RESUMEN EJECUTIVO DE LA EVALUACIÓN EX POST EXTERNA DEL PROYECTO DE COOPERACIÓN TRIANGULAR ENTRE ALEMANIA, BRASIL Y

There are a variety of oil indexation contracts in use; the sensitivity of gas prices to changes in the oil price depends on the type of contract. Jensen (2009) discussed the role of “pass through factors” (contractual terms that share the risk between buyer and seller) and lags between the recording of the oil price changes and their effect on the gas price. According to him, these types of contracts reduce the linkage between oil and gas prices, particularly in markets with rising oil prices. Other factors to consider when examining the relationship between global oil prices and European gas and electricity prices are the impact of trade balance, and hence currency movements, on the price paid for imported energy. A weaker currency raises the cost of imported oil, which in turn amplifies the effect of oil-gas/electricity price linkages, all other things being equal.

121 Middle East and North Africa

122 Provisional Eurostat data for 2012 indicate no change of the situation described.

For example, if an increase in the oil price leads to higher gas prices (due to oil indexation and other mechanisms), the net effect of this increase will be amplified if the country in question is experiencing a weakening of its currency. Conversely, a strengthening of the Euro or other European currencies with regards to the US dollar (the primary currency used in international oil transactions) reduces the impact of oil price increases on domestic fuel, gas and electricity prices. It follows that greater energy independence reduces the vulnerability of Member States with regards to currency related oil price movements, while also strengthening their bargaining position with foreign suppliers of natural gas. However, the question as to whether European shale gas or other developments could contribute to greater energy security remains controversial (see above).

Another potential dynamic to consider is the effect of climate change policies on power generators. On the one hand, the increased penetration of renewable energy in the power sector will lessen the dependence of power generators on gas, thus improving their bargaining power vis-à-vis their suppliers (which, for example, could result in decoupling of oil and gas prices). But on the other hand, pressures to reduce coal combustion in the power sector will have the opposite effect, since power generators must replace at least part of their coal derived electricity by consuming more gas (since fluctuating renewables are not suitable for base or peak power).

4.4. Conclusion

This chapter reviews various factors reinforcing or lessening the translation of high oil prices into high energy prices. In summary, the following factors could significantly weaken the impact of oil price changes on European gas and electricity prices:

 A significant increase in global LNG supplies and LNG import and regasification capacity in Europe, provided that gas demand is held constant or decreases;

 Continued increases in US domestic gas production, since this has the effect of lowering global demand for LNG;

 The (potential) development of US gas export capacity;

 The (potential) development of European shale gas production capacity;

 Price controls on retail gas and electricity prices;

 A high share of network charges and taxes in retail gas and electricity prices;

 Gas price liberalisation (through de-indexation of gas prices and/or elimination of destination clauses, etc.);

 Increased access to and diversification of gas supplies;

 Pass through factors and time lags (for oil indexation contracts);

 Strengthening of the Euro and other European currencies.

Factors that could significantly reinforce the impact of oil prices on European gas and electricity prices include:

 Increased global and/or European demand for gas, or reduced global and/or European supply capacity, since this is working against some of the factors listed above;

 Weakening or elimination of controls on retail gas and electricity prices;

 Lowering of network charges or taxes on retail gas and electricity;

 Weakening of the Euro and other European currencies.

As noted already, global and European gas supply and demand conditions are critical in determining the outcome of oil price influences on gas, and thus on electricity. In a tight gas market, there is little that policy can do to avert price increases. Thus, expectations that market liberalisation and de-indexation will necessarily lead to lower gas prices may be overly optimistic. When market conditions are tight, i.e. when demand exceeds supply capacity, gas wholesalers have no incentive to reduce their prices below that of the higher oil-indexed gas price. In other words, the impact of oil indexation is strong even though there is a significant share of hub price based contracts. Conversely, when gas supplies grow faster than demand, as happened in past years due to the USA reducing LNG imports and the fall in demand following the global recession, the gap between hub prices and oil-indexed prices (and thus the oil price) increases as gas suppliers seek to sell off their surpluses. This may result in lower gas prices for consumers. Hence, the link between oil and gas prices depends on the overall market conditions for gas, internationally, regionally and domestically.

Even if all gas transactions in the EU were based on hub pricing, there might still be a strong correlation between gas and oil prices. This might happen if LNG supplies are tight, enabling European and Russian producers to increase their prices toward oil parity (or even beyond). In a sense, proponents of electricity liberalisation faced a similar dilemma; in a free market, prices can go down under the pressures of competition, but they can also go up when demand outstrips supply. Thus, for a durable decrease in gas prices to occur, one must have not only market liberalisation and de-indexation but also continued investments in gas supply capacity. Paradoxically, some producers would argue that the high volatility and uncertainty of hub pricing discourages them from making such investments.