The Ukrainian parliament is considering controlling gas prices for private gas companies to help consumers through winter.
The gas prices are exploding in Europe, creating fear among companies and consumers as we are about to enter into the colder months. Ukraine is no exception, and parliament is now considering forcing private companies to sell gas below market price, writes Kyiv Post.
“To take all gas produced in Ukraine under control, we need to temporarily prohibit (private companies) from selling as they are now doing and force them to sell at cost with a minimal margin,” said David Arakhamia, head of the President’s party Servant of the People.
Statistics of gas prices by Tradingseconomics in USD/MMBtu.
The proposal is not surprisingly meeting resistance among the Ukrainian energy companies, where the Association of Gas Producers of Ukraine said: “Any attempts to use short-term, artificial and non-market methods will inevitably lead to negative consequences for the economy of Ukraine and the oil and gas industry in particular.”
The association estimates that a new law will cost the private gas industry around $378 million. But it is not only the private sector that is being hurt by the growing gas prices. Most of the Ukrainian gas market is under the control of the state-owned company Naftogaz, which also will be damaged by putting a gap on gas prices.
IMF wants to stop it
It is nothing new that the Ukrainian government has been setting caps on gas prices, and the industry has been subsidized for a long time to bring costs down and protect consumers. However, the IMF has been pushing to remove price controls because they say that the fixed prices are ineffective and can lead to stalling investments in energy efficiency and feed corruption.
“There is – and there will be – a substantial part of the Ukrainian population who cannot cover the cost of gas, heat, hot water, and electricity. The most efficient way to support those households is to identify them and provide them with financial support through the budget so that they can pay their utility bills. This instrument for support exists in the form of the Household Utility Subsidy program. We support this program,” said IMF Resident Representative in Ukraine, Goesta Ljungman, back in March.
“The other issue is structural – about what is the most efficient way organize the gas market. Since 2015, there has been a concerted effort to move towards an open and competitive gas market, both at the wholesale and retail levels. Important progress has been made, but a fully functioning market for household gas has not yet been established. Giving households the choice between a wide range of products – including fixed-price contracts – is one of many developments that are needed,” he added.
In January, Ukraine’s finance minister Serhiy Marchenko also acknowledged that IMF had expressed concern about the move to control household gas prices. The IMF, he said, views the government’s involvement in the gas market as a problem, which conflicts with the conditions that Ukraine agreed upon in a $5 billion program with the IMF in 2020.
“They are concerned that we are revising some of our earlier commitments,” he said.
Why do we have an energy crisis?
So, the global energy prices on gas are soaring, but what is the reason for that? Euronews says that it is due to several factors. Mainly, prices are now soaring because many countries are opening their economy again after the pandemic, creating a higher demand. In addition, long winters around the globe are also creating more demand for gas.
“You’re finding yourself in an area where demand has rebounded, and on the other side, supply is more constrained,” Thierry Bros, an energy expert, and professor at Sciences Po Paris, said to Euronews.
“Europe is seeing a perfect storm in its natural gas market,” explains Simone Tagliapietra, a senior fellow at the Brussels-based economic think-tank Bruegel, adding that Europe is also producing less gas for the domestic market, which is creating less supply.
“The big concern in the market is that the level of the storage of gas in Europe is lower than usual at this point of the year. We are not prepared, well prepared to navigate the winter season, which is the heating system. Right. So that is the concern that is driving up prices,” said Tagliapietra to Euronews.
Others have been pointing to Russia for the higher prices. Some have been arguing that the Russian state-owned company Gazprom has been withholding gas to Europe. Jack Sharples of the Oxford Institute for Energy Studies does not buy into that explanation.
“A significant section of the mainstream European media has attributed this to Gazprom intentionally withholding supplies in order to force the German regulator and European Commission to approve Nord Stream 2,” Sharples said to BBC, arguing that such as conclusion is “questionable” because Gazprom is meeting its agreed volumes.
Sharples, however, did add that Gazprom doesn’t provide more gas than what it is required to do, according to its contracts.