Russian gas price ceiling approved, but will not affect Russia

Following installation oil price ceiling, Europe has agreed on a ceiling on gas prices, but this may not lead to the expected consequences. We explain why the gas price ceiling will be ineffective and will not affect Russia.

What ceiling did you agree on?

In Europe agreed introduction of a price limit for gas at the level of $180 per megawatt-hour, or about $2 per thousand cubic meters. The restriction will take effect on February 1, 2023 and will be in effect for one year.

What's interesting: during the test vote for the price ceiling opposed 9 countries, including Hungary and Germany, but since a qualified majority was needed to make a decision, the decision was made.

The reaction of Russia

In Russia, they have traditionally been outraged by such price regulation, calling it contrary to the free market.

So, Deputy Chairman of the Security Council of the Russian Federation Dmitry Medvedev in his own way wrotethat the decision “it is dictated not by economic logic, but by zoological hatred for Russia based on the maniacal thesis “Russians are to blame for everything”, that is, it is a purely voluntaristic non-market measure” и "taken from the powerlessness of the EU to influence the situation". A high limit Medvedev considered the prospect of maintaining high gas prices.

And the press secretary of the President of the Russian Federation Dmitry Peskov called such a limit unacceptable.

“The principles are the same here. This is a violation of the market process of market pricing, an encroachment on it., - he said, promising a response - as was the case with the oil price ceiling.

At the same time, the head of the Russian Foreign Ministry Sergey Lavrov turned out to be more restrained and called the introduction of a price ceiling a personal affair of the European Union.

Is the ceiling as effective as they say?

It is worth recalling that amid the panic in the market after the explosions of the Nord Stream pipelines, spot gas prices rose up to a record 3500 euros per thousand cubic meters, however, after stabilization of the situation, they sank back. As of 12:00 on December 23 on the TTF exchange, the average price of gas was approximately $932, which is well below the established price ceiling. That is, this ceiling is aimed at protecting the European market from the maximum situational jumps in gas prices, which become a reaction to extraordinary situations, such as a sudden threat of a complete cessation of gas supplies to the region, and in fact can be applied extremely rarely.

We also recall that spot prices are formed in real time, and gas buyers can enter into long-term contracts at prescribed fixed prices that do not depend on such fluctuations in the market.

In fact gas price ceiling will not affect current gas prices, given that those are more than twice as low as the set maximum. Rather, the ceiling will not allow to manipulate the panic in the marketpushing the price up to new all-time highs. And it will also have little effect on the ability to form gas reserves in the EU, since such purchases are made not at peak prices, but when they decrease as much as possible - during the non-heating period. And at peaks, gas is purchased only when absolutely necessary.

In addition, the situation with gas and oil prices is different in that it was decided to limit the import of Russian oil to the EU, and the import of Russian gas began to decline from the summer on the initiative of the Russian side - after the Russian Federation, under the pretext of repairs, reduced and completely stopped exports . And during this time alternative markets partially found. That is, the decision to establish this ceiling is not even economic, but political.

In addition, in the context of high prices for Russian gas, expensive American liquefied gas turned out to be quite competitive (the US share in the LNG market in the EU is now 42%, the share of the Russian Federation is 16%). This is despite the fact that most of the LNG on the world market is traded under long-term contracts, and its cost depends on where the gas is supplied, because it also includes the cost of transportation by tanker. That is, the key problem with gas imports to the EU lies not so much in its shortage, but in high prices, which all exporters are interested in maintaining.

In such circumstances, Russia sells gas in Europe only to countries that it considers political allies - Hungary, Serbia, the details of contracts with which are not disclosed, however, these contracts are unlikely to provide for prices above the ceiling of $ 2000. Most likely, these prices, according to the old rules , are tied to the cost of oil, and not to the situation on the intra-European market.

Given this, the gas price ceiling is unlikely to affect gas exports from Russia to Europe in the current scenario. At the same time, given the high cost of energy, the EU will continue its policy of reducing consumption, which has a negative impact on both industry and the standard of living of ordinary citizens.

At the same time, it is likely that after the price ceiling is set, the average gas price will gradually move closer to it, which will negatively affect European consumers. This is possible due to the fact that there are far fewer gas exporters than oil exporters, and they can non-publicly coordinate their actions.

We also wrote about Iran threatens Zelensky over accusations of supplying Shaheds to Russia, and told on the rules for the use of gas cylinders in apartments and private houses.

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