Putin steps in as energy crisis intensifies
Gas prices fall back after Russian president offers to help stabilise markets
Good evening from London,
There was some late afternoon drama today as Russian president Vladimir Putin said his country was prepared to step in and stabilise soaring energy prices, which have rocked financial markets and fuelled fears that the global economic recovery could be knocked off course.
UK gas contracts for November delivery surged nearly 40 per cent as trading opened this morning to hit £4 per therm, having begun 2021 below 50p. But Putin’s offer — aimed at fending off criticism from Europe that Russia was holding back supplies — saw markets dramatically change course, sending the price down to £2.87.
Aside from the demand caused by economies emerging from the pandemic, traders have pointed to multiple reasons for the spike in prices, including the sharp fall in domestic production in Europe. The UK, which has very limited storage capacity, is especially vulnerable to higher energy costs.
Investors meanwhile have been increasingly worried that the increases will feed through into broader price rises across the economy, with UK inflation expectations at their highest level since 2008. This has resulted in government bond prices falling as well as hurting equities because of the effect on company profits.
In the EU, member states are urging Brussels to take action to halt the price rises, with some arguing that the Green Deal to make the bloc climate neutral by 2050 would only push up energy costs further and could lead to social unrest. One senior EU politician has warned that the Green Deal could become “the symbol of high energy prices and we will have instead of gilets jaunes, gilets [protesting over] energy poverty everywhere”.
Putin also hit out at EU policy, blaming “poorly thought through decisions” by Brussels officials for creating “serious imbalances” in European energy markets.
But the gas price rises in Europe are just one sign of a wider energy crunch that is playing out across the world, as consumer countries battle to secure fuel supplies. US oil prices this week hit their highest level in seven years after Opec+ decided to maintain current production levels, while the price of coal topped its previous all-time peak set in 2008.
China and India, seen by the IMF as the two biggest drivers of global growth and both heavily reliant on coal, have been hit by severe power shortages. China has suffered a “triple whammy” of emissions restrictions on power generation, a shortage of coal and price caps on electricity that mean demand is unaffected as input costs go up. India, which relies heavily on coal for its thermal power plants, has just four days of stocks left.
Ting Lu, chief China economist at Nomura, has highlighted the global implications of the power shortages in China. “Global markets will feel the pinch of a shortage of supply from textiles [and] toys to machine parts . . . [and this will] very likely result in a shortage of goods for Thanksgiving and Christmas”, he said.