The first victim of the gas crisis has appeared in Europe

/ Winter has not yet come, and the energy crisis in Europe has given its first victim. Two fertilizer plants have been closed in the UK. Cessation of activity at these gas prices is the best of both evils. And this is just the beginning – the snowball will continue to grow. This is a clear example of what the European continent needs to prepare for this winter as the energy crisis continues.

The big fertilizer producer Sea Industries has been forced to close two plants in the UK. The company shut down its operations in Billingham and Ins due to high natural gas prices. However, they do not give any forecasts for the terms of resumption of production. The first blow fell on fertilizer growers as they use natural gas as a raw material. At record gas prices, it turns out to be more profitable for the plants not to work.

Natural gas prices in Europe and the UK have almost tripled this year. The serious jumps in gas prices on the stock exchange up and down only reflect the panic in the markets. But even reducing prices to $ 700-800 does not alleviate the situation: the main factors for gas shortages in Europe have not disappeared.

In Britain, the energy crisis has been exacerbated by the state of emergency. On Wednesday, a fire damaged a power cord connecting the country’s electricity grid to the country’s leading electricity supplier, France. And this has further increased the demand for gas for electricity production in the UK.

This is a good example for the rest of Europe – a record increase in gas and electricity prices this winter, when energy demand will rise even more than it does now. And these are just the initial consequences. In addition, the situation can grow like a snowball. “The closure of two British fertilizer plants due to high gas prices shows that the global supply crisis could force many energy-intensive industries to reduce production this winter,” said Alexander Timofeev, an associate professor at REU Plekhanov.

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“Business costs are rising, which could negatively affect the profitability of enterprises, as well as record inflation for a decade,” said Olga Belenkaya, head of the macroeconomic analysis department of FINAM.

Logically, the plants where the gas is used as a raw material are stopped first. Most likely, after the British companies that produce ammonium nitrate, other European plants will close, and nitrogen prices will continue to rise due to lack of supplies, said Bloomberg analyst Alexis Maxwell. Fertilizers have already risen in price this summer, which has affected the growth of farmers’ costs and further the rise in food prices.

The UK as a whole is among those countries that are most at risk of energy shortages in Europe during the heating season. This is the other side of the island nation’s strong commitment to renewable energy as well as liquefied natural gas. The United Kingdom is the second largest importer of liquefied natural gas in Europe.

The country is also the greenest in Europe. Few have achieved such success in avoiding the burning of “dirty” coal and fuel oil. Coal production capacity in the UK has fallen from 23 to 5 gigawatts since 2011 and only two coal-fired power plants remain in operation. While gas production is 39 gigawatts. London boasts, on the right and on the left, of its achievements – how it gets most of its electricity from wind and what progress it has made towards decarbonisation.

However, Britain and parts of continental Europe have experienced surprisingly calm weather in recent weeks. The losses in the electricity network had to be compensated with natural gas, which increased the demand for fuel.

Climate concerns were instantly forgotten. Britain is now actively burning the dirtiest fossil fuel, coal. The British network operator turned to two coal-fired power plants to reconnect. These blocks have been closed for a long time. But they can be included, as the complete abandonment of coal is planned for 2024.

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“The closure of the two companies in the UK will again exacerbate the problem of growing global demand for a new ‘energy balance’ and then it will already have a huge political resonance,” Timofeev said.

The coal recovery began in the EU in the summer. European countries have started to generate more energy from coal due to gas shortages. Even despite the need to pay CO2 emission allowances of $ 60 per tonne, coal production has proven to be profitable at current gas prices. But most importantly, Europeans do not have much choice.

“Of course, if necessary, all reserves will be used, including coal and fuel oil. But overall, this is a reason for Europe to think about the need to diversify energy sources as part of increasingly stringent energy transition strategies, “Belenkaya said.

The problem is that even coal production may not be able to cope with growing demand in the winter, as many coal-fired power plants are already operating. Therefore, there are risks that after the closure of fertilizer plants and other industrial plants will also begin to close. If factories are now shut down by their own management, because production costs at such gas prices are simply unprofitable, then the leaders of one or another European country will be to blame for the closure of factories, which may impose electricity restrictions on industrial enterprises. That is, the factories will start turning off the lights. Because the main thing, of course, in such extreme conditions is to heat people’s homes. If the shutdown of the industry does not help, continuous population disruptions will begin. And the apotheosis of this situation will be the lack of fuel for heating residential buildings. It is hoped that the Europeans will not bring the situation to the third stage.

Goldman Sachs experts do not rule out the risk of power outages in Europe in the winter. Power outages, in turn, could lead to even higher energy prices, increased fears of inflation and higher raw material costs for businesses, they say. The most unpleasant may be the interruptions in the supply of heat and electricity to the population during the winter, says Belenkaya.

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The shutdown of the industry will directly affect the recovery of European economies from the pandemic. Even if companies continue to operate, high gas and electricity prices will lead to higher prices of manufactured products and accelerate inflation.

Remember that now prices are rising not only on gas but also on oil, grain, aluminum and other commodities. People are already paying more for food, and this winter they will have to spend more on heating their homes. The people of Great Britain were again the first to be hit in this regard. “The problem with Britain is that they have a very liberal market. For the population of the country the prices jump in the same way as on the wholesale market. That is, the counters in the apartments now also show $ 800 per thousand cubic meters. The state here in no way smooths out the fluctuations in prices for the population, does not subsidize, “said Igor Yushkov, an expert from the National Energy Security Fund.

Given the serious economic consequences of the energy crisis, European authorities are likely to do everything they can to avoid the worst-case scenario, which is also of interest to strategic gas suppliers such as Gazprom, Timofeev said. There is therefore hope that the crisis will not last long. The simplest thing is not to delay the issuance of a certificate and a permit for the commissioning of the Nord Stream 2 gas pipeline, so that Gazprom can quickly fill Europe with its gas.

Translator: V. Sergeev

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