills has now been compounded by the political – even military - dimension the conflict has now taken.
However, there are three factors in favour of the EU. Firstly, whilst we need Russian gas, they also need the money for that gas. Secondly, Russia may in fact need the cash more than the EU needs the gas, since there are other supply routes that the gas might take. The Nord Stream pipeline has been completed, for instance, which bypasses the Ukraine and instead goes through Germany. Thirdly, and very simply… we’re into spring, the weather is warmer and demand will now drop.
However, governments are certainly now stepping up the search for alternative routes, as these threats of cessation of supply is destabilising to the energy market, and to the industries and businesses that need the gas. With the alternative South Stream also under construction, there may even be the ability to bypass the Ukraine completely, by the end of this decade. With the Russian economy so dependent on the revenues from their gas exports, very real political wounds are opening up. This time it may need more than Florence Nightingale to attend to them, in this new conflict in the Crimea.