Early in 2022, economies all around the world gradually started to return to some degree of normality after nearly two years of rolling pandemic lockdowns.
In actuality, the return to normalcy occurred more quickly than many anticipated, which put additional strain on the frail supply systems that were still recuperating from the pandemic’s peak.
As a result, after falling in 2020 and 2021 due to decreasing demand, energy costs started to rise once more. A barrel of Brent crude cost $100 in mid-February after beginning the year below $80; it then began to decline for what would turn out to be a brief respite.
That’s because there was a growing worry that Russia’s growing hostility toward its western neighbour was more than just sabre-rattling simmering below the surface of a global economy emerging from COVID.
And this is what happened.
The invasion of Ukraine by Russia affected the energy markets almost immediately.
On February 23, the price of Brent crude was slightly under $100 per barrel. A week later, it had risen to $118 per barrel. By March 8th, the price had risen to more than $133 per barrel. In the meantime, the price of natural gas increased from about €88 per megawatt hour on February 23 to €165 a week later and €227 on March 7.
That had an immediate impact on both businesses and customers.
Motor fuel costs, which had been averaging between €1.67 and 1.77 per litre in February, shot up to €2 in the first few days of March.
The country’s utilities started raising their own rates in March despite numerous price rises in 2021. Some by nearly 30%. Governments rushed to address the issue as comparable price increases spread across Europe and the rest of the world.
The initial response in Ireland was a reduction in excise taxes and a household energy refund of €200. That ultimately turned out to be nothing more than an introductory move, as the initial price shock developed into a full-fledged crisis. Oil prices were inflated over a substantial stretch of the year, even though they never quite reached the highs witnessed in early March.
While this was happening, gas prices kept rising well into the second half of the year. That was partly caused by how Europe reacted to Russia’s invasion.
Germany moved quickly to revoke certification for the Nord Stream 2 pipeline, which had previously been expected to increase the flow (and lower the price) of Russian energy to western Europe. As well as promising to wean themselves off of Russian energy as soon as feasible, EU leaders refrained from punishing or even outlawing it. But in the end, it was Russia that increased the pressure by choosing to cut back on the supply it was sending through the initial Nord Stream pipeline.
Its supply to Europe had decreased by 75% by June. The pipeline was shut down fully in August after a 10-day closure in July. Russia conditioned the restoration of supply on the lifting of the EU’s economic sanctions placed on other facets of its economy. The timing of the action, however, raised concerns that Europe may experience energy shortages once winter arrived.
By the end of August, wholesale gas had increased by 467% from its pre-war level, reaching over €340 per megawatt hour.
For Irish users, it also meant additional price rises.
The Central Statistics Office reports that consumer electricity costs were 63.5% higher in November compared to the same month last year. Gas prices increased by over 89%.
And as a result of requests for the government to take more action in response to the price hike, the Budget 2023 was finally packaged as a “cost of living” package.
It also extended the fuel excise decrease and provided consumers with further energy refunds. The Temporary Business Energy Support Scheme provided assistance to firms in the interim.
However, rather than completely removing the impact of increasing costs, these measures merely served to cushion it. Additionally, it was unable to stop the economy as a whole from becoming infected. Imports increased in cost as energy prices rose. Farms had to spend more money on animal transportation and feeding. Producing items resulted in increasing costs for manufacturers. It costs more to heat and light offices.
All of this was finally passed on to the customers. Rapidly increasing consumer prices added to the pressure as central banks acted quickly to try to control inflation. In a matter of months, starting in July, the European Central Bank increased interest rates from 0% to 2%, increasing the cost of borrowing for businesses and individuals.
The combination of all of these factors increased the upward pressure on wages that was already being felt in many industries, raising further cost concerns for some businesses.
However, there might be hope at the end of this extremely challenging road. Oil prices have fallen back to their pre-war levels after rising again in June as demand for fuels like gasoline and diesel fell as a result of the anticipation of a worldwide recession.
A concerted effort to replenish Europe’s gas storage capacity, together with a winter that has been milder than anticipated thus far, has allayed concerns about blackouts in the area. As a result, the price of gas has also plummeted, eliminating the majority of the gains it made during the war.
Consumers have not yet experienced that, and making projections is a risky endeavor. There is some optimism, nonetheless, that this may enable energy companies to at least start to reverse some of their excessive price rises in early 2023.
However, the decline in wholesale prices must continue in order for that to happen, and the cold snap that hit Europe at the tail end of this year may prevent that. Even though winter 2023 is a year away, the difficulty of replenishing Europe’s gas reserves will continue to put pressure on demand as the continent approaches the spring and summer.