Europe’s Energy Crisis

By Amy Kim

Background

Europe’s energy crisis is the product of a multitude of factors accumulated over the last several years. The winter season in 2021 was unusually cold in Europe and Asia, the two largest competitors for liquified natural gas (LNG), leading to a severe contraction of supply (Popkostova, 2022). Simultaneously, the recovering economy increased power demand, and the EU’s recent drive in the climate agenda increased carbon prices, further inflating the cost of electricity—which is directly linked to the price of gas (Popkostova, 2022). At the time, much of the discourse was centered around managing trade relations, as well as building resilience, to support a sustainable green transition of energy, as it was clear that the acceleration of climate change was causing extreme weather events. 

Unfortunately, the energy crisis was soon exacerbated by the Russian invasion of Ukraine in March 2022. The EU swiftly condemned Russia's military aggression and issued a package of restrictive sanctions, including but not limited to prohibitions on Russian imports of coal, Russian imports of oil (with limited exceptions), exports to Russia of goods and technologies in the oil refining sector, and new investments in the Russian energy sector (“EU Restrictive Measures,” 2022).

Russia’s invasion of Ukraine and the subsequent cutoff of Russian energy supply through the sanctions have had global consequences. Russia is the world’s third-largest oil producer behind the United States and Saudi Arabia, as well as the world’s largest exporter of oil to global markets, of which 60 percent goes to Europe (IEA). According to global gas market experts, Europe is facing one of its “worst-ever energy crises…[that] could still get much worse” (Lu, 2022).

Soaring prices and uncertainties have led to discomfort and unrest in several European countries. In July, strikes across Norway, the biggest alternative supplier of natural gas in the EU, shut down production, exacerbating the crisis (Lu, 2022). Since October, France has faced major transportation disruption, due to a wave of strikes demanding higher wages in light of the recent increase in the cost of living (Pailliez & Clotaire, 2022). Despite the EU’s attempts to amend the sanctions so that its own member states are not too affected, many critical supply chains such as those for wood still remain constrained, and consumer confidence is at record lows (Nardelli, 2022). Growth is uneven across the Union with some member states hitting negative rates—experts view that a recession is inevitable in many member states (Nardelli, 2022).

The Weaponization of Energy

Russia has been accused of weaponizing its energy resources to pressure Europe in response to the massive sanctions package that has been affecting the country. In early September, it announced an “indefinite halt” to gas flows via Nord Stream 1 due to an apparent need for repair (Ellyatt, 2022).

Europe has been scrambling for alternative supplies for the upcoming winter season according to Paolo Gentiloni, the EU’s economics commissioner (Ellyatt, 2022). Russia has repeatedly been denying accusations of the weaponization of energy, asserting that the sanctions are the only reason the energy sources have been cut off.

Russia’s leverage on Europe’s energy sheds light on the buzzword weaponization. Europe heads into the winter season with real fears about its freedom and a ‘normal’ way of life. Citizens may indeed need to ration energy, or in the worst case, “choose between eating and heating come winter,” according to Helima Croft, managing director at RBC Capital Markets (Lu, 2022). Behaviors like having to ration energy supplies typically remind us only of conventional wartime, but as seen currently, that may not remain the norm anymore. We may perhaps have already given way to a new way of war.

Russia

While Putin may watch Europe scramble for alternative sources of gas with content, experts contend that Russia will soon face severe costs as it severs ties with Europe. The EU was the largest exporter of Russian gas, and according to the Kremlin itself, it could lose 6.6 billion USD in tax revenue every year due to losing the EU as a partner (Depetris, 2022).

Putin has been attempting to reroute his gas exports to East Asia, signing a deal with China in February to increase gas exports to Beijing by 10 bcm each year (Tsafos, 2022). But for Russia to raise its gas supplies to Asia to a level equivalent to its 2021 exports to the EU, it is predicted to take at least a decade (Shagina, 2022), including a substantial overhaul of infrastructure, currently “designed to service Europe” (Depetris, 2022). Even these results are conditional on China and Russia maintaining amicable relations and the extent to which Putin is willing to provide Xi leverage. 

As experts state that it is feasible for Europe to abandon Russia as a partner for energy by 2027 (Elliott, 2022), it will be interesting to observe how Russia will cope with the loss of its biggest importer—whether it will provide concessions to Europe and Ukraine or struggle to establish relations with Asia.

Europe

The EU has had its fair share of meetings and (dis)agreements on how to support its countries in the face of winter. On May 19, the European Council and Parliament reached an agreement to fill member states’ gas storage facilities up to at least 80 percent by the winter of 2022/2023 and then share those capacities where needed. On August 5, the Council adopted a regulation to reduce gas demand by 15 percent.

Undoubtedly, the most controversial topic of discussion revolves around the idea of a cap on the price of gas. There are two different methods of capping its price currently under discussion (Depetris, 2022). First is partial subsidies on gas purchases—the EU would select a “symbolic price” for gas that would be used on the wholesale market, and pay the rest. Consumers would still pay a high nominal price for gas but would receive a check for the amount paid above the symbolic price. While the EU would not have to adjust its trading exchanges or energy market rules, this option would be extremely expensive. An alternative is to choose a maximum sale price—simply put, a price ceiling will be set on how much gas can be bought and sold for. Under this option, the EU would be vulnerable to an EU-wide shortage of gas if sellers decide to sell somewhere which provides higher prices. This is easily doable by bidding just above the EU’s cap.

Reaching a conclusion on how to implement this price cap seems tricky for the EU, as doing so could lead to worsened outcomes, which include increases in consumption as well as exports of subsidized/capped gas outside of the EU (Taylor, 2022). At the same time, different EU states may have diverging priorities; while countries like Spain and Belgium are adamant about setting a clear price cap on gas to lessen the current inflation, others such as Germany and the Netherlands are more skeptical about what the cap will mean for Europe’s long-term gas purchasability (Dunai & Ivanova, 2022). Meanwhile, Hungary desperately wants to maintain friendly relations with Moscow, claiming that a complete halt on the Russian gas imports will badly damage its economy (Hancock, 2022). Disagreements continue even on sanctions packages; for example, while most of the EU wants to pass a new package that will loosen pressure on Russian fertilizers to alleviate food insecurity in developing countries, Poland and Lithuania have been blocking the package due to concerns that it will offer Russian oligarchs loopholes (Siebold et al, 2022). Internal divisions are clearly impeding the EU’s speed in reaching decisions.

While gas prices have dropped recently due to relative success in filling storage within member states as well as unusually warm weather conditions, it is critical for the EU to reach further agreements before the cold strikes instead of having “the same discussion [they’ve] been having for weeks” (Abnett, 2022).

Conclusion

It is still unclear if Russia and Europe’s new plans to remain autonomous from each other and overcome the energy crisis will prove fruitful. Clearly, this crisis is not contained to one winter season—we must wait to see if Europe’s alternative gas storage and import models or Russia’s newly budding diplomatic ties will remain sustainable.

References

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Depetris, Daniel. “Weaponizing Energy Will Hurt Russia the Most.” Time, 28 Sept. 2022, https://time.com/6217385/weaponizing-energy-will-hurt-russia-the-most/. Accessed 27 Oct. 2022. 

Dunai, Marton, and Polina Ivanova. “Hungary Sends Foreign Minister to Moscow to Ask Russia for More Gas.” Financial Times, 21 July 2022, https://www.ft.com/content/bc68bae2-dbac-4e0c-a424-531258c094e6. Accessed 8 Dec. 2022. 

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Ellyatt, Holly. “EU Economics Chief Says Bloc Is Not Afraid of Putin, Ready to React over Halted Russian Gas Supplies.” CNBC, 3 Sept. 2022, https://www.cnbc.com/2022/09/03/europe-ready-to-react-to-halted-russian-gas-supplies-official-says.html. Accessed 27 Oct. 2022. 

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Pailliez, Caroline, and Clotaire Achi. “Scuffles Break out as French Strike to Call for Higher Wages.” Reuters, 18 Oct. 2022, https://www.reuters.com/world/europe/france-braces-nationwide-strikes-amidst-soaring-inflation-2022-10-18/. Accessed 19 Dec. 2022. 

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Shagina, Maria. “Russia’s Demise as an Energy Superpower.” Survival, vol. 64, no. 4, 2022, pp. 105–110., https://doi.org/10.1080/00396338.2022.2103261. 

Siebold, Sabine, et al. “EU Countries Have Another Go at Russia Sanctions amid Polish, Baltic Concerns.” Reuters, 15 Dec. 2022, https://www.reuters.com/world/europe/eu-members-fail-reach-agreement-new-russia-sanctions-diplomats-2022-12-15/. Accessed 19 Dec. 2022. 

Taylor, Kira. “Energy Ministers Split on EU Gas Price Cap, Move towards Joint Purchasing.” Euractiv, 26 Oct. 2022, https://www.euractiv.com/section/energy/news/energy-ministers-split-on-eu-gas-price-cap-move-towards-joint-purchasing/. Accessed 27 Oct. 2022.

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