The gas crisis is testing old solutions to rising oil prices

The commodity market cliche is that the better way to deal with high prices is to end up with high prices.

Demand was suppressed, new supply was stimulated, prices fell in time as the market returned to balance. But now in Europe's energy market, this old truth is being tested.

Gas prices have soared to record levels, both in continental Europe (at least for this time of year) in the UK, prices for everything home heating to electricity are rising sharply.

In countries such as Spain Germany, soaring electricity prices have risen to the top of the political agenda. In the UK, the energy regulator says its so-called price cap on energy bills needs to rise by 139 pounds, more than 10 percent, later this year. The Bank of England warned this week that inflation could hit 4% by the end of the year, driven in large part by rising energy costs.

Beyond the short-term pain in consumers' wallets, there are reasons to believe that high gas prices may spur the usual response.

The reason is that natural gas is a fuel that occupies awkward space in the nexus of the energy climate debate.

It is much cleaner than coal produces about half as much carbon dioxide when used to generate electricity, but environmentalists still dismiss it as the fossil fuel responsible for emissions climate change.

But in the short term, the stepped-up fight against climate change is driving demand for gas. Carbon prices -- one of the EU UK's main tools to fight climate change -- have soared in response to increasingly ambitious political targets to cut emissions.

The result is that burning coal for electricity is becoming less economical, which is a good thing for the climate. But it also means it will be replaced by natural gas, many renewables have yet to fill the gap.

Energy companies are in trouble. The old solution was to increase investment to boost gas production. But with most developed countries adopting plans to achieve "net zero" carbon emissions by 2050 earlier, the appetite for investing billions of dollars in long-term gas projects has waned.

At the same time, the gas market has become more global. LNG can be transported around the world by tanker, once the different gas markets South America to Asia start to connect.

As developing economies like China come under pressure to start slowing growth in coal consumption, guess what fuel they're turning to? Asian LNG imports are soaring, but this is a noticeable impact on the amount that can be shipped to Europe.

The result is something close to a global gas crisis.

The country that can only be said to have spare capacity in the short term is Russia. Gazprom, its monopoly pipeline gas exporter, has so far refused to send any additional supplies to Europe is considered unlikely to do so until the controversial Nord Stream 2 pipeline is approved.

If the winter is mild, prices could fall back later in the year, but hope is rarely a better strategy. More LNG is due to hit the market later this decade, but BP's chief financial officer, Murray Auchincloss, said this week that he does expect prices to fall significantly until 2022 at the earliest, even then there is a lot of uncertainty.

This is to say that countries shouldn't seek to raise carbon prices curb demand for fossil fuels. But it does suggest that we should expect to see more rupture during energy conversion.

In the oil industry, there is already talk of $100-plus oil on the horizon, as companies scale back investments in future supply demand is expected to continue to grow for at least the best part of this decade.

The IEA argues that if the world is serious about going to net zero by 2050, there is no need to invest more in new oil gas fields. But their own projections suggest that demand is still growing fast enough on the current trajectory to indicate the need for new fields.

The main challenge for the government, therefore, is to accelerate efforts to respond to demand. Volatility in energy prices during the transition may be inevitable.

But they are also a good opportunity to accelerate measures to address the root cause of the problem, which is just too much gas being produced, but too much gas being consumed. If they can do that, then the old truths should still apply.

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Source: International gas network