Key Takeaways
- Since Russia’s invasion of Ukraine, high energy prices have been a major drag on the economies of the UK and Europe.
- Wholesale gas prices are much higher in the UK and Europe than they are in the US – with US LNG imports on the horizon, there is scope for prices to tumble.
- The futures market is pricing in a 37% fall in UK natural gas prices over the next four years – a move that would give household incomes a real boost.
- Consumer strength has been a big contributor to US growth – as real incomes and confidence pick up on this side of the Atlantic, growth in the UK and Europe could well improve.
High energy prices have been a major drag on the economies of the UK and rest of Europe ever since the Russian invasion of Ukraine. Energy prices may have come off their highs, but they remain well above pre-war levels. And well above those in the US. This is about to change. Over the next 4 to 5 years, energy bills for households and businesses should fall by 15% or more, raising real incomes and reducing prices.
Let me explain why. Wholesale prices for natural gas in Europe and the UK are currently around $15 per unit versus just $4 in the US. Even allowing for the costs of shipping, there is scope for prices here to tumble as we import more LNG from the US. So why haven’t prices fallen already? There are two reasons. First, it takes time, up to 4 years, to build the necessary terminals over there and over here together with the specialised ships to carry the stuff. President Biden issued an executive order last year banning new export licenses but that has been rescinded by President Trump. Second, there is currently excess global demand for LNG. The US has a surplus, but Europe is bidding against Asia. But that too is changing, and a glut of gas is coming to the market.
This is reflected in the futures market which is pricing a 37% fall in UK natural gas prices over the next 4 years. That would cut UK household bills by around £235 a year by the winter of 2028/29. That’s close to 15%, raising real incomes by half of a percent. Bills for businesses would fall by a similar amount, raising profitability and encouraging expansion. Europe would also benefit to varying degrees in different countries, but the impact is most obvious here in the UK.
Source:Bloomberg and Columbia Threadneedle Investments as at 27 January 2025
A cynic might argue – and this includes some of my colleagues – that the industry or the government might try to grab some of this windfall. Perhaps, but there is a good chance that the impact could be even greater. Experts in this area from Citi investment bank reckon that UK wholesale gas prices might fall by as much as 25% by 2029 as the shortages in supply and transport go into reverse.
Much of the superior growth in the US versus Europe and the UK in recent years reflects stronger consumer spending. That in turn can be traced directly to the hit in real incomes and confidence in Europe and the UK from higher energy bills. This suggests that that tide is about to turn.
