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Gas price caps make it more difficult to balance supply and demand – OIES

Oil&Gas Materials 6 December 2022 13:56 (UTC +04:00)
Gas price caps make it more difficult to balance supply and demand – OIES
Laman Zeynalova
Laman Zeynalova
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BAKU, Azerbaijan, Dec.6. An understanding of how market balance supply and demand, and the problems posed by a price cap appears to be sorely lacking in much of the discussion, Trend reports Dec.6 with reference to the Oxford Institute for Energy Studies (OIES).

“The problem with a price cap is that it addresses the symptom – high prices - rather than the cause, the massive supply shock to both the European and global LNG market caused by the reduction in Russian gas flows. A price cap will do nothing to incentivize demand reduction or more supply to rebalance the market. Alternative supplies of LNG to Europe have already been maximised, and a price cap could cause serious harm. Instead, the question of how to react to the gas crisis should be divided into two parts. Firstly, how to ensure that supply is incentivized and that gas supplies are used efficiently (minimising wastage or unnecessary use whenever gas is consumed) and effectively (in those sectors which cannot reduce their gas use below certain levels or cannot switch to alternatives),” reads the OIES report reads.

The analysts note that to date the EU wholesale gas market has done a good job of this, as more supply has been attracted to the market, and demand reduction is in evidence.

“Some of this is because of innovation and efficiencies in the industrial sector. For example, Saint-Gobain has decided to heat its warehouses less and provide warmer clothing for its staff instead.78 Renault has opted to lessen the time it keeps paint hot in its paint shop. Some of the change is a result of fuel switching, for example using diesel fired boilers. However some of the demand reduction is as a result of mothballing or closure of energy intensive plant, or reduction in output which is of more concern to the long-term future of European industry. Analysis by Anouk Honoré (OIES) shows how the impact of high gas prices on industrial output has been mixed. Manufacturing accounts for 90 per cent of industrial gas demand. Overall manufacturing output has been remarkably resilient in the last few months, remaining at about the same level. However, certain energy intensive sectors such as chemicals have been more affected. This shows that some sectors are better able to cope with the high gas prices than others, albeit not cost free.”

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