Letter: Why Norway won’t cut petrol prices in the event of a supply shortage & more

In his Markets Insight column (August 19), David Sheppard suggests that Norway lower the price at which it sells its gas. But as Sheppard himself acknowledges, Norway is already stepping up gas extraction, at the cost of lost oil production, thus making a modest effort to help Europe through the crisis.

There are, however, arguments against his proposal to Norway to lower prices. The Norwegian price cuts would do little to help end users, but rather benefit intermediaries such as companies that buy and resell the gas. Although Norway is a big seller in the North West European gas market, its market power is limited. The lack of vertical integration means that parts of the value chain are separate and free to set prices independently.

As a remedy, Sheppard could consider downstream price controls, but the basis for this would be arbitrary.

The German government recently committed 15 billion euros to replenish gas stocks before winter. The aim is to show its audience that the government in Berlin is serious about security of supply and that Russia is not indispensable.

A special gas purchase commission will have the necessary resources to conclude delivery contracts, also from distant sources.

The transaction is likely to lead to even higher natural gas prices in Europe. Presumably, German electricity and gas companies favor higher gas prices in order to replace Russian molecules with foreign molecules, which implies higher transport costs. Companies also need higher prices to finance the expansion of solar and wind energy. The prevailing market structures and practices in Germany facilitate to some extent the transmission of these high costs to consumers. But it’s far from a perfect solution, and balancing the market is difficult.

The deeper problem is the contradiction between the willingness to pay extremely high prices and the unwillingness to contract long-term supplies at more moderate prices (ie with Qatar and other suppliers).

I fear the result will be a lasting supply crisis with high prices. In this situation, why should Norway or any other seller offer lower gas prices?

Øystein Noreng
Emeritus Professor, BI Norwegian
Business School, Oslo, Norway

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