Introduction
This paper applies economic principles to examine the price, supply, and demand dynamics for natural gas in Europe during 2022 and the resulting impact on its substitutes. Driven by the Russian invasion of Ukraine, the increased price of natural gas led to a decline in demand for natural gas. This simultaneous shift in both supply and demand curves ultimately caused the equilibrium price to rise. In response, cheaper alternatives—specifically heat pumps and solar energy—experienced a surge in demand. The research indicates that the supply of heat pumps and solar power successfully expanded to meet this rising demand without significant price fluctuations.
Analysis
In 2022, the average price of natural gas grew significantly due to the military conflict between Ukraine and Russia. In particular, in the second half of 2022, average gas prices increased compared to the same period in 2021, rising from € 7.80 per 100 kWh to € 11.40 per 100 kWh, which is the highest recorded price according to Eurostat (2023a). Such a price increase negatively affected the demand for natural gas, as it dropped from 15,810,000 terajoules in 2021 to 13,722,451 terajoules in 2022 (Eurostat, 2023b).
From the viewpoint of macroeconomics, Europe’s pledge to reduce purchases of natural gas from Russia pushed the supply curve upwards, pushing the equilibrium price higher. The increase in price and decrease in demand indicate a shift in supply and demand curves. The supply curve shifted upward, while the demand curve shifted downward. This resulted in a new equilibrium point with a higher price and a lower quantity exchanged in the market. Thus, the laws of economics perfectly explain the situation with the price of natural gas in Europe.
According to Zeniewski et al. (2023), gas was substituted with cheaper alternatives, such as solar power and heat pump systems. Research has demonstrated that the supply of heat pumps in Europe increased from 2,175,000 units in 2021 to 3 million units in 2022. At the same time, no significant price rise was recorded in 2023 (European Heat Pump Association, 2023).
Since the equilibrium price remained stable, the rise in demand must have been entirely offset by a corresponding increase in supply. Essentially, both the supply and demand curves shifted upward simultaneously, resulting in no significant change to the price. This greater demand for heat pumps likely stemmed from the rising cost of their substitute, natural gas (Zeniewski et al., 2023).
Similarly, the demand for solar energy increased from 28.1 GW in 2021 to 41.4 GW in 2022 (Ghantous, 2023). The cost of installing PV has experienced a significant increase. This implies that an increase in demand accompanied the increased supply. The natural gas price increase led to inflated demand for cheaper substitutes, resulting in a higher supply of these alternatives. Since both the supply and demand curves for solar energy were shifted upward, the equilibrium price remained unchanged.
Conclusion
The case of natural gas prices in Europe is a vivid example of how price fluctuations of a product affect the supply and demand of substitutes. The war in Ukraine led to a pledge to reduce imports of natural gas from Russia, resulting in a decrease in supply. As a result, the prices of natural gas increased, shifting the demand curve to the left. Customers began to search for more affordable alternatives, resulting in increased demand for non-fossil fuel options. However, the prices of the substitutes were not affected, as the supply of substitutes increased to meet the demand.
References
European Heat Pump Association. (2023). Heat pump record: 3 million units sold in 2022, contributing to REPowerEU targets. EHPA. Web.
Eurostat. (2023a). Electricity & gas hit record prices in 2022. Web.
Eurostat. (2023b). Natural gas supply statistics: Consumption trends. Web.
Ghantous, N. (2023). EU solar deployment rate soars by almost 50% in 2022 – report. Energy Morning. Web.
Zeniewski, P., Molnar, G., & Hugues, P. (2023). Europe’s energy crisis: What factors drove the record fall in natural gas demand in 2022? IAE. Web.