Capping European gas prices?

10 Reasons why the EU might want to be reluctant with imposing a price cap for Wholesale gas.

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Rumours are getting stronger that the EU wants to impose a cap of some sort on wholesale gas prices .

Here are 10 reasons to consider before doing so.

1.      The current crisis is caused by stagnating supply: there is not enough pipeline gas coming to Europe. A Price cap is addressing the symptom, but not the root cause.

2. If the gas price is capped, then there is less of an incentive for consumers to lower demand. And we desperately need demand reduction: it  is the strongest instrument Europe has to get out of this energy crisis.

3. Europe needs to be able to outpay other global LNG buyers to make sure all available LNG comes to Europe. A price cap harms this ability. Our global competitors know exactly what they need to pay to let the LNG cargoes sail in their direction.

4. A price cap on Russian gas would be mainly a political signal. If we want to reduce Gas revenues that help Russia to finance their special operation, one might want to consider to ban the import of any Russian gas altogether.

5. If companies are allowed to buy LNG above the Price Cap and get compensated by the government for the difference, then this will weigh heavily on the government’s budget and will require substantial extra borrowing.

6. An overall Price Cap in Europe for wholesale gas will take away differences between European Hubs and countries. Markets would otherwise entice players to bring the gas to the place where it is needed most (with the highest price), but that stimulus will have disappeared.

7. We no longer know the real price of gas. Some argue a Price Cap may also turn into a Price Floor in practice.

8.LNG sellers may develop concerns whether they want to sell LNG into Europe, especially longer term. The country risk will clearly increase when the EU has developed a practice of market intervention.

9.With a Price Cap, existing Price Indices may become redundant. This will impact existing Gas Supply Contracts which use these Price Indices to calculate the contract price. Plenty of work for lawyers to sort out the mess.

10.  Installing price caps in European wholesales gas markets will be a big and wild experiment. Many things can go wrong, see above. Should the EU embark on such an adventure ?

Source: Frank van Doorn