The Unprecedented Natural Gas Crisis in Europe: Investigating the Causes and Consequences with a Focus on Italy

Abstract

The energy prices in Europe have in recent years surpassed unprecedented thresholds and varied in unexpected ways compared to previous years. This paper presents a study of the fuel markets in Italy, supplemented by insights from Sweden. Italy is heavily dependent on natural gas. The results show that natural gas demand changed only slightly in the period 2017–2022, but prices started to increase at the end of 2021. Notable spikes occurred at the beginning of the events in Ukraine, even though the baseline was already three times higher than the average price from 2017 to 2019. Distinct dynamics can be identified with the increase in demand for power generation, contrasted with a decrease in industrial natural gas demand after August 2022. The trends in coal and wood chip prices are consistent with those of natural gas, while oil prices appear to be less correlated. Additionally, events such as CO2 trading and the launch of the Fit for 55 program by the EU show some correlation with the trend in natural gas prices during 2021. Interestingly, the origin of the increase in natural gas prices during 2021–2022 cannot be simply attributed to the mismatch of supply and demand or any singular external event. This paper aims at starting a discussion on the topic by proposing some explanations.

Keywords

• natural gas supply–demand
• natural gas prices
• natural gas price spillover
• cross-correlation analysis