Putin will continue to blackmail Europe with dependence on the supply of energy resources.
Winter is approaching, and it seems that it promises to be brutal and divisive over an energy crisis that is rapidly escalating as Vladimir Putin chokes Europe with Russian gas supplies. Several calamities over the past decade have nearly torn Europe apart, including the euro crisis in the early 2010s and the migration crisis of 2015. The winter energy shock of 2022 may still rank with them. Once again, the unity and determination of the continent are put to the test, writes The Economist.
Most Europeans have yet to see or smell the gas disaster, but the markets are already flashing red warning signs. Gas prices this winter, at €182/MWh ($184/MWh), are about the same as they were in early March, following Russia's invasion of Ukraine, and seven times their long-term level. Governments are preparing bailouts for failing utilities in France and Germany, and some investors are betting on which industrial companies will go bankrupt later this year when rationing takes effect. While most European politicians are struggling to get the public to agree on the difficult decisions that lie ahead, even seasoned energy traders accustomed to wars and coups have begun to express concern.
A serious energy crisis has been a threat ever since Russian tanks entered Ukraine. As sanctions and Russian blackmail threaten to cut off Europe from its main energy supplier, where gas is the main stumbling block. It meets a quarter of the continent's energy needs, and Russia supplies a third of this volume. Figures are higher for some countries, including Germany. Unlike oil and coal, which are interchangeable and traded around the world, gas must either be transported by pipeline or transported as liquefied natural gas (LNG) using facilities that take years to build or retrofit.
< p>As Putin perfectly understands, the gas market is also a market where Russia holds the whip in its hands. Its economy would collapse without oil exports, which have averaged 10% of its GDP over the past five years — which is why Russia has taken incredible and largely successful steps to break the Western embargo on crude oil. But Russia can live without gas exports, which make up only 2% of GDP. By closing the taps on its pipelines, it believes that it can do more harm to Europe than to itself.
Until a few weeks ago, it seemed that Europe would manage to avoid the worst thanks to more LNG cargoes from America and other countries. The demand for gas is seasonal, so it is necessary to create reserves in the spring and summer. From 26% in March to June, Europe's storage was more than half full and was due to reach 80% by November, the minimum needed to survive the winter.
Now the picture is getting worse again. Faults at a Norwegian gas field are partly to blame, along with hot weather that requires electricity to power air conditioners. But the big problem is the flow of gas to Europe from Gazprom, the Russian gas monopoly. Gazprom was already operating at about half its normal level, and supplies fell even further. Russia states that since July 11, repair works are being carried out on the important Nord Stream 1 gas pipeline, which will be completed by July 22. But this is not compensated by the increase in supplies through alternative pipelines passing through Ukraine. Because traders believe that Putin is deliberately squeezing supply, because delivery prices for two winters, for 2023-2024, are four times the normal level.
Consumers who use gas directly for heating and cooking, and indirectly for electricity, have little idea what could hit them. Currently, many are protected by price caps, subsidies and long-term contracts. A typical German pays at least 70% less than the market price for gas. Industrial customers such as chemical and glass companies may have problems. Problems also await a wide list of companies, including many German large enterprises. According to the UBS bank, in the Eurozone, the cessation of Russian gas supplies can reduce GDP growth by 3.4 percentage points and increase inflation by 2.7 percentage points. In Germany, the blow would be even worse.
You might think that recession and inflation would be tolerable — after all, in 2020, the GDP of coronavirus-hit Europe fell by 6%. But the energy threat is more insidious. Shortages can trigger “beggar-neighbor” behavior, as states stockpile gas, preventing it from flowing to a neighboring country. Great Britain threatened the same. The gap in wholesale gas prices in different EU countries shows that companies are afraid of disruptions in the single market. National debts are higher than ever. A stagflation shock could trigger fears of defaults or even an Italian debt crisis that would threaten the entire euro zone. A popular backlash against energy prices could also undermine popular support across the continent for anti-Putin.
For all these reasons, European governments must step up now to face the energy shock. As with vaccines, they must overcome national differences. The European Commission is working on a plan that it will present at an emergency summit on July 26. Given their role in the gas trade, the UK and Norway should be included in the plan. Supplies should be maximized, so general LNG purchases should continue and this is why the Netherlands should delay the closure of its Groningen gas field next year.
Also read: Germany wants to give up Russian gas by summer 2024
Next is the need for a common hierarchy of rationing applied across the continent: intensive energy users should suffer first and consumers last. Countries need to share storage facilities and guarantee free movement of gas. The more integrated the system, the more sustainable it will be. Finally, politicians must be honest with the public. Consumer prices should rise now to reduce demand and help build storage. Next winter, even small voluntary changes in household habits, such as reducing heating, will help.
If Europe gets its act together, it won't just win the energy prize in the coming months. Europe will get rid of Russian energy intimidation forever. In addition, a coherent continent-wide energy security mechanism will be established to help accelerate the transition to cleaner energy. Europe has a habit of uniting during crises. It's time to do it again. If you're reading this in Paris or Madrid with the air conditioning on, turn it down.
It was previously reported that Biden attended a summit of Gulf and Arab leaders. It seems that he has not yet succeeded in solving the main problem – increasing the supply of oil and reducing its prices.
