Why is the price of gas increasing?

The price of gas has been increasing year after year, to the point that the French government has ordered a freeze on prices, so that businesses and households are not affected by the price surge. If this announcement had not been made in October 2021, gas prices would have increased by more than 40%.
We will explore the factors that influence gas prices, as well as ways to anticipate and mitigate the impact of these price hikes.

Gas prices, like many commodities, are determined by supply and demand. How can we then explain the fact that gas prices remained stable during the year 2020, despite a significant decrease in demand during the lockdowns? This can be attributed to the health restrictions, which led to a global reduction in gas production. If production had remained the same, prices would likely have decreased. It is possible that gas producers chose to avoid this scenario, and this consideration may have been a factor in the production decline.

When activity resumed on an international scale, the demand for gas increased significantly to supply factories and businesses. This sudden surge in demand caught production off guard, especially as many companies sought to catch up on production they were deprived of during the pandemic. Demand therefore recovered more quickly than production, leading to a surge in gas prices. Gradually, gas availability and needs align, and prices eventually stabilize, remaining higher than pre-freeze rates.

In addition to the global pandemic, the war in Russia is impacting the price of gas. This could result from reduced production in countries involved in the war, logistical challenges on supply routes, or simply from the increased consumption by warring countries to fuel their armies.

Russia is the world’s second largest producer of gas. During the conflict, exports will slow down, or even come to a halt, either due to political embargoes, or because Russia will keep its production to supply the overworked armament factories.

However, we can try to put things into perspective by noting that France only sources 11% of its gas consumption from Russia (in 2015), and that the main supplier to France is Norway, with 42%. However, this does not mean that the war will not have an impact on gas prices in France.

We could say that French companies and households, which do not rely much on Russia for their supplies, should not be too affected. However, this is not the case for all European countries. France’s neighboring countries that rely more on Russia for their supplies will have to turn to new sources, increasing demand from these producing countries, notably Norway. Therefore, if Russia stops exporting its gas, demand from other producers will increase, leading to a new rise in gas prices in France. This has already been the case for petrol prices.

It is also worth noting that Ukraine, although producing little gas, is one of the main supply routes for gas transiting through Europe from Russia. Given the conflict between these two countries, it is likely that new supply routes will need to be found. Congestion and supply difficulties in certain areas should be anticipated. The cost of the necessary logistical changes will also impact gas prices. Currently, gas transit through Ukrainian territory from Russia has not been interrupted and has even increased, due to Russia’s more competitive pricing compared to other European producers.

In order to prevent French businesses, in particular, from being impacted by the rise in gas prices, the government decided to freeze prices in October 2021. Throughout 2021, gas prices had been increasing every month prior to this announcement and have continued to rise since. This measure aims to wait for prices to decrease and includes a smoothing effect. This means that the savings made during the freeze will be offset by a higher price than the market price when this measure ends.

How can one protect themselves from this upcoming increase in gas prices?