This oil will need to be replaced and the substitution towards other sources of oil puts upward pressure on their prices. Unfortunately, Europe is not only facing an oil shortage but a broader energy crisis. The price of natural gas, used for electricity generation and heating, has skyrocketed. In August, gas prices rose to four times the level at the start of the year.
Oil as a substitute for expensive gas Figure 6.2 shows the level of gas and oil prices relative to their levels at the beginning of 2022. Gas prices have increased faster than oil prices. In September, oil prices were around 1.2 times higher than the price at the start of the year. Meanwhile, gas prices were still over 2 times higher than at the beginning of 2022. Here too, Russia is the EU’s main gas supplier. Before Russia invaded Ukraine, tensions around Russia’s Nord Stream 2 pipeline resulted in Russia limiting gas supplies through Nord Stream 1. This meant that gas stocks in the EU were low going into the war. Gas supply has only gotten more erratic since then. Claiming everything from maintenance to minor gas leaks, Russia has intermittently stopped gas flows to Europe. And pauses in gas supplies have become longer as the EU’s measures to curtail Vladimir Putin’s unprovoked war in Ukraine have intensified. As is the case with oil, limited supplies of gas have pushed up European gas prices. Oil has now become a cheaper alternative and countries that can are switching to increased oil usage. If gas supplies remain tight, switching will continue, bolstering the demand and price of oil.
2022 will be marked as the year
of energy shortages
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