This allows us to distinguish between two types of supply shocks, that is, unexpected events that reduce or jeopardise supplies. On the one hand, there are interruptions to gas flows, such as the breakdown of a compressor at a Norwegian gas field: the available gas supply is immediately reduced. On the other hand, there are announcements regarding future availability, such as when, in March 2022, Russia announced that it would require payment for gas in roubles. On that day, gas flows were not interrupted, but future deliveries became more uncertain.
The two shocks have very different consequences. A disruption to gas supplies pushes up gas prices, but the effect wears off quickly: industrial production falls for a few months and then recovers, and only around 1 per cent of the rise in gas prices is passed on to consumer prices. The effect of news that casts doubt on future supplies is quite different. Gas prices remain high for longer and industrial production remains virtually unchanged, but consumer prices continue to rise: the pass-through increases from around 2 per cent in the first few months to around 5 per cent after a year – five times the level seen following a supply disruption. In other words, inflation is affected more by the fear of running out of gas than by an actual gas shortage.
Why does news about future supplies affect prices more than an actual disruption? When news of this sort emerges, the amount of gas available does not decrease and consumption changes little. Instead, market volatility and the stocks held by those who import and resell gas rise, and both remain high for a long time. It is similar to the behaviour of people filling up their tanks on the eve of a petrol station strike: there is no shortage of petrol yet, but everyone wants to stock up, and queues form before the strike begins. In the oil market, it has long been recognised that expectations of future scarcity are reflected in today’s prices through the demand for stocks (Kilian and Murphy, 2014). In the gas market too, precautionary demand can help to keep prices high. A gas price that remains high for a long time gradually feeds through into consumer prices, starting with electricity bills.
In the eurozone, a rise in gas prices due to supply issues is passed on first and foremost to the wholesale price of electricity, which is often determined by gas-fired power stations themselves. The price rises immediately and peaks after around six months. From there, the costs are passed on along the supply chain: producer prices rise more than consumer prices, a sign that businesses are absorbing part of the cost increases from which households are partly shielded.
Among consumer goods, the transport sector reacts immediately, whilst the food sector sees the sharpest rises, as gas is used to produce fertilisers. On the production side, the losses are concentrated in a few sectors: machinery and vehicles immediately, and chemicals and paper with a lag of a few months. In these sectors, gas is used directly in production – either as a raw material or to fuel furnaces and boilers – and it is difficult to replace it at short notice. This is a particular concern for Italia, where gas is the main source of electricity generation and where ceramics, glass, paper, chemicals and steel account for a significant share of manufacturing.
