Russia tensions threaten to further increase gas prices

As tensions simmer on the Ukraine-Russia border, fears that a conflict could plunge the energy markets deeper into turmoil are beginning to grow.

According to the Kremlin, the positioning of some 100,000 troops is a precautionary response to the possibility of Ukraine joining NATO, something Russia has vehemently opposed for years. However, Ukraine and its allies have suggested the military presence shows an intent to invade, which has been categorically denied by the Kremlin. 

It’s a precarious situation, made even more so by Europe’s reliance on Russia for natural gas. Around 40% of the continent's supply comes from Kremlin-backed Gazprom. If conflict arose, or proposed sanctions against Russia were actioned, this could result in supply being restricted to Europe. 

These issues are made more serious by the fact that natural gas prices are already at record highs. Numerous global factors, including huge demand in Asia and low wind farm output in Europe, have caused wholesale costs to surge over the past 12 months.

The problem has been especially bad in the UK due to poor domestic energy generation. Britain also has one of the lowest storage capacities for energy in Europe, making it particularly vulnerable to unfavourable market conditions.

Despite these issues, the UK is not reliant on Russia for energy, with less than 3% of its natural gas shipping supplied by Gazprom. While this provides some insulation from the ramifications of a potential conflict, the interconnected nature of the energy market means that lower supply in Europe will result in higher prices across the board.

According to Drew Stevenson, PWC’s Energy, Utilities and Resources Leader, the delicate nature of the market right now means that geopolitical tensions can have a more significant effect on wholesale prices. 

“This volatility in the market is now feeding through to the UK supply chain and, as we’ve seen of late, retail gas prices,” said Stevenson.

“The trend is likely to continue over the winter period where demand for heating is strong, and beyond, including in the domestic market, when the default tariff cap is reset in April.” 

UK households have been largely protected from rising prices due to Ofgem’s price cap, a figure set by the regulator to limit how much suppliers can charge customers. However, it is reviewed every 6 months, with the next adjustment in April.

Industry experts Cornwall Insight predict that it will rise by around 50%. Should this happen, your average household would be paying nearly £650 extra a year on gas and electricity. Should supply be restricted due to the ongoing situation in Ukraine, this could be pushed even higher.

While things might look a little alarming, it's important to note that Russia is highly unlikely to turn off the faucet completely. Europe remains a huge part of Gazprom’s international business, with its shares already suffering as the faceoff at the Ukrainian border continues.

This means that, as always, international cooperation remains the preferred option, while any kind of conflict, whether militaristic or though sanctions, remains a lose-lose for everyone involved.

Michael Quinn

Michael is a dedicated author helping usave to write guides, blogs and news for the last four years. When not writing articles, you can usually find him at wine tasting events or having a political debate on the night tube.

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