Russia continues to reduce its supply of natural gas, driving up wholesale prices of natural gas tenfold compared to pre-crisis price levels. Physical scarcity of natural gas is now a serious threat to the security of Europe’s energy supply. Given the limited possibility of domestic production or imports of liquified natural gas, Europe must reduce its gas consumption.
In a new study titled “Gas demand in times of crisis”, Hertie School researchers Oliver Ruhnau, Clemens Stiewe, Jarusch Müßel, and Lion Hirth find that the demand responded significantly to the current crisis. They estimate that industry has reduced demand by about 11% from the beginning of the crisis onwards, while households have reduced only since March 2022 by about 6%. These estimates are based on a carefully designed method, as Oliver Ruhnau explains: “To disentangle the price response of end consumers from other effects, we control for the impact of seasonality, temperature, economic activity, and the power sector.”
“The results demonstrate that firms substantially respond to gas market prices”, Lion Hirth concludes. “To rule out potential supply deficits in the coming winter, demand needs to be reduced further. Our study shows that prices are an effective means to incentivize such a reduction and should, therefore not be diluted by policy interventions. To support vulnerable consumers, policy makers should focus on direct payments instead of price-based subsidies.”
The study was summarised in the Tagesspiegel Bacgkround on July 6, 2022. The full working paper can be found here.
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For more informatoin, contact
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Lion Hirth, Professor of Energy Policy