.gif)
Loading
Increasingly expensive gas and electricity prices in Europe are sending a strong signal to manufacturers to consider shutting down plants temporarily and to home and office owners to turn down their thermostats to save fuel this winter.
First-month gas futures are now more than six times more expensive than at this point last year, as the region struggles to import enough gas to fill its depleted inventories before the peak of the winter heating season.
According to Gas Infrastructure Europe, regional storage sites are still only 74.7% full, the lowest in more than a decade, and compared to a five-year pre-pandemic seasonal average of 87.4%.
In the short term, Europe is unlikely to attract much more gas because production is fixed and there is already a global shortage, which is also pushing up prices in northeast Asia and North America.
The escalation in futures prices signals that traders think lower consumption will be necessary to prevent stocks from eroding to critically low levels and risk fuel supplies running out this winter.
The crisis could easily be solved by lowering thermostats by 0.5-1.0 degrees in homes, offices, schools and factories this winter; the result would be huge fuel savings with minimal impact on comfort. In practice, politicians will be reluctant to call for thermostat reductions, as it implies policy failure and has unpopular associations.
Instead, European governments are trying to protect residential and small business customers from the full force of rising energy prices on their bills through price caps, rebates and tax reductions.
But if the crisis continues to worsen, and especially if the winter proves colder than normal, protecting residential customers may prove untenable and calls for energy savings may become inevitable.
In the meantime, politicians are likely to explore other fuel-saving measures, including reducing street lighting and extending the closure of government buildings, offices and schools over the mid-winter holiday period.
Sharply rising energy costs will force many manufacturers to reassess their production plans this winter, especially those with energy-intensive processes and/or limited ability to raise the price of their products.
For manufacturers, short closures have the double benefit of cutting energy costs and also raising the price of their products, helping to protect margins against rising energy and gas prices.
Once enough credible plant closures and other energy-saving measures are announced, futures prices are likely to moderate.
Plant closures, however, would worsen problems throughout the supply chain and intensify upward pressure on inflation, as well as disrupt long-standing relationships with customers.
But unless the winter proves mild, price increases and physical shortages of gas, coal and electricity are unlikely to remain confined to energy markets, spreading to the rest of the economy as is already happening in China.
