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This is probably not how he envisioned it, Russian President Vladimir Putin. When he started an economic war over the summer and weaponized gas exports to Europe by drastically reducing those exports, he was initially successful. But as winter approaches, Putin’s economic offensive seems to be failing as quietly as his military offensive in Ukraine. Gas prices plummeted in October. What was Putin missing?

In the summer and in September everything went according to Putin’s plan. Gas prices rose through the roof, even overshadowing the oil price shocks of the 1970s. Even better for Putin, record high gas prices also pushed up electricity prices. In Switzerland, the consequences were shown to the population when Elcom presented the new rates at the beginning of September. An average household will pay 27 percent more next year – if it’s unlucky, twice as much.

Perhaps Putin should have invited his economists to one of his famous, too-long tables. The Financial Times writes that they should have told him how his energy war could end. When a good becomes more expensive, people or industries consume it less or more sparingly. Or they switch to a number of replacement products. Demand falls, in extreme cases it is outright destroyed – and prices fall again.

In Europe, for example, the gas-intensive production of ammonia for fertilizers was temporarily stopped and more was imported from the US. In electricity production, gas has been replaced by dirty coal and clean renewable energy. With such small and large savings measures and evasive maneuvers, gas consumption in, for example, Germany could be significantly reduced.

Called out by the economists

It had become clear. As early as August, the German “Frankfurter Allgemeine Zeitung” (FAZ) asked: “Will the industry survive the winter without Russian gas?” The article featured German economists who dared to predict early on that the economy would be tough, but manageable without Russian energy. They were fired upon with counter-arguments from company leaders. The head of the chemical group BASF warned of “the worst crisis since the end of the Second World War”.

But while the economy was still grumbling and screaming, probably also to persuade politicians to take relief measures, they had long since taken action. Some stockpiled replacements, and they did so clandestinely so as not to alarm the competition. Savings were made, a switch was made from gas to oil and so on. The previously much criticized economists nevertheless gave the industry a small scolding. They had the FAZ align:

A matter of temperature

In any case, economists and energy experts assume that gas prices will continue to fall in the near term: “Natural gas prices will fall by 30 percent in the coming months,” say Goldman Sachs. They first mention mild weather as the reason for these assumptions. The relatively warm October has considerably delayed the start of the heating season and thus throttled gas consumption.

Second, Goldman Sachs points to the rapid delivery of alternatives, namely shipping LNG to Europe. “The storage facilities in Europe are now well stocked,” says René Baggenstos, head of energy consultancy Enerprice.

The mild weather and the build-up of alternatives have allayed fears of a winter crisis. “Actually, a certain relaxation is noticeable,” says Thomas Hegglin of the Swiss Gas Industry Association (VSG). And that in turn translates into the price drop in the short spot market. And according to Goldman Sachs, this should not be over yet: The Wall Street Bank expects the European gas price to fall in the first quarter of 2023 from about 120 euros today to 85 euros per megawatt hour.

Before winter is after winter

But even if this winter were mild, gas prices are likely to rise again after that — by next summer at the latest, when all countries will attempt to fill their gas storage tanks, which will likely be quite empty by then, for the winter of 2023/24. The experts at Goldman Sachs expect a gas price of just under 250 euros per megawatt hour at the end of July.

There is another indication that the problem is far from resolved and that prices will rise again: Today – and this is quite unusual – gas prices in the short-term spot market are significantly lower than those in the medium-term market, as Hegglin explains.

In other words: for once, gas is cheaper for cold winter days than for warm summer months. Because then the empty storage tanks have to be filled again: and that will take a lot of effort, says Baggenstos. “Because in 2023 we will not only start in August, but without the main gas supplier from the start”, so without Russia.

The short-term decline in gas prices in futures markets should also have a positive effect on heating bills for certain companies and perhaps households, Baggenstos added. But that ultimately depends on the supplier’s purchasing strategy. (aargauerzeitung.ch)